Money & Finance › Fraud, scams & enforcement › Securities fraud: lying to investors and rigging markets
Insider trading
· Fraud or scheme
Fact, law or dataA rule, statute, definition or measured number.
Buying or selling a security using important nonpublic information in breach of a duty to keep it confidential.
See it on the Money & Finance map →How it works
Insiders may legally trade their company's stock but must report trades within two business days. The violation is trading on 'material nonpublic information', such as an unannounced merger, obtained in confidence, or tipping someone who trades. No statute defines it; courts built the law from the 1934 Act's antifraud rule and in 1997 extended it to outsiders who steal information. Surveillance flags trades just before big news; phone records and cooperating witnesses build cases. Penalties reach three times the profit and 20 years in prison.
Why it matters
If insiders can profit at others' expense, ordinary investors lose confidence and demand higher returns; enforcement aims to keep the market a fair game.
Facts, rules and data
Court cases such as Texas Gulf Sulphur (1968), Dirks (1983) and O'Hagan (1997); the 2009–11 Galleon hedge-fund case, built on wiretaps; SEC and FINRA trading-surveillance data.
Debates and risks
Some economists, starting with Henry Manne in 1966, argue it speeds prices toward the truth and should be legal; whether members of Congress should be barred from trading stocks is also debated.
Inside this (1)
Connections (3)
▸FINRA: the brokers' self-regulator surveils markets for Insider tradingFact, law or data
The connection
FINRA's surveillance systems scan billions of trading records a day across US stock and options markets, flagging unusual buying just before mergers or earnings news. Analysts then pull account details from brokers to see who traded and any links to insiders. Because FINRA cannot charge people outside its member firms, it refers suspects to the SEC.
When and why
Nationwide, run from FINRA's market-surveillance offices; it refers hundreds of possible fraud and insider-trading matters to the SEC each year.
How we know
FINRA's annual reports on referrals; SEC insider-trading complaints that credit FINRA surveillance; the Consolidated Audit Trail, a database of nearly every US stock and options order.
Debates and risks
Surveillance catches suspicious timing, not the tip itself; tips passed through friends or encrypted apps are hard to prove, and the audit trail's cost and privacy draw lawsuits.
▸Insider trading is prohibited under Securities Act of 1933 and Exchange Act of 1934Fact, law or data
The connection
The 1934 Act's Section 10(b) and SEC Rule 10b-5 ban deception in securities trades, and courts treat trading on confidential information in breach of a duty as such deception. Section 16 makes officers, directors and 10% owners report their trades and return short-swing profits made within six months. Later laws set penalties up to three times profits.
When and why
The SEC first applied Rule 10b-5 to insider trading in the 1961 Cady, Roberts case; Congress raised penalties in 1984 and 1988, during the Boesky era.
How we know
Supreme Court decisions (Chiarella 1980, Dirks 1983, O'Hagan 1997, Salman 2016) and the Insider Trading Sanctions Act of 1984.
Debates and risks
Because no statute defines insider trading, its boundaries keep shifting; the SEC's 2024 'shadow trading' jury win, over trades in a rival company's stock, widened it.
▸Ivan Boesky and the 1980s insider-trading cases was the face of 1980s Insider tradingFact, law or data
The connection
Boesky made insider trading a household term. His case showed how takeover tips moved from investment bankers to traders for cash, and his cooperation exposed a wider ring around Drexel. It cemented the view that trading on stolen deal secrets is fraud.
When and why
New York, 1982–1986, with bankers Martin Siegel (from 1982) and Dennis Levine (from 1985); charged and settled November 14, 1986.
How we know
SEC complaints, guilty pleas and congressional reports behind the 1988 Insider Trading and Securities Fraud Enforcement Act.
Debates and risks
How widespread such trading was in the 1980s takeover boom, beyond those charged, is unknown.