Insider trading is the act of purchasing or selling stocks based on information that isn't public. It can be either legal or illegal based on when the insider makes the trade. Insider trading is illegal when the material information still isn't available to the general public.
Insider trading comes with stern penalties including both a monetary penalty and jail time. Despite numerous high-profile cases involving insider trading, many investors still don't know how it works and what it is.
What is insider trading?
Insider trading means that a person buys or sells stock based on material information that isn't available to the public. The SEC defines illegal insider trading as “the buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”
Pfizer’s insider trading case
On Nov. 9, Pfizer’s CEO and executive vice president both sold about $5.6 million of the company’s stock. On the same day, the stock price surged as much as 15 percent after the news that Pfizer’s experimental coronavirus vaccine is 90 percent effective. Pfizer CEO Albert Bourla sold 132,508 shares, while its Executive Vice President Sally Susman sold 43,622 shares. Both of them sold shares for $41.94 per share.
Kelly Loeffler’s insider trading case
In March 2020, Georgia GOP Senator Kelly Loeffler faced questions about unusually large share sales shortly before the markets tanked. Loeffler and her husband Jeffrey Sprecher sold stocks worth between $1.25 million and $3.1 million. According to Loeffler’s disclosure records, the stock sales started on Jan. 24. On the same day, Loeffler attended a non-public Senate briefing on the coronavirus outbreak.
David Perdue’s insider trading case
In April 2020, Georgia GOP Senator David Perdue faced questions about unusually large share buys in DuPont de Nemours. The company produces personal protective equipment. On Jan. 24, Perdue bought about $65,000 of stock in DuPont. Perdue made a series of 112 transactions with stocks bought for about $1.8 million and sold stocks worth $825,000. He bought a total of $185,000 in stock in DuPont through Mar. 2.
Steve Cohen’s insider trading case
Steve Cohen is a hedge fund manager. Following claims of insider trading, Cohen’s flagship hedge fund, SAC Capital, shut down and the fund was forced to pay almost $2 billion in penalties.
Martha Stewart’s insider trading case
In December 2001, the FDA announced that it wouldn't approve ImClone's primary pharmaceutical product, Erbitux. Just a few days prior to the announcement, Martha Stewart sold about 4,000 shares of the biotech company—avoiding a loss of about $45,000 in the process. The stock fell from $50 to $10 in the next few months. Stewart had acted upon a tip from her stockbroker.
Is insider trading illegal?
Insider trading is illegal when non-public material information is used for profit. Insider trading can be done by anyone including company executives, their relatives, and friends, or any regular person on the street as long as the information isn't public. The SEC can track illegal insider trading by taking a look at a stock's trading volumes.