How do people generally get convicted of insider trading? If you have a friendship with someone in senior management of a business on the stock exchange, does that mean that if you invest in it and end up with a great ROI, you’d be investigated, charged, and potentially convicted?

Question

I should have rephrased my question. Would knowing an executive and making a huge profit on a couple trades be enough evidence to get convicted of insider trading?

In: 9

Answer 1

It depends on timing and whether you actually have any significant secret info. You are allowed to use any public information you want when making trades, but you’re not allowed to use significant information that you get from an insider of the company that isn’t public.

If you buy the stock during a period where nothing significant happens for the company, and it goes up a lot over the next 5 years, and then you sell, that’s fine – the fact that you are friends with an executive wouldn’t matter in itself if you aren’t using inside information to trade.

If you buy $1 million in stock on November 14, a merger is announced on November 17, the stock goes up 30%, and you sell on November 19, the SEC would see that from trading records and would charge you. In fact, after there’s a big move in a stock, they specifically look to see who made large short-term trades and whether they have any connection to the company.

I know of an insider trading case where a law student was working on a merger as a summer intern at a law firm, before the merger was made public, he had his mother buy $100,000 of the stock of one of the companies involved, and he got caught and charged with insider trading.

Answer 2

It depends on timing and whether you actually have any significant secret info. You are allowed to use any public information you want when making trades, but you’re not allowed to use significant information that you get from an insider of the company that isn’t public.

If you buy the stock during a period where nothing significant happens for the company, and it goes up a lot over the next 5 years, and then you sell, that’s fine – the fact that you are friends with an executive wouldn’t matter in itself if you aren’t using inside information to trade.

If you buy $1 million in stock on November 14, a merger is announced on November 17, the stock goes up 30%, and you sell on November 19, the SEC would see that from trading records and would charge you. In fact, after there’s a big move in a stock, they specifically look to see who made large short-term trades and whether they have any connection to the company.

I know of an insider trading case where a law student was working on a merger as a summer intern at a law firm, before the merger was made public, he had his mother buy $100,000 of the stock of one of the companies involved, and he got caught and charged with insider trading.