Series 65: 10.11.8. Insider Trading

10.11.8. Insider Trading

What do Raj Rajaratnam and Michael Douglas’s character from Wall Street have in common? They both went to jail for insider trading. It’d be in your best interest to not find this in common with them.

To avoid joining the elite club of inside traders, you need to avoid using information that is unavailable to the investing public to buy or sell securities in order to make a profit or avoid a loss. Likewise, you need to avoid knowingly participating in or helping your clients use information that is unavailable to the investing public to buy or sell securities to make a profit or avoid a loss.

The rationale behind insider trading rules is that the marketplace needs to be fair for all investors, and it is not ethical for one person to take advantage of many others based on information that is unavailable to the investing public. Most often, such situations involve the officers and directors of publicly traded companies. These individuals typically know the big happenings within the company before anyone else, including regulators and the news media. But insider trading also often involves investors and professionals who know and work with these “corporate insiders,” especially when their firms are providing underwriting and investment banking services.

Insider trading is subject to a civil penalty of treble damages (three times the amount of the benefit obtained by the violation). “Benefit obtained” means profit gained or loss avoided. For more severe instances, the Justice Department may bring criminal charges, carrying maximum penalties of a $5 million fine and 20 years in prison f