Insider Trading

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What is illegal insider trading?

Illegal insider trading occurs when a person breaches a fiduciary duty or position of trust and confidence by buying or selling a security when they know material, nonpublic information about the security or its issuer. Here are some classic types of insider trading:
  • A company executive sells off their stock in the company because they know that the company has had a major setback before it is publicly announced. (Or, on the flip side, an executive buys up stock in their own company before a positive development becomes public.)
  • A stockholder who owns more than 10% of a company’s shares learns, for example, that the company is about to announce an important new product and tells their friend about it. The friend then trades based on that information. This type of insider trading is sometimes called “tipper/tipee” insider trading, and both the person who gives the tip and the person who receives the tip can get in trouble for it.
  • An accountant who does work for a company learns that the company is about to report a big dip in quarterly earnings and sells off stock in that company before the earnings numbers become public. Even though the accountant is not an employee of the company whose stock they sell, they still are in a position of trust and confidence and have inside information.
The phrase “insider trading” usually refers to illegal insider trading. However, it is important to note that it is not illegal every time someone who is an insider at a company trades that company’s stock. If they are not acting on material nonpublic information, and if they comply with SEC reporting requirements, the transaction may be legal. The rules about what kinds of insider trading are illegal come from Sections 10(b) and 16(b) of the Securities Exchange Act of 1934. If you have information about insider trading and are unsure if it is illegal, it is a good idea to reach out to an attorney experienced in securities and commodities fraud matters about your potential whistleblower case. Whistleblower Partners would be happy to hear from you.

Why is insider trading harmful?

Insider trading gives fraudsters an unfair advantage over the rest of the investing public. Like other forms of market manipulation, it undermines the fair functioning of the securities market. Investors without inside information need to be able to trust that they can safely invest in the market and not lose out to insiders who will always be one step ahead. Illegal insider trading is a perennial enforcement priority for the SEC. 

Who is affected by insider trading?

Everyday investors are harmed by insider trading, since they can’t compete with insiders. Insider trading hurts public confidence in the securities market.

What role do whistleblowers play in exposing insider trading?

Whistleblowers play a vital role in helping the SEC uncover insider trading through tips to the SEC Whistleblower Program. There are a variety of ways a potential whistleblower might learn about insider trading. A whistleblower might be a company insider who knows that colleagues are making illegal trades, an employee at a brokerage who knows that other brokers are trading on material, nonpublic information about companies they work with, or even someone who learns that friends or acquaintances are making insider trades.

How can you blow the whistle on insider trading?

You can blow the whistle on insider trading by making a tip to the SEC Whistleblower Program. Whistleblower Partners are experienced in assisting clients with SEC whistleblower tips. You can read more about who can be a whistleblower and the whistleblower experience in our FAQs.

These descriptions of insider trading are general in nature and do not constitute legal advice. Insider trading is complex and ever-evolving. The attorneys at Whistleblower Partners understand the complicated, constantly changing legal landscape and are happy to discuss any potential matter further.

If you would like more information or would like to speak to an attorney at Whistleblower Partners, please contact us for a confidential consultation.