Any investor has heard of insider trading and non investors who have watched the movie “Wall Street: Money Never Sleeps” know that Gordon Gekko (Michael Douglas) served 8 years in prison for insider trading amid other things. The society views insider trading as crime little do they know that there are instances when insider trading is legal.
How insider trading can be legal
The Securities and Exchange Commission states the following when explaining legal insider trading; “The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies.” Even so, these corporate insiders and people that own at least 10% of the company must file a statement of ownership.
Illegal insider trading
Illegal insider trading is an evil that has cost people jobs, lives, jail time and made companies go belly up. This involves trading a public company’s stock or other forms of securities using confidential information that is not publicly accessible to the rest.
Example of illegal insider trading
X that works for XYZ Company knows that there are internal wrangles in the XYZ Company and that last year’s performance was awful. The company has not made the news available to the public but X tells his friend Z over drinks what is going on and Z shorts a million stocks of XYZ Company. A few days later, XYZ company’s stocks plummet making Z a millionaire in less than a month.
How SEC fights insider trading
It is believed that today Americans invest in the stock market than they do in commercial banks. This shows that Americans trust their stock market and pressures the SEC to ensure that Americans are not exploited.
After the bear jumped out the window in 1929 (stock market crash), the SEC was tasked to be more vigilant on insider trading and other factors that contributed to the crash. This led to the Federal Securities Act of 1933 that requires all selling or marketing of stocks to be regulated by the SEC.
The SEC also forces all stock brokers and brokerage firms to register and adhere to the SEC broker laws. This makes it easier for SEC to investigate insider trading and related incidences. To date, the SEC has taken several insider traders to court notably “United States v. O’Hagan” and “Martha Stewart – ImClone” saga.
A new addition that gives insider trading a blow is Fair Disclosure. This states that, if someone in a position to trade stocks gets or gives inside information that can be used to trade stocks, that information must be made public.
The SEC, however, complains that there is disparity between the SEC and the judicial system. It says that the judicial system has played the largest role in defining the laws that govern insider trading.
Sources:
Securities and Exchange Commission (website) – Insider Trading
Securities and Exchange Commission (website) – Speech by SEC Staff: Insider Trading – A U.S. Perspective