Legal Definitions - insider dealing

Insider dealing, also commonly known as insider trading, refers to the illegal practice of buying or selling securities (such as stocks, bonds, or options) based on confidential, non-public information that could significantly affect the price of those securities. This information is typically obtained through a privileged position or relationship, giving the individual an unfair advantage over other investors. The core principle violated by insider dealing is that all investors should have access to the same information when making investment decisions, ensuring a fair and transparent market.

Here are some examples illustrating insider dealing:

• Corporate Executive's Stock Purchase: Imagine a Chief Financial Officer (CFO) of a technology company who learns in a private board meeting that the company is about to announce a groundbreaking new product that is expected to double its quarterly earnings. Before this information is made public, the CFO uses their personal brokerage account to purchase a substantial number of shares in their own company.

  This is insider dealing because the CFO used confidential, non-public information (the upcoming product announcement and projected earnings increase) obtained through their privileged corporate position to make a personal profit by buying shares before the information became public and drove up the stock price.

• Investment Banker's Tip: A junior analyst at an investment bank is working on a confidential merger and acquisition deal where a large pharmaceutical company is planning to acquire a smaller biotech firm at a significant premium. The analyst, knowing that the biotech firm's stock price will surge once the acquisition is announced, tells a close friend about the impending deal. The friend then immediately buys a large block of shares in the biotech firm.

  This constitutes insider dealing because the analyst disclosed material, non-public information (the impending acquisition) obtained through their professional role, and the friend then used this information to trade securities for personal financial gain. Both the analyst (for tipping) and the friend (for trading) could be held liable.

• Government Official Avoiding Losses: A high-ranking official within a regulatory agency is privy to information that a new environmental regulation, which will be announced next month, is going to severely impact the profitability of companies in the fossil fuel industry. Knowing this, the official sells off all their personal investments in several fossil fuel companies before the regulation is made public, thereby avoiding significant financial losses.

  This demonstrates insider dealing because the official used confidential, non-public information (the upcoming regulation) obtained through their government position to avoid personal financial losses by selling shares before the market reacted to the negative news. Insider dealing can involve avoiding losses, not just making profits.