Answer a question for me. What would you do if with your investments if you knew key information that external investors didn’t know or the information was purely confidential? Would you act on it? Be warned, if you do act on “insider” information for the benefit of your portfolio, you could be on the hook for insider trading–an illegal act of varying degree. Defined as “the illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information,” insider trading is not an isolated white collar crime. People of all types can commit this crime, sadly to say, and face the severest penalties when they are privy to confidential or privileged information.
Whether you are a member of a major corporation or a member of a Congressional committee that deals with Wall Street regulation, someone material nonpublic information about the security are given an unfair advantage, so to speak. However, you need to keep in mind that “insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic,” according to a brief definition of the practice on Investopedia. Almost always, though, is that most cases of insider trading–especially high profile ones–are tied to a tale of illicit activities.
Recently, I’ve been documenting the recent tales in a long series of unfortunate events surrounding the Equifax data breach. For one, I mentioned that a high-level executive within Equifax was indicted not too long ago for expending his equity shares in the company after news of the data breach surfaced throughout Equifax internally. And, I should mention that the person who benefited in this particular case was former Equifax Chief Information Officer Jun Ying–the firm’s leading technology executive–sold off all his owned vested stock options and a valued $1 million sell-off of his shares a week before the company announced the 2017 data breach.
The Securities and Exchange Commission (SEC) caught on to Ying’s actions and he was soon indicted for insider trading. But, we need to remember that these cases aren’t isolated, as I mentioned above.
“Fiscal year 2017 was a successful and impactful year for the Enforcement Division. The Commission brought a diverse mix of 754 enforcement actions, including 446 standalone actions and returned a record $1.07 billion to harmed investors,” according to an SEC statement announcing the agency’s FY 2017 enforcement Issues Report on Priorities audit.
The SEC’s audit statement adds: “The Commission also continued to bring actions relating to market manipulation, insider trading, and broker-dealers, with each comprising approximately 10 percent of the overall number of standalone actions, as well as other areas.”
Aside from my doomsaying, you should just remember that the risks of insider trading shouldn’t be deterrents to investing and growing a healthy portfolio. As long as you follow the clearly defined rules, you shouldn’t run into any trouble with the SEC.