What is Insider Trading?
Insider trading typically refers to the white-collar crime of purchasing or selling the stocks of a publicly-traded company while knowing the material, non-public information. That being said, legal cases of insider trading do exist (more on this later).
Material information is any and all information that can have a significant impact on a company’s stock price and an investor’s trading decisions. Non-public information is information that is not legally available to the public.
For illegal insider trading to occur, it often takes an information leak by an ‘insider’—someone who has privileged access to a company’s information, unreleased economic report, etc. Company executives, for example, constitute insiders.
Insider information provides an unfair advantage to a few privy investors if they actually decide to trade the company’s securities before the material information goes public. They can make (theoretically) risk-less trading decisions to guarantee gains or avoid losses depending on what the soon-to-be-released economic reports say. The U.S. government, hoping to keep markets fair, has banned insider trading due to these undue advantages.
The Zero Theft Movement, along with our growing community is working to eliminate the rigged parts of the U.S. economy so the ethical parts can thrive for the public and businesses alike. Certain illegal and unethical forms of insider trading contribute to the economic rigging we hope to eradicate.
Shedding Light on Insider Trading
Despite its reputation and connotation, insider trading can be done legally and perhaps ethically. It’s so common that it actually happens on a daily basis. Let’s take a look at the differences between legal and illegal insider trading.
Legal Insider Trading
Insiders can legally trade their company shares, but they must disclose these transactions to the Securities and Exchange Commission (SEC). The agency publishes legal insider trading records on its EDGAR database.
To allow for legal insider trading while preserving a degree of accountability, the government enacted the Securities Exchange Act of 1934. Executives and major owners of a company’s stock, by law, have to disclose their stakes, transactions, and change of ownership.
Examples of legal insider trading abound. Think about the many employees who can purchase their employer’s shares. Or the CEOs who invest in their own company by engaging in stock buybacks.
Some have argued that stock repurchases harm the economy. A Forbes article states, “Buying back company stock can inflate a company’s share price and boost its earnings per share — metrics that often guide lucrative executive bonuses.” Market manipulation is one potential issue, the other a question of whether those funds should go to increasing wages and innovation.
See what the Zero Theft community has discovered about stock buybacks…
Illegal Insider Trading
As we covered in the introduction, illegal insider trading typically happens when an investor buys or sells a company’s stock with material, non-public information. It’s outlawed by the government because it ‘rigs’ the marketplace in the favor of the few who have access to that insider information.
It should be noted, however, that insider information obviously ceases to provide an unfair advantage to privy investors when it gets released to the public. Therefore, possessing knowledge of the material, non-public information alone does not break any laws or regulations.
While many think that illegal insider trading happens between cronies up high in corporate skyscrapers, that isn’t actually the case. Anyone, even those multiple times removed from the insider, can learn about insider information through the grapevine. Whether they choose to act on that information is a different matter, of course.
The following are some examples of illegal insider trading:
- A CEO of a company discloses to a friend/shareowner that the company will miss it’s projected earning goal by a significant amount. The friend/shareowner avoids the dip in stock value by selling their shares sometime before the earnings report goes public.
- A government official learns about regulatory reforms that will loosen restrictions on an automobile company’s exports. They buy a bunch of shares in the automobile company before the reforms get announced.
- A company executive, while getting a haircut, makes a passing comment about his employer’s plans to acquire a competitor to his long-time barber. The barber buys a bunch of company shares before the information goes public and also tips his close friends.
SEC Investigations
In easy cases, the SEC can simply identify suspicious activity by tracking the trading volumes of stock. The sudden spike in sales or purchases that occurs without any public release of material information indicates to the SEC that illegal insider trading might be afoot.
But oftentimes, those trading illegally won’t want to alert authorities to their illicit behavior. That’s why insider trading rarely comes with an obvious paper trail where a company’s stocks get bought or sold en masse.
The SEC proclaims to take a ‘broken windows’ approach. Just as most would get a broken window in their home fixed ASAP, the agency strives to treat all their cases with efficiency and urgency in order to deter others from committing similar crimes.
