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What is insider trading?

The basic tenets of prohibited insider trading forbid using "inside" knowledge to get an advantage in securities trading. With continuously increasing levels of enforcement along with strict court rulings that give prosecutors more scope, anyone involved in trading and investment should be aware of the many complex laws and regulations governing the various aspects of this activity.

Who is an insider?

An insider, for the purposes of securities trading, is someone with inside or confidential knowledge about facts that will influence securities prices and that are not available to the public. Insiders may obtain this knowledge by virtue of working for the company in question, occupying a fiduciary position (such as attorney, accountant or financial advisor) with the company or its employees, or due to personal or familial relationships with persons in key roles. In the case of one person illegally providing insider knowledge to another, both of them can be charged with insider trading violations.

For example, if you are an attorney handling a company's patent applications, you may be in a position to know that the company is about to put a lucrative product on the market. Based on this, you buy a large amount of stock in the company. Alternatively, you tell your friend about this development and the friend buys a lot of stock. In the latter case, both of you may be accused of insider trading.

Are there any exceptions?

There are several defenses and exceptions to this broad general rule. For example, an accused may be exonerated if he or she can show that the trading decision did not take into account the confidential information. Another is that the trader was genuinely unaware of the confidential and non-public nature of the information.

While many associate the phrase "insider trading" with breaking the law, there is a way to do it legally. In a typical case, this consists of corporate insiders buying and selling their own stock in their company. Such sales must comply with SEC regulations, including requirements for filing a report. It is prudent to consult an attorney to ensure that your paperwork is entirely compliant because even small errors can potentially land you in a lot of trouble.

The rules governing securities trading are fairly complex and subject to changes and differing interpretations by courts. If you have concerns about the legality of a course of action in the area of trading, it is a good idea to consult an attorney who really knows the ins and outs of this legal field.

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