Insider trading - sustany/dvg GitHub Wiki

Insider trading is the trading of a company�s securities by individuals with access to confidential or material non-public information about the company. �Taking advantage of this privileged access is considered a breach of the individual�s fiduciary duty.

A company is required to report trading by corporate officers, directors, or other company members with significant access to privileged information to the Securities and Exchange Commission (SEC). �Federal law defines an �insider� as a company�s officers, directors, or someone in control of at least 10% of a company�s equity securities. �Congress has criminalized these insiders� use of non-public information under the theory that the use fraudulently violates a fiduciary duty with which the company has charged the insider.

Courts impose liability for insider trading with Rule 10b-5 under the classical theory of insider trading and, since U.S. v. O�Hagan, 521 U.S. 642 (1997), under the misappropriation theory of insider trading.�

Under the classical theory of insider trading, insiders who �tip� friends about material non-public information which may influence the company�s publicly traded stock price may be liable. �Because friends do not satisfy the definition of an insider, a problem arose regarding how to prosecute these individuals.� Today, a friend who receives such a tip has the same duty as the insider imputed onto them.� In other words, a friend may not make a trade based upon that privileged information. �Failure to abide by the duty constitutes insider trading and creates grounds for liability. �The person receiving the tip, however, must have known or should have known that the information was company property to be convicted.

Dirks v. SEC, 463 U.S. 646 (1983)�was a pivotal U.S. Supreme Court decision regarding this type of insider trading. �In�Dirks, the Court held that a prosecutor could charge tip recipients with insider trading liability if the recipient had reason to believe that the information�s disclosure violated another�s fiduciary duty and if the recipient personally gained from acting upon the information. Dirks�also created the constructive insider rule, which treats individuals working with a corporation on a professional basis as insiders if they come into contact with non-public information.�

The� emergence of the misappropriation theory of insider trading in O�Hagan has paved the way for passage of�17 CFR 240.10b5-1, which permits criminal liability for an individual who trades on any stock based upon the misappropriated information. �Previously, the prosecutor could only charge the insider if the stock of the insider�s company had been traded. �While proof of insider trading can be difficult, the SEC actively monitors trading, looking for suspicious activity. Under Rule 10b5-1, however, a defendant can assert an affirmative preplanned trade defense.