Insider Trading

“Insider trading” is a term that most investors have heard and usually associate with illegal conduct. Recent government actions, including the criminal case against Martha Stewart have enforced that view.

However, the term “insider trading” actually includes both legal and illegal conduct. The legal version is when corporate insiders, officers, directors, employees and large shareholders, buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. Many investors and traders use this information to identify companies with investment potential, the theory being, if the insiders are buying the stock, they must know more about their company than everyone else, so it is a good idea to buy the stock.

Reports of transactions by insiders are filed with the SEC on Forms 3, 4 and 5, and the SEC has an excellent overview of these forms and the requirements for filing of same. Most of the internet based financial quote sites have insider trading information for each particular security. Visit Yahoo Finance and select a security, then select the menu choice for Insider Transactions. Here is the insider trading page for Citigroup for an example.

The insider trading definition that we are concerned about is the buying or selling of a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Over the last 10 years the SEC and the courts have greatly expanded this definition, to include trading by individuals whose “relationship of trust” is so remote as to be non-existent, but that discussion is left for another day. While myself, and most other securities attorneys believe that the concepts of insider trading have been expanded beyond all permissible bounds, the law today is that if material information about a company, or about the company’s stock, is obtained in violation of any duty to any person, and used to trade, the trader is guilty of insider trading.

Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. Examples of insider trading cases that have been brought by the SEC are cases against:


  • Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
  • Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who traded the securities after receiving such information;
  • Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
  • Government employees who learned of such information because of their employment by the government;
  • Employees of financial printers who learned of the information during the course of their employment; and
  • Other persons who misappropriated, and took advantage of, confidential information from their employers.

In recent years, the SEC and the Courts have expanded this further, and insider trading can now include trading by the random man in the street if the SEC believes that he obtained the information from someone who should not have the information. See SECLaw Blog posts on insider trading for more information. In my opinion, this has all gone too far, and the SEC needs to be reigned in on the expansion of insider trading liability.

The theory behind the prohibition on insider trading is that it undermines investor confidence in the fairness and integrity of the securities markets. Thhe SEC claims that the detection and prosecution of insider trading violations as one of its enforcement priorities, and all investors must be aware of the potential danger in trading on a “tip” from someone who knows non-public information regarding a security.

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed. Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is “aware” of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.

Insider trading carries severe civil and criminal penalties. If you are contacted by a regulatory agency regarding trades that you made, you should contact a securities attorney before speaking to the regulators. For more information about the defense of insider trading allegations, contact Mark Astarita of Sallah Astarita & Cox, at For more general information regarding insider trading and the SEC’s views of it, read Insider Trading -A U.S. Perspective.

– Mark J. Astarita, Esq.

  • FINRA Approves Rule to Protect Seniors and Other Vulnerable Adults from Financial Exploitation  FINRA announced a rulemaking item to help firms better protect seniors and other vulnerable adults from financial exploitation. The proposal would allow a firm to place a temporary hold on a disbursement of funds or securities and notify a customer’s trusted contact when the firm has a reasonable belief that financial exploitation is occurring. The proposal would ...
  • Promises of Indestructible Wealth According to the SEC’s complaint,  Online videos designed to attract investors to attend investment seminars were posted with such titles as “Finances God’s Way” or “Indestructible Wealth” which encouraged retirees to sell their existing securities holdings and invest in the created by the videos promoters.The SEC claims that the videos falsely guaranteed promising returns, and ...
  • Barclays Financial Advisers Split, Forming $3 Billion Independent Firm A half dozen financial advisers from Barclays PLC’s U.S. wealth-management group, including its former head, have left the firm to form a multi-billion-dollar independent practice with national ambitions. Barclays Advisers Start New Firm
  • Same-Sex Court Ruling Answers And Creates Questions For Advisors The Supreme Court’s ruling in Obergefell vs. Hodges which permits same-sex marriages across the country is not only a landmark ruling in US history, it is a unique opportunity for financial advisers to provide advice and assistance to their same-sex couples. From tax advice, amending tax returns, re-titling accounts, and modifications of beneficiaries, the decision presents ...
  • Stifel Grabs Advisors With $285M AUM Recruiting and broker transition continue at Stifel. Today they announced that three advisers, with $285 million AUM joined from Janney Montgomery Scott. Source: Stifel Grabs Advisors With $285M AUM
  • SEC Warns of Purported Financial Professionals Using False Credentials to Attract Investors In a recent blog post at The Securities Law Blog, I warned investors and brokers of the fraudulent use of FINRA’s Broker Check system by fraudsters to impersonate legitimate financial professionals. See, FINRA Admits BrokerCheck Being Used for Fraud. BrokerCheck, the publication of private, regulator-mandated information regarding financial professionals, has been a problem since the day ...
  • Apple’s Tim Cook Accuses Facebook and Google of Violating User Privacy In a blistering speech attacking unnamed Internet Giants, Cook blasted the flagrant invasion of privacy, and stresses Apple as a company “that doesn’t want your data”Great speech, but much of the fault of the loss of privacy to Google and Facebook is our own. We constantly give both companies access to our personal information, in exchange ...
  • Piper Jaffray to Host 35th Annual Consumer Conference Piper Jaffray , a leading investment bank and asset management firm, is scheduled to host its 35th annual Consumer Conference, June 9-10, 2015 in New York. Source: Piper Jaffray to Host 35th Annual Consumer Conference
  • The Securities Law Blog: Be Wary of Famous People Promoting Penny Stocks The penny stock market has the potential for significant profits, and of course, significant losses. Investing in start-ups and small companies is speculative, and high risk, but has an allure for a certain type of investor.One problem with this market segment is the promotion of such investments to individuals who are unsuitable for the investment,Over ...
  • FINRA Fines Morgan Stanley $2 Million for Short Interest Reporting and Short Sale Rule Violations | The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Morgan Stanley & Co. LLC $2 million for short interest reporting and short sale rule violations that spanned a period of more than six years, and for failing to implement a supervisory system reasonably designed to detect and prevent such violations. Source: FINRA Fines ...