Insider trading or trades, is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. Insider trades take place legally every day, when corporate insiders – officers, directors or employees – buy or sell stock in their own companies within the confines of company policy and the federal regulations governing this trading.

 

When we hear the term “insider trading” we usually think of the illegal variety, the type of insider trading that achieved wide-spread notoriety in the 1980s with the SEC’s civil cases and the United States Department of Justice’s criminal cases against Michael Milken and Ivan Boesky and which inspired even Hollywood’s imagination with the movie “Wall Street”. Illegal insider trading is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses in the stock market.

 

An example of this type of illegal trading is when an executive of a company purchases shares of the company based on a pending merger announcement. Illegal insider trading also occurs when friends, family members or business associates are also given this privileged nonpublic information to then purchase or sell shares of this stock. However once the company has announced the merger publically insiders may legally trade the shares. In addition, insider transactions must be reported to the Securities and Exchange Commission.

 

More Americans are investing in the stock market. This reflects Americans’ trust and confidence in the American stock markets and that trust stems from a belief that our government pursues its mandate to maintain the fairness and integrity of the stock markets. Investors put their capital to work – and their fortunes at risk- because they trust the marketplace is honest. Our securities laws require free, fair and open transactions.

 

Because illegal insider trading, similarly called “trading on material of non-public information”, undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.