Insider Trading

What is Insider Trading?

When investors are detained or arrested on suspicion of insider trading, there is a strong possibility that the bail bonds process will be part of the situation.

Depending on the jurisdiction and on local prosecutors, insider trading suspects may be kept in custody unless they are able to post a bond. In many cases, prosecutors will argue that wealthy investors pose a flight risk due to their access to cash resources and ability to travel; on the other hand, the desire to white-collar defendants in custody is a form of grandstanding.

In the United States, insider trading is a criminal offense prosecuted at the federal level. Nearly all insider trading investigations are conducted by the Securities and Exchange Commission and prosecuted by district attorneys. Most of the arrests are carried out by regional FBI agents; however, many defendants are called into the local U.S. Attorney’s office to be charged without being taken into custody. When this is the case, there may not be a need to set bail or to go through the bail bonds process.

Understanding the Concept of Insider Trading

The major stock exchanges that make up Wall Street are set up for public trading of equity securities. The public aspect of securities trading dictates that all potential investors should have access to the same amount of information about all companies and instruments listed on the New York Stock Exchange and the NASDAQ. When non-public information is acquired, distributed or otherwise utilized to trade Wall Street securities, the result is insider trading.

When discussing insider trading, certain distinctions should be made. First of all, corporate insiders are allowed to trade shares of the companies they are associated with as long as they file SEC Form 4, which becomes part of the public record. This disclosure must be made a few days prior to the execution of the trade, and it must be based on information that is publicly available. For example, Microsoft co-founder and former CEO Bill Gates remains a major shareholder of the Seattle tech giant; if he wishes to sell some of his preferred shares, he must file a Form 4 disclosure when doing so.

Insider trading is a crime when traders knowingly identify non-public information about a company and utilize it to make a profitable trade. An infamous insider trading case sent television and domestic lifestyle icon Martha Stewart to a federal prison for a few months. The ImClone insider trading scandal started with the biotech company failing to obtain regulatory approval for an antibiotic in 2001, which happened to be a heady year for Wall Street due to the bursting of the Dot-Com bubble. SEC investigators learned that several investors, including Martha Stewart, received information about ImClone’s failure to get FDA approval ahead of the public announcement, which sent shares of the company on a downward spiral. Stewart and other insiders were found guilty of selling their ImClone before everyone else was able to cash out of the risky stock.

Preventing Insider Trading

Fraudulent action is at the heart of insider trading crimes. Individuals who work for publicly traded companies should remember that SEC investigators constantly monitor trading activity as they search for suspicious transactions.

Executive officers and company principals are often subject to higher scrutiny when it comes to insider trading enforcement. It is important to remember that privileged information should always be kept confidential. Publicly traded companies sometimes run into situations that prevent them from releasing information on a timely manner; however, there should not be a veil of secrecy with regard to finances and certain operations that should be reported on SEC forms.

One way to avoid insider trading is with proper awareness, particularly among employees who are involved in research and development, accounting, finance, and operations. Corporate legal teams should hold periodic training sessions that explain the dangers of disclosing information before it is made public. Furthermore, trading advice should never be a topic of conversation between company executives and outsiders.

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