Many people hear the term “insider trading” and automatically leap to the idea that something illegal has happened. The truth is that both legal and illegal insider trading exists and in order to be able to tell which is which, you need to start with a solid understanding of what an insider is and what they are allowed (and not allowed) to do.

When it comes to the question of stocks and the factors that influence their valuation, an insider is a person who has valuable, non-public information by virtue of some level of proximity to the corporation or elements affecting the corporation.  Insiders generally include high-ranking company executives and directors. Insiders can also be anybody whose ownership of a company’s equity is equal to or greater than ten percent.

Even though they possess this valuable information, insiders are allowed to buy and sell stock in their company, as long as they do so in the legally approved way. This includes when company employees or executives buy stock in the companies in which they work. These transactions are registered with the Securities and Exchange Commission.  What insiders are not permitted to do is to use and trade on their non-public information for profit. This type of activity would include an insider buying or selling stock immediately before something consequential happens with the company, such as an impending lawsuit or disappointing results of clinical testing, and inside information can be what has been told to family, friends, or any other member of the public.

A recent example of this occurred when Representative Chris Collins of New York first convinced family members to purchase a stock, then learned that damaging information was about to be released about the company. He immediately called his son to share the insider information so that he could sell the shares he had purchased. This represented illegal insider trading, as it provided his son with an unfair advantage over the public. In Mr. Collins’ case, the penalty for insider trading was not only his need to resign from his position in Congress. He also faces the possibility of up to ten years in prison, and his son and the father of his son’s fiancée are also now facing related charges.

If you have been accused of insider trading, you need the guidance of a law firm that has a solid base of knowledge regarding what is a permissible use of inside knowledge. For assistance, contact our firm today to set up a consultation.