When a person in North Carolina hears of “insider trading,” they may think of the infamous Martha Stewart case. The businesswoman and television star was convicted of and served jail time for insider trading. Yet, it is important to remember that there are both legal forms of insider trading and illegal forms of insider trading.
During legal insider trading, officers, employees and other insiders of the corporation purchase company stock and sell it. If an insider buys or sells his or her own company’s stock, he or she must notify the U.S. Securities and Exchange Commission of his or her activities.
However, if a person breaches his or her duties as a fiduciary while buying or selling company stock, this is illegal insider trading. This happens if the person has information that is material and is not available to the public regarding the security at issue. “Tipping” this kind of information can also be a form of illegal insider trading.
For example, a chief executive officer who buys or sells corporate securities after having been made privy to secret material information about the corporation’s developments may be accused of insider trading. The buying or selling of corporate stock by relatives, friends or others based on an insider tip may also be considered insider trading.
Furthermore, lawyers, bankers and brokerage accountants are often in the position of a fiduciary to a corporation. If they use information they were given to do their job to buy or sell corporate stock, this could be considered insider trading. Insider trading is not limited to private sector employees — government employees who become aware of insider information within the course of their job, and use that information to buy or sell corporate stock may be accused of insider trading.
Insider trading is a complicated type of white collar crime. Those who have questions about legal versus illegal insider trading may want to do their research, so they do not conflict with the law.
Source: SEC.gov, “Insider Trading,” accessed on June 15, 2015