Insider Trading
What does "Insider Trading" mean in law?
Insider trading refers to the purchase or sale of securities by persons who possess material nonpublic information about the issuer, in violation of a duty to disclose or abstain from trading. Under Rule 10b-5 of the Securities Exchange Act of 1934, corporate insiders (directors, officers, and employees) breach their fiduciary duty to shareholders when they trade on material information that has not been publicly disclosed. The misappropriation theory extends liability to outsiders who trade on confidential information obtained through a relationship of trust and confidence, even if they owe no duty directly to the corporation's shareholders. Tippee liability attaches when a person trades on material nonpublic information received from an insider who breached a duty by disclosing the information and received a personal benefit from doing so.
Definition
Insider trading refers to the purchase or sale of securities by persons who possess material nonpublic information about the issuer, in violation of a duty to disclose or abstain from trading. Under Rule 10b-5 of the Securities Exchange Act of 1934, corporate insiders (directors, officers, and employees) breach their fiduciary duty to shareholders when they trade on material information that has not been publicly disclosed. The misappropriation theory extends liability to outsiders who trade on confidential information obtained through a relationship of trust and confidence, even if they owe no duty directly to the corporation's shareholders. Tippee liability attaches when a person trades on material nonpublic information received from an insider who breached a duty by disclosing the information and received a personal benefit from doing so.
Example
A pharmaceutical company's CFO who sold 50,000 shares after learning that the FDA had rejected the company's flagship drug application—before the denial was publicly announced—was prosecuted for insider trading because she traded on material nonpublic information in breach of her fiduciary duty.