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Insider Trading
Practical Law Glossary Item w-000-7450 (Approx. 3 pages)
Glossary
Insider Trading
The purchase or sale of a security while in possession of material, nonpublic information in violation of a duty not to trade. Insider trading law has developed through judicial interpretation of the general antifraud provisions of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 under the Exchange Act, and through Securities and Exchange Commission (SEC) rulemaking.
In the typical insider trading case, the government must prove that the defendant:
- Purchased or sold securities.
- Was one of the following:
- an insider of the company whose shares were traded;
- a temporary insider of the company whose shares were traded; or
- a misappropriator of information from a person or entity to whom he or she owed a fiduciary duty or other relationship of trust and confidence.
- Knowingly possessed material, nonpublic information.
- Acted with scienter.
Insider trading also includes situations where an insider or misappropriator discloses, in exchange for a personal benefit, material, nonpublic information to an outsider who trades or tips another individual for personal benefit. In that situation, both parties have engaged in insider trading.
Reporting companies typically maintain insider trading policies applicable to their directors and employees prohibiting any form of insider trading and imposing special trading restrictions on their directors and officers.
The prohibitions against insider trading are enforced by both the Department of Justice (DOJ) and the SEC. In criminal cases, the DOJ must prove its case beyond a reasonable doubt, while in civil cases, the SEC is subject to the preponderance of the evidence standard.
For more information on insider trading, see Practice Note, Defending Against Insider Trading Claims.