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What makes insider trading illegal?

On Behalf of | Apr 6, 2021 | White Collar Crimes |

Most people assume that insider trading is illegal, but there is a type that is actually legal. It’s important for South Carolina residents to understand the difference between legal and illegal insider trading to avoid problems with the law.

Legal insider trading

The definition of insider trading is the buying or selling of stocks based on material information that isn’t available to the public. When directors make decisions together on their company’s stock, they are technically insider trading, but it is the type that is legal. The catch is that the law requires them to disclose their decisions within a short period of time to the SEC and the public. In addition to disclosing stakes and transactions, companies must report changes in ownership.

To comply with this requirement, make sure to fill out SEC insider trading Form 4 within two days to report selling or buying company stock. SEC insider trading Form 3 is to report the initial stake in the company. You need to file Form 3 within 10 days of becoming an insider. Officers and directors are considered insiders.

Illegal insider trading

Illegal insider trading is a white-collar crime that law enforcement can arrest individuals for. Insider trading is illegal when you don’t follow the SEC’s rules in disclosing transactions, stakes and changes in ownership. It’s also against the law when you buy or sell stock based on the information you overheard that isn’t yet available to the public. Paying for insider information is also illegal. Law enforcement can prosecute individuals for these different types of insider trading.

Dirks test

The SEC uses the Dirks test to determine if a person is guilty of illegal insider trading. Two key criteria that the SEC investigates are whether the individual broke rules of confidentiality and whether they did so knowingly.

When you find out something important about a company’s financials that isn’t available to the public, you must avoid selling or buying its stock until the public also knows. It doesn’t matter if you accidentally came across the information or not; benefiting financially from it is still illegal insider trading. If you have questions about illegal insider trading, a criminal defense attorney may provide more information.