Legal Definitions - insider trading

Insider trading occurs when an individual buys or sells a company's stocks or other securities using important, confidential information about that company that is not yet known to the general public. This information is typically acquired through a position of trust or privileged access, and using it for personal financial gain is considered a violation of that trust and a breach of legal duty. The Securities and Exchange Commission (SEC), which is the primary federal agency responsible for regulating the U.S. financial markets, actively monitors and prosecutes insider trading to ensure fairness and maintain investor confidence.

Here are some examples to illustrate how insider trading can occur:

• Example 1: Executive Selling Shares Before Bad News

  Imagine the Chief Financial Officer (CFO) of a major retail chain learns that the company's quarterly sales figures are significantly worse than expected, and this information has not yet been released to the public. Knowing that the stock price will likely drop sharply once this news is announced, the CFO sells a substantial portion of their personal company stock holdings before the official announcement. This is a clear case of insider trading because the CFO, as an insider, used confidential, market-moving information to avoid a personal financial loss, breaching their duty to the company and its shareholders.

• Example 2: A "Tipped" Friend Trading on Confidential Information

  A software engineer at a prominent tech company confides in a close friend that their company is on the verge of announcing a revolutionary new product that is expected to significantly boost its stock value. The engineer explicitly tells the friend that this information is highly confidential and not yet public. Despite this, the friend immediately purchases a large number of shares in the tech company, hoping to profit from the impending announcement. Here, the friend engaged in insider trading because they traded on information they knew was confidential, obtained through a breach of trust by the engineer, and used it for personal gain.

• Example 3: Lawyer Misappropriating Client Information

  A lawyer is working on a confidential merger deal where their client, a large corporation, plans to acquire a smaller competitor. Through their work, the lawyer learns the identity of the target company before the merger is publicly announced. Instead of maintaining confidentiality, the lawyer secretly buys shares in the smaller target company, knowing its stock price will surge once the acquisition news breaks. This is insider trading under the "misappropriation theory" because the lawyer, while not an insider of the target company itself, breached a duty of trust and confidentiality owed to their client by using that private information for personal profit.