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What is insider trading?

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Insider trading is not uncommon and there are numerous insider trading lawsuits filed every year. Stock prices are heavily influenced by news and information, some of which are available to company insiders before becoming public knowledge, leading to insider trading. 

What is the meaning of insider trading and is insider trading illegal? Here we take a look at the insider trading definition in more detail.

Insider trading is the buying and selling of a company’s stock based on non-public information about the firn. 

According to the US Securities and Exchanges (SEC), illegal insider trading also involves tipping of insider information and trading of securities by the person who receives the tip.

How does insider trading work?

A company’s stock price can rise and fall based on a variety of news, including financial reports, mergers and acquisitions, management changes, stock splits and dividend announcements. Executives that work in the company may have information about such developments before these are made publicly available, which gives them an unfair advantage over other investors.

Access to such information in advance can be used to buy or sell the company’s stock before a major price surge or fall following the market-moving news. 

Insider trading examples often involve company employees who were aware of confidential corporate information and their friends and family members who have used this information for insider trading.

Such cases have been brought up against employees in law, banking, brokerages, and other firms providing services to the insider trading-linked company, government employees and political intelligence consultants.

Is insider trading legal?

According to the US SEC, illegal insider trading refers generally to buying or selling a security based on non-public information and  breaching fiduciary duty or other relationship of trust and confidence. 

“Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities,” said the US SEC.

In the US, insiders are allowed to buy and sell company shares, but they must register the transactions with the SEC. 

Famous insider trading examples

The most recent stock insider trading lawsuit was filed against retail company Bed Bath and Beyond (BBBY) and its executives in August 2022.

In the first 17 days of August 2022, BBBY stock surged over 500% from $4.94 to a five-month high of $30. However, the stock crashed over 70% in the days that followed to to trade at about $8.78 by the end of the month.

Stockholder rights law firm Bragar Eagel & Squire filed a class action lawsuit against the firm, alleging that company insiders profited at least $110m from their insider sales of BBBY stock from August 16 to August 17, 2022.

Separately, Pengcheng Si filed a class action suit against Bed Bath & Beyond, JP Morgan Securities, RC Ventures and company insiders accusing them of aggressively promoting BBBY shares and “pumping and dumping BBBY shares”.

FAQs

Is insider trading legal?

According to the US SEC, illegal insider trading refers generally to buying or selling a security based on non-public information and breaching fiduciary duty or other relationship of trust and confidence. Insiders are allowed to buy and sell company shares, but they must register all transactions with the SEC.

Is insider trading profitable?

Insider trading can be profitable yet it is highly unfair to other market participants, and therefore can be prosecuted. The US SEC treats the detection and prosecution of insider trading violations as one of its enforcement priorities. In the US, company insiders are allowed to buy and sell company shares, but they must register all their transactions with the SEC.

What are the types of insider trading?

Some examples of insider trading cases have been filed against company employees, friends and family members of employees, government officials and political intelligence consultants.

 

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