Most people’s take on insider trading is that it’s cheating and should be a punishable crime. However, insider trade isn’t always illegal, and when it is, this white-collar crime can be difficult to prove and prosecute. That said, it’s crucial to remember that you don’t have to trade to be found guilty of insider trading.
To be prosecuted for insider trading, one has first to be considered an insider with access to information that isn’t privy to the public. Secondly, the insider must have traded on the confidential information or shared it with others who traded on it. If no trade occurs, the most that an insider may generally be charged with is violating their code of conduct by breaking sensitive information.
The cornerstone of the legal framework against insider trading is the Securities Exchange Act of 1934. Section 10(b) and Rule 10b-5 specifically address fraudulent activities in securities trading. These provisions make it unlawful to employ manipulative and deceptive devices in purchasing or selling securities.
Key reasons for illegality
Insider trading erodes the foundation of fair and efficient markets. When individuals with privileged information exploit it for personal gain, it creates an uneven playing field that disadvantages other market participants.
Moreover, company executives, board members and employees owe a fiduciary duty to their shareholders. Engaging in insider trading violates this duty, as these individuals are often entrusted with sensitive information meant to benefit the company as a whole, not to be used for personal enrichment.
Lastly, ensuring equal access to information is crucial for the proper functioning of financial markets. Insider trading disrupts this balance, as those with privileged information gain an unfair advantage over other investors who operate with publicly available data.
Enlisting legal counsel should be non-negotiable if an individual has been charged with insider trading. If you are facing charges, an experienced legal team can first establish if you’ve technically participated in illegal insider trading and can help you to mount a solid defense to help minimize any penalties you may be at risk of facing as a result of your alleged conduct.