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Insider Trading on the Corporate side - Coggle Diagram
Insider Trading on the Corporate side
Regulations and the Role of SEC
SEC uses regulations to make sure that company people do not trade stock on undisclosed information
SEC did not require firms to disclose information about OMR (Open Market Repurchases) , but since 2003 it required companies to mention it in the Form K report and average price paid for each share because investor cannot note about the stock repurchases in the previous quarter until at least one to four months it occurs.
Notable laws
Securities Exchange Act 1934 which established the rules for insider trading.
2002 Sarbanes-Oxley Act which makes reporting insiding trading for faster.
Dodd Frank Act which makes whistleblowing programs to report insider trading anonymously.
What is insider trading
Insider trading is when someone trades a stock with information that is not readily available to the public.
Challenges and Problems in Insider Trading
A. One major problem is a method known as front running which a stock broker first gets a large order to buy shares in a company from a client and the broker first buys stocks in the basis that the price will increase before placing an order for the client
Often times very hard to convict unless you have someone who bears witness or have a smoking gun email.
Consequences of insider trading
Criminal Offenses
Those convicted can receive up to 20 years for each violation and depends on profit made and whether there is a history of the offense.
Individuals can be charged up to $5 million and corporations can be fined up to $25 million per violation under Securities Exchange Act of 1934.
Civil Offenses
SEC can fine up to three times the profit gained or loss avoided as insider trading.
Those guilty are required to return any gains, profits, and losses avoided because of the illegal trades.
Who can be considered insiders?
Corporate Insiders -> Officers, directors, employees of the companies
Shareholders with more than 10% of company's securities
Individuals who get non public information under duty of trust such as lawyers, accountants, consultants, and other professionals.
The people who receive non public information from an insider and use the information to profit of a trade.
Martha Stewart actually had to go to court for insider trading on stock that made her $45,673 on non public information.