What Is Insider Trading Law

Chip Skowron, co-manager of the hedge fund portfolio of FrontPoint Partners LLC`s health funds, was convicted of insider trading in 2011, for which he served five years in prison. He had been informed by a consultant of a company that it would make a negative announcement regarding its clinical trial for a drug. [68] [69] [70] [71] Initially, Skowron denied the charges against him, and his defence lawyer said he would plead not guilty, saying, “We look forward to responding to the allegations in more detail in court in due course.” [72] [73] [74] However, after the counsellor who had advised him pleaded guilty, he changed his position and pleaded guilty. [72] In 2014, in United States v. Newman, the U.S. Court of Appeals for the Second Circuit, cited the Supreme Court`s decision in the Dirks case and ruled that a “tippee” (a person who used information obtained from an insider) is guilty of insider trading, the tippee must not only have known that the information was inside information, but also that the insider disclosed the information for improper purposes (e.g., a personal benefit). The court found that the breach of an insider`s fiduciary duty not to disclose confidential information – in the absence of an illegitimate purpose on the part of the insider – is not sufficient to give rise to criminal liability on the part of either the insider or the insider. [8] Notwithstanding the above, information about a takeover bid (usually in connection with a merger or acquisition) is held to a higher standard. If this type of information is obtained (directly or indirectly) and there is reason to believe that it is not public, there is an obligation to disclose it or to refrain from trading. [15] The SEC defines insider trading as a person who trades in a security while having knowledge of material non-public information about that security or company.

Although the Securities Exchange Act makes it clear that insider trading is considered a violation of securities fraud, there are some instances where it may be legal. Dirks v. Securities and Exchange Commission. The Supreme Court ruled that those who receive inside information from an insider are liable if they had reason to believe that the informant breached a fiduciary duty by disclosing confidential information. In 1968, the Court of Appeals for the Second Circuit developed a “level playing field” theory of insider trading in SEC v. Texas Gulf Sulphur Co.[23] The court stated that anyone in possession of inside information must either disclose the information or refrain from trading. Texas Gulf Sulphur Company officials had used inside information about the discovery of the Kidd mine to make a profit by buying shares and call options on the company`s shares. [24] “There are two ways to enforce insider trading laws,” Hockett says.

Attorney[81] and SEC[82] dropped their charges against Steinberg and others in 2015. The term “insider trading” usually has negative connotations. Legal insider trading takes place every week on the stock exchange. The SEC requires transactions to be filed electronically in a timely manner. Transactions are submitted electronically to the SEC and must also be disclosed on the company`s website. What is illegal insider trading? The question of legality stems from the SEC`s attempt to maintain a fair marketplace. A person who has access to inside information would have an unfair advantage over other investors who do not have the same access and could potentially make greater and unfair profits than their fellow investors. The recent emergence of the insider trading theory of embezzlement paved the way for the adoption of 17 CFR 240.10b5-1, which allows criminal liability for a person who trades in shares based on misinformation.