Inside information consists of undisclosed facts or confidential information concerning publicly traded companies. As explained by the Corporate Finance Institute, individuals who obtain nonpublic information may gain an advantage. Other stock market investors either remain unaware or may suffer a loss.
Knowledge concerning internal operations or financial statements may enable the purchase of a company’s stocks at a low price. The stocks may then increase in value after the information becomes available to the public. Insider information may also allow an investor to sell before a loss occurs.
Insiders’ trades may reflect an unlawful advantage
The U.S. Securities and Exchange Commission considers trading based on inside information a felony offense. As noted on investor.gov, an employee trading stocks based on nonpublic data reflects a breach of fiduciary duty. It may lead to federal charges.
Employees may also breach their duty by sharing nonpublic information with friends and family. By letting a friend know about an acquisition, for example, an employee transfers his or her fiduciary duty. The friend must also refrain from trading until the shared information becomes public.
Certain trades may cause law enforcement to investigate
With access to inside information, employees may decide to purchase or offload the company’s stocks. They may also share information with friends, family or business associates who may take advantage of it. Suspicious trades may cause the SEC to begin an investigation.
The SEC uses sophisticated surveillance tools to monitor stock market activity. Tips, complaints or other information regarding a company’s trades may also trigger an inquiry.
Based on the outcome of an investigation, a company’s employees and investors may face allegations of insider trading. Investors may find themselves questioned or forced to respond to inquiries. Receiving a notice from the SEC may require a defense strategy to help avoid federal charges.