Markets

Insider Trading

Hedge Funds

Retirement

Opinion

Insider Trading Education Center

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?

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.

Who are we?

Insider Monkey is one of the fastest growing financial research websites on the web, read by 1.5 million people every month.

Our research is headed by Ian Dogan who is a former fund manager, holding a Ph.D. in the field. We partnered with Marketwatch and created the Marketwatch/Insider Monkey Billionaire Hedge Fund Index.

Our content has appeared on:

Testimonials
  • I've been an Insider Monkey subscriber for a couple years now and the flagship strategy is one of the best strategies in my portfolio. Because the strategy is small cap you will see some major short term swings, but if you can follow the strategy and rebalance only once every quarter you will see some really strong results once you hit the 12 month time frame and beyond.
    David L.
  • I initially became aware of Insider Monkey when Meena was interviewed on Business News Network (BNN) in Canada. The idea of mimicking the best ideas from the best fund managers was appealing (as I have met many smart managers on Bay Street in Toronto). While I have only had the newsletter for one year, the Insider Monkey allocation has been the best performer in my equity portfolio. I look forward to continued outperformance in the future.
    G. Chin
    Toronto, Canada
  • I first came across Insider Monkey (IM) nine quarters ago (1/2013) and since then have enjoyed exceptional returns. Last year (3/2014) I traveled to NYC to meet the founder because I was thinking about doubling down on their strategy. I left favourably impressed and proceeded. It was a smart move. At the beginning of this year I decided to double down again. There are no guarantees but preliminary results are promising.

    Why do I recommend IM?
    1. It's easy: 15 picks every 90 days. Most picks are repeated at least once, some more than eight times.
    2. It's flexible: if a pick goes bad you only hold it for 90 days.
    3. Time saving: the IM team vets hundreds of HF SEC reports every 90 days and produces a list of 15 SC picks from the best stock pickers in the world. A world-class research department for less than a dollar a day.
    4. It works. Need I say more?

    One admonishment: have faith in the model, hold all 15 picks for ninety days.
    Tommy
  • I want to thank you and the team for the great results this past year. Many of my friends and colleagues use profesional financial advisors and annually pay 1% to 1.5% of their portfolio value for mediocre results. Insider Monkey's performance is outstanding for a mere fraction of the cost. I am an analyst for a utility and have always wanted to invest in high growth small cap stocks, but I have never had the time, expertise or access to the information needed to effectively research them, and was never comfortable with casual stock recommendations from magazines, blogs, and television. I had never subscribed to a premium publication but was immediately impressed with the Insider Monkey team’s analysis and the proven results of the 15 Stock Small Cap Strategy.

    Keep up the great work. Thus far, the Insider Monkey team’s approach has enhanced my investment portfolio and I look forward to future issues and following the team’s investment strategy throughout the foreseeable future.
    Jim T.
    New York