Laws Prohibiting Insider Trading – How Insiders Get Caught

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The more infamous form of insider trading is the illegal use of undisclosed material information for profit. Insider trading rules are meant for corporate insiders, such as management officials and employees, in addition to anyone else with access to nonpublic information about a publicly traded company.  This can be done by anyone, including friends and relatives, or just a regular person on the street, as long as the information is not publicly known. 

Considering that insiders top executives, employees and directors know more about a company than others and are more in the firing line for illegal insider trading. They must follow a protocol for trading shares so that they don’t unfairly profit from their position. A securities law allows company officials to schedule their stock market trades in advance so as not to give the impression of improprieties.  

And although an insider is legally permitted to buy and sell shares of the firm and any subsidiaries that employ him or her. However, these transactions must be properly registered with the necessary financial regulators like the Securities Exchange Commission (SEC) and are done with advance filings. 

The SEC is the government agency in the United States responsible for monitoring these kinds of transactions. It has adopted rules regarding insider trading. Defining it as any securities transaction made when a person involved in the trade has non-public, material information, and uses this information to violate his or her duty to maintain the confidentiality of such knowledge by using it for financial gain. 

The SEC is able to monitor illegal insider trading by looking at the trading volumes of any particular stock. Volumes commonly increase after material news is issued to the public. But when no such information is provided and volumes rise dramatically, this can act as a warning flag. The SEC then investigates to determine precisely who’s responsible for the unusual trading and whether or not it was illegal. 

For example, suppose the CEO of a publicly-traded firm inadvertently discloses his/her company’s quarterly earnings while getting a haircut. If the hairdresser takes this information and trades on it, that’s considered illegal insider trading, and the SEC may take action.

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