Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Is Insider Trading illegal?

You would respond “of course insider trading is illegal” but in practice insider trading is more legal than illegal. When insiders are in possession of market-moving (material) non-public information and trade based on that information, then insider trading is illegal. However, when you look at the most insider trading cases that are brought to public’s attention, you will notice that the perpetrators are usually finance professionals or lawyers in possession of some imminent M&A information and they recruit friends and family to profit from it in stock and options markets. Can you remember any recent insider trading cases where an insider is prosecuted because they traded immediately before a significant corporate announcement?

The Walt Disney Company (NYSE:DIS)

Insider trading laws, regulations, and company policies restrict most insider trading to certain safe periods such that the transactions conducted during those time periods are less likely to be prosecuted. Most insiders are not idiots; they know that they are watched and they will be prosecuted if they tip someone off. As a result, we don’t see many “illegal” insider transactions conducted by inside insiders. Usually none of the more than 200,000 insider filings reported to SEC each year (see definition of insider trading?) has been deemed illegal by prosecutors.

In 2010 so far, there were only 5 insider trading cases brought by SEC. In the first case SEC charged a securities professional, meaning someone working for an investment bank, for tipping his friend and making around $1 million in at least 11 separate instances. Why did SEC say “at least” in their statement? Because it could be more, they just don’t know. They believe they could only prove 11 incidences. Did you also notice something else? SEC probably got the hint of illegal insider trading after the 11th incidence, I mean at least 11th. So if these guys stopped after the 10th insider trading case, they would not have been caught.

In the second case, a Walt Disney Company employee –no, not the CEO or CFO, just an administrative assistant- and her boyfriend tried to sell Disney’s earnings information to 20 different hedge funds before it is released. This is not an insider trading case, this is a dumb criminals case, perfect fit for Jay Leno’s show.

In the third case, a Microsoft employee –no not the CEO or CFO or other legal insiders, just a product manager at the MSN division- obtained earnings estimates and relayed the information to Art Samberg of Pequot, a hedge fund. These are not the insiders who are required to file their transactions. SEC was not successful initially in investigating this case and closed it in 2007. Only after Microsoft employee’s ex-wife brought new evidence into SEC’s attention, the case was a success 8 years after the initial illegal insider trading incident.

In the fourth case SEC charged billionaire Wyly brothers with using elaborate offshore trusts and subsidiary companies to conceal their transactions. Naturally Wyly brothers did not report their transactions on Form 4 either. SEC alleges that this has been going on for more than 13 years. 13 years? And they noticed this now!!

Finally in the fifth case SEC charged a former Deloitte and Touche LLP partner and his son with insider trading in the securities of several of the firm’s audit clients. This is similar to the first case we discussed. Usually lawyers, investment bankers, and accountants trade using insider information they obtained through their employment. SEC catches them only after several previously undetected insider transactions.

As you can see none of the insider trading cases brought by SEC this year involves legal insider transactions reported on Form 4.

Next: How Insiders Use Private Information and Don’t Get Caught?

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
This is a FREE report from Insider Monkey. Credit Card is NOT required.