Often, there may not be a clear-cut connection to draw between seeking personal benefit or monetary gain by leaking or acting upon confidential information. It can merely be a case of someone who couldn’t keep a secret when it comes to Insider trading.
Even lower-level employees who learn of information by virtue of their employment with the company are ‘insiders’. And can be liable for insider trading if they trade or tip while in possession of non-public information.
Like the secretary who learns of an upcoming nonpublic merger by looking at a document in the boss’ printer and then goes and trades on that non-public information would be liable for insider trading. This is why a company’s insider trading policies should, and most do, cover all employees.
That’s just one of the many examples of insider trading that can occur. And since Illegal insider trading is very different than legal insider trading. The key is that the person who buys or sells the stock acts on insider information (not public information) in violation of the law.
Insider trading is a white collar crime and a person who has been found guilty of insider trading can be sent to prison. Other examples and instances can include:
- A lawyer representing the CEO of a company learns in a confidential meeting that the CEO is going to be indicted for accounting fraud the next day. The lawyer shorts 1,000 shares of the company because he knows that the stock price is going to go way down on news of the indictment.
- A board member of a company knows that a merger is going to be announced within the next day or so and that the company stock is likely to go way up. He buys 1,000 shares of the company stock in his mother’s name. So he can make a profit using his insider knowledge without reporting the trade to the Securities and Exchange Commission and without news of the purchase going public.
- A high-level employee of a company overhears a meeting where the CFO is talking about how the company is going to be driven into bankruptcy as a result of severe financial problems. The employee knows that his friend owns shares of the company. The employee warns his friend that he needs to sell his shares right away.