Who is an “insider”?
Insider is a person who:
- has access to information that is not available to public about a corporation or
- owns more than 10 % of a company´s stock.
What is insider trading?
It is a common misconception that all insider trading is illegal. Insider trading is legal when corporate insiders (officers, directors and employees) buy or sell their own company’s stock. In US when insiders trade their own securities, these transactions must be reported to the SEC (U.S. Securities And Exchange Commission).
It is a case of illegal insider trading when a corporate insider uses information that is not available to the public in order to make profit. For example Illegal insider trading may also contain “tipping” information. Not only corporate officers, employees and directors but also friends, family members and government officers can be guilty of illegal insider trading.
The SEC (U.S. Securities And Exchange Commission) monitors illegal insider trading by keeping an eye on trading volumes of any stock.
The Martha Steward -case
One of the most famous illegal insider trading incidents was the case of Martha Steward. Steward is an American television personality, most famous of her television show and magazine.
In 2002 the SEC started an investigation after discovering that Steward had sold her shares of an American pharmaceutical company ImClone Systems just before the new cancer drug the company was developing was not approved by the FDA. Due to the drug not being approved the value of ImClones stock dropped dramatically from USD 50 to USD10.
Most of the investors took a financial hit unlike Martha Steward, CEO and his family and friends. Due to insider information Steward sold her 4 000 shares and made USD 250 000 USD on the sale before the value plummeted.
In 2014 Steward was sentenced to five months in prison and a fine of USD 30 000.
More recently A former Capital One Financial Corp analyst Nan Huang was found guilty of using non-public sales information to buy and sell stock.
Due to non-public data Hung earned USD 1 500 000 from the illegal trades.
The SEC has suffered many losses in insider trading cases, most famously a case against Mark Cuban (known from TV program Shark Tank and owner of the Dallas Mavericks). The conviction of Hung was a much needed victory.
Bio. Martha Steward Biography. http://www.biography.com/people/martha-stewart-9542234
Investopedia. Top 4 Most Scandalous Insider Trading Debacles. Beattie, Andrew. 29.11.2015. http://www.investopedia.com/articles/stocks/09/insider-trading.asp
Investopedia. What is “Insider Trading”. http://www.investopedia.com/terms/i/insidertrading.asp
Incestopedia. What Investors Can Learn From Insider Trading. 6.1.2016. http://www.investopedia.com/articles/02/061202.asp
Investopedia. What exactly is insider trading? http://www.investopedia.com/ask/answers/192.asp
U.S. Securities And Exchange Commission. 15.1.2013. https://www.sec.gov/answers/insider.htm
Reuters. U.S. jury finds ex-Capital One analyst liable in insider trading case. Barlyn Suzanne. 14.1.2016. http://www.reuters.com/article/us-sec-capitalone-insidertrading-idUSKCN0UR2KR20160114