Investor Insider Trading: Legal and Ethical Considerations for Traders and Investors

Introduction

Investor insider trading is a hot topic for both traders and investors. It is seen as a way for traders and investors to gain an advantage over the market by taking advantage of non-public information. While the practice may be seen as unethical and even illegal in some cases, the reality is that many investors get away with it. This article will discuss the legal and ethical considerations for traders and investors when it comes to insider trading, and how investors get away with insider trading.

Legal Considerations for Investor Insider Trading

Prohibited By Law

As mentioned, insider trading is illegal and prohibited by law in most jurisdictions. This means that traders and investors are not allowed to use material non-public information to trade securities. Material non-public information includes information about a company’s financial performance, earnings, mergers and acquisitions, and other information that could impact the stock price of a company.

Insider trading is viewed as unfair to other market participants who do not have access to the same information and can result in market manipulation. Violating insider trading laws can result in severe penalties, including fines, imprisonment, and loss of securities licenses.

Liability For Tippees

Investors can also be held liable for insider trading if they receive information from an insider and use it to trade securities. This is known as being a “tippee,” and can result in legal consequences even if the investor did not directly obtain the insider information. To avoid liability, investors should be cautious when receiving information and should not use the information to trade securities unless it has been publicly disclosed.

Insider Trading Policies

Many companies have insider trading policies in place to prevent insider trading and ensure compliance with the law. These policies may require employees to pre-clear trades, report trades to the company, and restrict trading during certain periods. It is important for investors to be aware of these policies if they are investing in a publicly traded company. Companies may also require their directors, officers, and employees to report their securities holdings and transactions to the SEC.

Disclosure Requirements

Investors and traders are required to disclose any material information that could impact the stock price of a company. This includes information about a company’s financial performance, earnings, mergers and acquisitions, and other material events. Failure to disclose material information can result in legal consequences. Companies are also required to disclose material information in their filings with the SEC, such as annual reports and quarterly reports.

SEC Enforcement

The Securities and Exchange Commission (SEC) is responsible for investigating and prosecuting insider trading cases. The SEC can also impose civil penalties on investors and traders who violate insider trading laws, including fines and disgorgement of profits made from illegal trades. The SEC has a whistleblower program that incentivizes individuals to report securities violations, including insider trading.

Ethical Considerations for Investor Insider Trading

Fairness

The most important ethical consideration of insider trading is fairness. Insider trading undermines the fairness of the market by giving some traders an unfair advantage over others. The use of material non-public information for trading can result in profits that are not based on merit or hard work, but rather on an unfair advantage. This can result in a loss of confidence in the market and damage the integrity of the financial system.

Honesty

Another important ethical consideration is honesty. Investors have a duty to be honest in their dealings and to disclose any material information that could impact the stock price of a company. Investors should not engage in insider trading, even if they think they can get away with it. It is important to maintain the integrity and be honest in all dealings, including in investing and trading.

Confidentiality

Insider trading can also involve breaching confidentiality. Investors who obtain material non-public information have a duty to keep that information confidential. Breaching confidentiality can damage relationships and result in reputational harm. Investors should not engage in insider trading or disclose confidential information.

Responsibility

Investors and traders have a responsibility to comply with securities laws and regulations. Compliance with these laws is not only a legal requirement, but also an ethical one. Investors who engage in insider trading are not only breaking the law but also shirking their ethical responsibility to maintain the integrity of the financial system.

Consequences

The consequences of insider trading can have a far-reaching impact. Insider trading can result in fines, imprisonment, and loss of securities licenses. It can also result in reputational harm and loss of investor confidence. Investors and traders should consider the consequences of insider trading and the impact it can have on themselves, the market, and society as a whole.

Recent Instances Of Insider Trading By Investors

John Gordon London

John Gordon London was recently convicted of insider trading in 2019. London was a former lawyer and investment adviser, who attempted to trade on insider information regarding a potential merger of two companies. The merger was being discussed by executives of the two companies, and London was aware of these discussions. He then attempted to purchase shares of one of the companies before the merger was publicly announced, to take advantage of the potential increase in share price. The U.S. Securities and Exchange Commission (SEC) brought civil charges against London for his actions, and he was ultimately sentenced to two years in prison and ordered to pay $8 million in fines.

Steven Cohen

Steven Cohen was recently charged with insider trading in 2020. Cohen is the founder and CEO of Point72 Asset Management, a hedge fund and investment firm. Cohen was accused of using insider information to purchase shares of two drug companies and then using that information to gain an unfair advantage in the market. He was charged with one count of conspiracy to commit securities fraud and is facing a potential jail sentence and millions of dollars in fines.

David Berke

David Berke was recently indicted on charges of insider trading in 2020. Berke is a former hedge fund manager at Visium Asset Management, and he is accused of using insider information to buy and sell securities. According to the indictment, Berke used non-public information to purchase and sell stocks and bonds, resulting in a profit of over $2 million. He was charged with one count of securities fraud and is facing up to 20 years in prison and a possible fine of up to $5 million.

Conclusion

Investor insider trading is a complex subject that involves both legal and ethical considerations. Legally, insider trading is prohibited in most countries and carries a variety of penalties if convicted. Ethically, it is seen as an unfair advantage and can undermine the trust and confidence of investors in the markets. As a trader or investor, it is important to understand the legal and ethical implications of insider trading and to take steps to avoid any illegal or unethical behavior. By doing so, traders and investors can protect themselves and their investments while helping to ensure that the markets remain fair and efficient.