When Is Insider Trading Legal or Illegal?

By www.ProfitableTradingTips.com

http://profitabletradingtips.com/profitable-trading-tips/when-is-insider-trading-legal-or-illegal
The New York daily news just published
an article of hedge fund manager
who was facing insider-trading
charges and who apparently
committed suicide.

a hedge fund manager facing insider-
trading charges was found dead in his
brooklyn apartment – the victim of an
apparent suicide, officials said.

on june 15, valvani was hit with federal
insider-trading charges after he was
accused of getting advance word about
u.s. food and drug administration
approvals of generic drugs and using the
information to make profitable trades.

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he earned about $25 million on the
secret information – and passed on the
info to another portfolio manager who
made his own illegal trades, authorities
said.

Insider trading can result in a
maximum fine of $5 million a
maximum prison sentence of 20 years.

But just what constitutes insider
trading and when is insider trading
legal or illegal?

Insider Trading Definition

investopedia provides an insider
trading definition and help with
understanding when is insider trading
legal or illegal.

insider trading can be illegal or legal
depending on when the insider makes
the trade:

it is illegal when the material
information is still nonpublic–trading
while having special knowledge is unfair
to other investors who don’t have access
to such knowledge.

illegal insider trading therefore includes
tipping others when you have any sort
of nonpublic information.

directors are not the only ones who have
the potential to be convicted of insider
trading.

people such as brokers and even family
members can be guilty.

A crucial term here is material
information.

Corporate insiders who are privy to
plan of a merger that has not yet gone
public hold material information and if
they trade on that info they are
probably guilty of insider trading.

However, an employee of the company
working on the loading dock who sees a
huge inflow of new equipment and a
huge outflow of products may very well
assume that the value of the company’s
stock will go up.

Making the inference that more
business means more profits and
buying or selling stock is very unlikely
to be construed as insider trading.

Timing Is Everything

When an insider has material
information he or she cannot use it to
trade until that info is public.

However, once the information enters
the public domain they can legally
trade on it.

To the extent that the market moves
greatly and the person does not act
rapidly there may be no advantage.

However, there are times when the
value of insider info is not immediately
clear to the market in general in which
case an insider can still place trades
between the time when info becomes
public and when analysts have had time
to digest it.

Here is where average traders are wise
to pay attention to what insiders are
buying and selling in own accounts.

When Is Insider Trading Not
Insider Trading?

There is always the risk that a corporate
officer may wish to sell some of his
stock for perfectly legitimate reasons.

He does so and then his company’s
stock crashes.

He will be suspected to have known
this was going to happen and may be
prosecuted.

How can he avoid this? The Securities
and Exchange Commission has a rule
that applies.

The New York Times Deal Book
discusses the fine line between legal
and illegal insider trading.

to address the issue of how insiders can
trade in their company’s shares, the
s.e.c. in 2000 adopted rule 10b5-1 to give
corporate employees a means to buy
and sell without fearing potential
securities fraud charges.

under the rule, an insider can put in
place a plan to trade company shares
when the person does not have inside
information.

that allows a corporate employee to
“carry out those pre-planned
transactions at a later time, even if they
later become aware of material
nonpublic information.”

in other words, it is a type of legal
insider trading because the plan must
prevent the insider from changing the
transaction by having in place a
mechanism for the timing of the trades
and the amounts involved.

When Is Insider Trading Legal or Illegal?

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