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When does a tip become insider trading?

On Behalf of | Jan 14, 2020 | Firm News |

Investing in the stock market is always a risk. The market changes from day to day. If you follow the market each day, you may bite your fingernails if your investment begins to sink or celebrate if your stocks rise. Wouldn’t it be great if you could know when a stock price was going to go up or down so you could make your trades accordingly?

Most of the time, only a small group of people know if something is going on in a company that may affect its stock price. Anything that affects the confidence of the consumers and the shareholders can impact the value of a stock, and using that privileged information to decide when to buy or sell securities is called insider trading. In many cases, insider trading is illegal.

Where did you get your tip?

When you make your decisions about buying or selling securities, you must use the same information the rest of the public uses, including the history of the security and the latest publicity the security or its entity has received. To keep the market fair and to prevent breaches of fiduciary duty, the law prohibits investors from using insider information. Those who disclose material information for the benefit of traders often violate the trust their companies have placed in them.

Nevertheless, if you stand accused of insider trading, you will want to have a strong defense. Some factors that may demonstrate your actions did not involve insider trading may include the following:

  • The information was public so that all investors had the same opportunity to learn the facts. For example, news services covered the story or the company published it in a newsletter to investors.
  • The information did not relate to the stock or other security that you ultimately traded.
  • The person who shared the information with you had no fiduciary duty or obligation to keep it confidential.
  • The information you received about the security or its issuing entity was not material. In other words, it would not likely affect a reasonable investor’s decision about trading the security,

Unfortunately, your defense may not be so easy. Federal courts expect that traders do due diligence in investigating any information they obtain about securities. If the information you used to make your trade violated the informant’s fiduciary duty or trust, even ignorance on your part may not be enough to protect you from federal charges. You may find that a skilled South Carolina attorney can be a welcome advocate when facing these complex issues.