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 doing certain things. 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 this rule 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 the masses didn’t have access to. Most often, such situations occur with the officers and directors of publicly traded companies, who know the big happenings within the company before anyone else, including regulators and the news media. But it also often occurs with investors and professionals who know and work with these “corporate insiders,” especially when their firm is providing underwriting and investment banking services.
Insider trading is subject to a civil penalty of the greater of $1,000,000 or three times the amount of the profit gained or loss avoided. For more severe instances, the Justice Department may bring criminal charges, carrying ma