Damico & Stockstill, Attorneys at Law

Is insider trading always considered fraud?

Louisiana business executives and other employees may buy and sell stock in companies that employ them. The practice becomes a white collar crime when insiders act on material information that is not publicly known. Insider trading also includes tipping off someone else about confidential information.

A Baton Rouge insider who buys or sells securities based on undisclosed company knowledge takes advantage of a position of power, disregards a fiduciary duty and cheats investors unaware of what he or she knows. Company insiders are obligated to hold sensitive information in confidence, without using or sharing information for personal gain.

The U.S. Securities and Exchange Commission describes insider trading as securities fraud. "Tipping" refers to sharing private company information with a "tippee" -- often a relative or friend -- who can be charged for trading on the tip. The government also goes after employees of outside companies, who trade illegally using information accessed while providing services for the business.

Government prosecutors must show an accused trader knew material information was confidential and traded because the public didn't know about it. Otherwise, anyone who bought or sold a security on a given day or at a given time might be suspected of insider trading. It can be difficult to prove both points in a tippee situation.

What if you take the advice of a friend who gives you a stock tip? You don't know why he made the suggestion, but you take the advice knowing his past tips have worked for you. No law is broken unless you are aware the friend's tip is based on undisclosed company knowledge, but your friend is in trouble for breaching a company confidence.

Remember, prosecutors carry the burden of proof in every criminal case. For insider trading, evidence must show a defendant had specific knowledge and took deliberate actions. There cannot be a conviction if proof of one point is lacking.

Source: U.S. Securities and Exchange Commission, "Insider Trading" accessed Mar. 05, 2015

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