By Merriman Wealth Management, Wealth Advisor
Published On 12/08/2014
nsider trading is not a new concept, but it continues to be a high priority for the SEC’s enforcement program because it undermines investor confidence in the fairness and integrity of the securities markets.
Individuals are getting more creative in looking for ways to cover their tracks. In 2014 the industry has seen everything from someone attempting to hide insider trades by using a relative’s account in a foreign country, to a man writing tips on post-it notes that he then literally ate to eliminate the evidence. Meanwhile the SEC is leveraging more technology tools than ever before to strategically detect illegal trading activity.
Put simply, insider trading is buying or selling securities while in possession of material, nonpublic information about the security. Insider trading in this context is illegal – you can’t profit from information that is not available to the whole market. It is also illegal to communicate (or “tip”) material, nonpublic information to others who may trade in securities on the basis of that information. All information is considered nonpublic unless it has been effectively disclosed to the public. Material information includes anything that an investor might consider important in deciding whether to buy, sell, or hold securities. For example: new product development, earnings reports, mergers & acquisitions, major personnel changes, obtaining or losing important contracts, litigation, or a big scandal.
Just an investigation, even without subsequent litigation, can be very costly both financially and personally. Penalties for insider trading vary depending on the severity of the crime, but generally include disgorgement (forced giving up of illegal profits) plus interest, civil fines of $1 million or three times the profit gained or loss avoided through the trade (whichever value is greater), criminal penalties up to $5 million, bar from serving as an officer or director of a public company, and imprisonment for up to 25 years.
You should never trade while aware of material, nonpublic information. If you receive a tip: don’t place any trades; don’t share the information with anyone; and tell the person who gave you the tip that it is insider information that he/she should not be sharing with anyone.
Written by former Merriman CCO Stephanie Brown
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By Merriman Wealth Management, Wealth Advisor
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