Insider trading is illegal, and it can land you in federal prison. So why would anybody risk it?
Maybe some people don't believe they'll get caught if they're careful. Others, however, don't realize that what they're doing is illegal -- especially if they're not an industry insider.
The most common cases of insider trading involve someone on the inside of corporation who makes an investment decision -- or encourages others to -- based on private information that he or she about that company. In some cases, the goal of insider trading is to make a lot of money. In other situations, insider trading is done with the hopes of avoiding big losses once that private information becomes public knowledge.
For example, imagine that the president of a drug company gets a report that the company's much-touted new pain medication isn't passing its trials and won't go to market as expected. The president believes that the company's stock is likely to take a huge hit as soon as the news breaks about the drug.
Concerned about his parents, who have invested heavily in his company, he makes a call and gives them the bad news a day before the information goes public. That is just enough opportunity to sell their stocks while the price is high.
Who is guilty of insider trading in that situation? The president of the company, surely -- but also the parents for acting on information. They had an unfair advantage over other investors.
It's little wonder that people often don't understand the rules surrounding insider information. Logically, it seems like it should be okay to make use of whatever information comes your way. In fact, insider information used to simply be considered one of the benefits of owning a company -- or knowing someone who did. It wasn't even banned until after the stock market crash in the 1920s.
If you're under investigation for insider trading after a stock market trade, make sure that you have a clear understanding of your rights and responsibilities -- before you talk to investigators. There are a lot of potential minefields when you're involved in insider trading, even if you didn't realize what you were doing was wrong. A criminal defense attorney experienced in fraud crime cases can provide valuable guidance and protection.