Insider trading may lead to civil or criminal charges resulting in steep penalties, prison sentences or both. Under New Jersey and federal law, obtaining non-public information leading back to a company insider and acting upon it for monetary gain is illegal.
You can also face civil or criminal charges even when a company insider does not directly offer you confidential information.
How is insider trading detectable?
Corporate insiders may buy and sell their companies’ stock but must report their transactions to the US Securities and Exchange Commission. However, the SEC monitors trading activity and red flags drastic stock sales and purchases involving companies that do not make public announcements warranting such transactions.
Can you commit securities fraud indirectly?
You can face securities fraud charges that do not involve actively trading on your own company’s insider knowledge or encouraging others to do the same. For example, if you overhear your housemate’s conversation with business colleagues about their company’s exciting upcoming merger, using that information to buy stock for your financial gain would be insider trading leading to a securities fraud conviction.
You can also be guilty of securities fraud if you act on a tip you receive directly from the spouse, household member or another confidante of a company’s insider who may or may not realize they are leaking confidential information. Ultimately, you are guilty of insider trading when you can track a link to the source of the information you act upon.
Insider trading is a form of securities fraud that can be especially harmful to the economy because it discourages public investments in companies that must raise stock prices. As a result, investors experience diminishing returns.