The SEC uses two main methods or strategies to protect markets:
Market Surveillance
Market surveillance refers to the strategy described above, in which the SEC monitors trading volumes and patterns with robust and sophisticated tools. The agency remains especially vigilant during periods when companies publish their earnings reports. Again, sudden spikes in trading volumes instantly set off the SEC’s alarms, so you won’t necessarily find perpetrators being so obvious about their insider trading.
Have you ever heard of dark pools? These private exchanges allow investors to trade securities with little transparency. High-frequency trading firms, along with other financial institutions, could be manipulating markets from the shadows.
See what the Zero Theft community has discovered about dark pools…
Leads
The other main way the SEC catches bad actors is through tips and its whistleblowing program. Displeased traders and investors often point the SEC to the questionable activity they’ve noticed or experienced. Whistleblowers, those who have evidence pertinent to an investigation, can earn a cut ranging from 10-30% of the money collected from those convicted of breaking securities laws.
The SEC reportedly receives over 20,000 tips, complaints, and referrals annually.
Penalties & Sanctions for Illegal Insider Trading
If charged with illegal insider trading, you could serve a maximum of 20 years in federal prison.
The maximum criminal fine for individuals is $5,000,000, and the maximum fine for ‘non-natural persons (such as a business whose securities are publicly traded) is $25,000,000.
On top of the fine, guilty parties might have to surrender, or ‘disgorge,’ up to three times the profits gained or the losses avoided.
Examples of Insider Trading
Although a decent number of high-profile cases of insider trading have emerged over the years, we will cover just a couple of the, particularly significant ones.
Congressman Chris Collins
Former Congressman Chris Collins served as an independent director for an Australian biotech company, Innate Immunotherapeutics Ltd. In 2018, the SEC revealed in a press release that Collins was “charged with tipping Cameron Collins [his son] after receiving confidential information about negative clinical trial results for Innate’s multiple sclerosis drug. Cameron Collins and his girlfriend’s father, Stephen Zarsky, are charged with trading and tipping others on the basis of the material, nonpublic information.”
According to an NBC report, “Cameron Collins sold more than 1 million shares of the company’s stock, avoiding about $571,000 in losses, while his fiancee’s father, Stephen Zarsky, avoided losses totaling almost $144,000 after trading on the illicit tip.”
Chris Collins pled guilty for insider trading and received a prison sentence of 26 months.
Martha Stewart and ImClone
In 2003, famed renaissance woman Martha Stewart and her broker, Peter Bacanovic, were charged with illegal insider trading of ImClone shares. ImClone’s shares took a massive plunge when it failed to receive FDA approval for its drug Erbitux in 2001.
The SEC alleged (in the press release linked above) that “Stewart committed illegal insider trading when she sold stock in a biopharmaceutical company, ImClone Systems, Inc., on Dec. 27, 2001, after receiving an unlawful tip from Bacanovic…Stewart and Bacanovic subsequently created an alibi for Stewart’s ImClone sales and concealed important facts during SEC and criminal investigations into her trades.”
Thought.co reports that “Stewart was sentenced to 5 months of prison time for obstruction of justice and conspiracy after the insider trading charges were dropped and securities fraud charges dismissed. In addition to the prison sentence, Stewart also settled with the SEC on a separate but related case in which she paid a fine of four times the amount of the loss she avoided plus interest, which came to a whopping total of $195,000. She was also forced to step down as CEO from her company Martha Stewart Living Omnimedia for a duration of five years.”
What do YOU think about Insider Trading?
Illegal and some legal forms of insider trading expectedly causes public outrage. Stock markets should remain as fair and equal as possible. Crony capitalists should not have the opportunity to guarantee gains and avoid losses with insider information that most do not have.
We at the Zero Theft Movement, along with our growing community, strive to eradicate the rigged parts of the U.S. economy and protect the ethical parts. We provide the platform for you to fight the corporatocracy!
On our voting app, citizens author theft proposals, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
The ZTM community knows that many businesses, including some corporations, act ethically. We are trying to hold the bad actors accountable. The corrupt corporations, lobbyists, and government officials. That way, good people and businesses can properly thrive and enjoy the piece of the piece they’re all due.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the book. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.