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Jasmin Merdan/Getty Images October 28, 2022 Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can plan for their financial futures. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Investing disclosure: The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. You may have heard the term “insider trading” thrown around in financial dramas on television or in the movies, but what exactly does it mean? Insider trading involves the trading of a public security, such as a or a , by someone with material non-public information that impacts the value of the security. Here’s what else you should know about insider trading including when it can happen legally. What is insider trading
The Securities and Exchange Commission, or SEC, defines as the “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.” The rule also applies to those people who pass along the information or tip off others so that they can benefit from the information. People who trade on the tipped information may also be in violation of insider trading laws. Insider trading laws exist to preserve trust and faith in the securities markets. When some people are able to trade with advantaged information, it undermines the public’s trust in the financial system. Information is considered material if it could impact the value of a security and it’s considered non-public if it hasn’t been publicly announced or shared widely. Companies typically announce material information such as earnings announcements or news about corporate mergers in press releases or . When is insider trading illegal
Insider trading is illegal when a person or entity buys or sells a security when they are in possession of material nonpublic information. If the information has been made public, it’s no longer illegal to trade on it because you wouldn’t have an unfair advantage. For example, say you work in the accounting department of a publicly traded company and help prepare the company’s financial statements each quarter. If you notice that the company’s results are particularly strong for the current quarter and purchase shares before the earnings have been announced, you’d be in violation of insider trading laws and would be subject to fines and possible jail time. At the same time, if you passed that information along to someone else, you could both be prosecuted for illegal insider trading. When is insider trading legal
Insider trading isn’t always illegal. It also refers to the buying and selling of shares by a company’s executives or directors. These trades must be disclosed to the SEC shortly after they are made and are sometimes planned months in advance. These SEC forms involve insider trading: Form 3: This form must be filed within 10 days of someone becoming an “insider,” which is defined as an officer or director of the company. It shows the insider’s initial stake in the firm. Form 4: When an insider trades in the company’s securities, they must disclose the transactions within two business days of the date of the trades. Form 5: This form is similar to Form 4, but covers transactions over the prior year that had not been previously disclosed because of an exemption or a failure to report. Some transactions don’t have to be reported immediately on a Form 4, but do have to be included on Form 5. Examples of well-known insider trading scandals
Martha Stewart
In 2003, Martha Stewart and her Merrill Lynch broker were charged with securities fraud related to insider trading of ImClone shares in 2001. The CEO of ImClone, a biopharmaceutical company, was also a client of Stewart’s broker and had sold all the shares held by him and his daughter at Merrill Lynch in anticipation of the FDA rejecting an ImClone cancer treatment. Stewart’s broker tipped her off and she was able to avoid losses of $45,673 when the FDA’s ruling was made public. She later lied to the SEC and criminal investigators about the trades and ultimately served five months in federal prison. Former Amazon AMZN employee
The SEC charged former financial analyst Brett Kennedy and his college roommate with insider trading in 2017. The charges alleged that Kennedy had accessed Amazon’s first quarter 2015 earnings report early and sold the information to Maziar Rezakhani, his college roommate, for $10,000. Rezakhani made more than $116,000 in illegal profits from trading on the information and shared some of those profits with his advisor Sam Sadeghi, the SEC alleged. Kennedy was sentenced to six months in prison and fined $2,500. Dean Foods
In 2016, the SEC charged famed Las Vegas Billy Walters with insider trading, alleging that he made $40 million in illegal profits after former Dean Foods board member Thomas Davis, who owed Walters money, tipped him off to information about the company over a five-year period. Walters shared the material nonpublic information with pro golfer Phil Mickelson, who used the information to make nearly $1 million in illegal profits, which he used to pay a debt to Walters. Mickelson was not charged but was named as a relief defendant for the purpose of recovering profits made off Walters’ illegal scheme. Walters was sentenced to five years in prison, while Davis was sentenced to two years. Bottom line
If you’re involved in the financial markets, it’s important to have a solid understanding of insider trading laws. If you’re unsure of whether information is material or nonpublic, it’s a good idea to consult with a financial expert or attorney before acting on it. Anything that’s close to the insider trading line should likely be avoided. SHARE: Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can plan for their financial futures. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles