People who buy and sell stocks do so on the basis of public information. If some securities holders learn through confidential information that a business is about to go under, they could sell their securities and reap a windfall before the news goes out. This could leave the other stockholders with stocks that will suddenly have less value due to the impending downfall of the company.
To ensure a fair playing field, the federal government bans the practice of insider trading. As recent instances of prosecution by the U.S. Department of Justice have shown, the government will levy charges of fraud if one person conveys insider information to other parties.
Fraud charges in California
Forbes reported in August of 2020 that the DOJ had pressed charges against the founder of a California pharmaceutical company. The allegations stated that the founder, knowing a pharmacy giant would soon buy his business, alerted two friends, a relative and a girlfriend to the sale before the deal was public knowledge.
The government claimed that the alerted parties made $700,000 selling their stocks. Based on these allegations, the DOJ levied a number of charges against the founder, including a count of securities fraud, a count of wire fraud, and a count of fraud in connection to a tender officer. In addition, the SEC filed a civil case against the company founder.
Tracking down insider trading
As the above example shows, a person can incur insider trading charges by passing on sensitive financial information to friends and family. According to Marketwatch, the government has pursued many other cases of insider trading, prosecuting not only people who work for a company like board members or secretaries, but also individuals like gamblers and even a therapist.
Still, proving a case of insider trading is not always easy. Some people overhear sensitive information in public without knowing the information should be confidential. They may pass the information along to other people who may profit from it. Without proving beyond a reasonable doubt that someone communicated information knowing that it was confidential, it may be difficult for the government to prove insider trading took place.