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Illegal vs. legal insider trading

| May 21, 2021 | Federal Securities Law |

The Securities and Exchange Commission regulates tradable financial tools, or securities, such as stocks and bonds. Insider trading is a familiar term to many stock traders in Pennsylvania. Many people still associate insider trading with fraud, but not all of it is illegal.

When is insider trading legal?

An insider is a person in a company who has access to valuable or confidential information about a stock. Insider trading occurs when people who have ties to the company, such as employees or directors, buy, sell and trade company stocks.

To be legal, it must present a fair opportunity to all traders in a company, and traders must report transactions to the SEC within two days. For example, if a board member buys 1,000 shares in the company they work for and report to the SEC, it is legal.

Illegal insider trading and avoiding it

Illegal insider trading involves making trades with confidential information not released to the public. This gives insiders an unfair advantage over other traders, which makes it a punishable offense.

For example, if an insider learns of an acquisition not disclosed to the public and sells shares based on the information, it is illegal. The SEC has modified the definition of insider trading to also include random people who have illegally obtained inside information.

Getting charged with insider trading

Traders involved with a company should read their company’s trading policies or ask a lawyer about federal securities law. Acting on hot tips possibly linked to insider information is as illegal as acting on inside information from a company.

Insider trading can be difficult for prosecutors to prove; it requires tedious work to establish illegal trading patterns and get convictions. However, the accused trader still needs a defense team to help them fight the charges.

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