It's obvious to most people that insider trading is cheating and ought to be a crime, though it can be difficult to prove and prosecute. Ivan Boesky and hedge fund billionaire Raj Rajaratnam famously went to jail for doing it and George Soros paid a big fine. Still, the cases can be murky: You don't need to actually trade to be guilty of insider trading, and not every trade on inside information is a crime. Still, prosecutors argue their famous cases - such as one filed in New York this year against UK billionaire Joe Lewis - build trust in the financial system and ultimately ensure a level playing field for all investors.
What is insider trading?
It needs two things to happen. First, to be considered an insider, you have to be in possession of information that isn't public; perhaps that's advance notice of a company's earnings, or results of a drug trail. If you take this information and trade on it or give it to others and they trade on it, you can expect prosecutors to take an interest. If no trade occurred, then don't worry about insider trading, though the leak could still be a breach of other laws or an employer's code of conduct. Prosecutors don't have to show a motive but in the Lewis case, where he's charged with passing tips to his personal pilots, among others, they came up with a novel explanation: the inside information was allegedly a substitute for a formal retirement plan. (Lewis's lawyers say the charges are "ill-conceived.")
How has the law developed?
Insider trading hasn't always been considered a crime. In the US, it became so through judicial interpretation of a 1934 law aimed at cleaning up markets after the 1929 stock market crash. The SEC adopted a civil procedure in 1942, but the first time that insider trading was really identified as an offense was in the 1960s, and prosecutions didn't really take off until the advent of the hostile takeover in the 1980s, with investigators focusing on suspicious trading ahead of a merger or sale. The US still tends to prosecute insider trading through wire fraud laws - that's how Lewis's pilots are being pursued. In the UK, the first criminal legislation targeting insider trading was introduced in 1980 just as Prime Minister Margaret Thatcher was pushing through a wave of privatizations of Britain's state infrastructure. The aim was to show would-be retail investors that the London stock market could be properly policed and encourage them to buy shares in the newly listed companies for the first time, says Sarah Clarke, a barrister and author of "Insider Dealing: Law and Practice."
What constitutes inside information?
Corporate employees are allowed to trade their own stock as long as the information they're trading on is generally available. That can be hard to define and regulate, however. Courts cast a sharper eye on those who go actively hunting for secret information. A UBS compliance official who accessed data directly from the bank's highly confidential internal mergers list was found guilty in London of sharing it with a day trader, who was also jailed. Clarke, who prosecuted that case, says it's also likely to be considered insider trading if you overheard a juicy piece of gossip at a dinner table and traded on it, knowing that the source of that information was an insider. On the other hand, in France, market regulators cleared a potato seller who said he got a tip on a deal by accidentally overhearing a conversation at a railway station. The regulator said it couldn't be proved that the potato seller - who didn't trade on the information but said he'd shared it with his brother - knew it was insider data.
How widespread is insider trading?
In 2022, the Securities and Exchange Commission, which regulates US stock markets, brought 43 insider trading cases compared with 28 in 2021. But even the 2022 number is below the wave of cases from a decade or so ago, when US authorities pursued a nationwide crackdown on insider trading at hedge funds. In 2012, the SEC brought 58 insider trading cases against almost 200 individuals as part of a broad pursuit of traders and their sources from Wall Street to Silicon Valley. The Financial Conduct Authority is the prosecutor for insider dealing in the UK - it's one of the few criminal powers that the UK watchdog has. But it pursues a fraction of the cases of its American counterparts.
What are famous examples of insider trading?
Lewis, whose family controls Tottenham Hotspur soccer club, was at the time of his indictment the highest-profile figure targeted this year by federal prosecutors in New York. One of the most famous cases from the 1980s made household names of financiers Michael Milken, Dennis Levine, Martin Siegel, and Boesky, who's thought to be at least part of the inspiration for the character Gordon Gekko in the 1987 film "Wall Street." Authorities had called Rajaratnam (who's out of jail after serving 7 1/2 years) "a billion-dollar force of deception and corruption." He was accused of tapping a network of informants across swaths of corporate America for inside information to trade stocks such as Goldman Sachs, Google, Intel and Hilton Worldwide. In 2005, Martha Stewart, the one-time caterer who parlayed cooking and homemaking tips into a billion-dollar media company, went to prison for obstructing justice in an insider trading probe. She was convicted of lying to federal authorities about a 2001 sale of shares. A former trader in the UK, Julian Rifat, was banned in 2020 from any finance jobs after his guilty plea.
How have the tactics evolved?
The Rajaratnam case was the first major insider trading case in which the government used wiretaps, a tactic often used against organized crime and drug trafficking. Nowadays, burner phones are a repeated and common theme among many of the most recent insider prosecutions. The day trader who cooperated with the UBS compliance official bought her a BlackBerry burner that was exactly the same model as she used for work at the bank.
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