When is a Stock Tip Considered Insider Trading?

Insider TradingInsider trading is a criminal activity that is poorly understood. People who invest in the stock market are always looking for a better understanding of the stocks that they are considering for investment —to many, it seems that there is a fine line between information that is legitimate and legal and what is not. If you have received a stock tip and you’re concerned that acting upon it might be considered insider trading, the question that you need to ask yourself is whether what you’ve heard has been made publicly available, or if it is privileged, and therefore gives you an unfair advantage over other potential investors.

If the information is not public, it is insider trading and is commonly associated with white-collar crime.

The law that defines insider trading was passed in the year 2000, and it specifically defines insider trading as a “securities transaction made when the person behind the trade is aware of the private material information.” This is not the same as a stock purchase being made based on careful analysis of market trends or information that can be obtained through research.

When insider trading occurs, it involves a person who is inside of a company revealing information that has not yet been revealed to the public. The person who reveals this information is known as the “tipper,” and it can be anybody from the CEO of a company to the spouse, parent, child or sibling of an employee. When this person gives information to a “tippee” who uses it to make a stock trade, both are guilty of insider trading, and if no action is taken by the tippee, the tipper can still be accused of the crime. Similarly, if the tippee overhears insider information and acts on it without the insider being aware that they’ve listened in on, then the tipper may not be seen as responsible – though, their carelessness in not safeguarding information may represent a breach of the law.

There is nothing illegal about getting or giving a “hot” stock tip if it is based on market research and analysis, but if the information that is being shared is something that comes from inside of a company and acting upon it represents having an unfair advantage, then it is insider trading, and it is a criminal act.

If you have been accused of insider trading and need competent criminal defense, contact Bochetto & Lentz for assistance.

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