Insider trading may be difficult to prove but leads to penalties

Insider trading has generated decades-long controversy regarding its legality and possible harm caused to stock market investors.

When an individual faces allegations of wrongdoing, a prosecutor must prove that he or she breached a duty of care that resulted in a substantial profit from trading on confidential information. 

It may, however, often be difficult to prove that an actual fiduciary duty of care exists unless an individual is a certified accountant or an attorney representing a company. As noted on the U.S. Securities and Exchange Commission’s Investor website, if an individual is privy to information undisclosed to the public and acts on it, the SEC may determine that it reflects illegal insider trading. To prevent a potential unlawful trade investigation, a stockholder may decide to wait until the company releases the shared confidential information to the public. 

When nonpublic information motivates an individual with a duty of care to buy or sell the company’s stock, the SEC may question the trade’s legality. The duty of care generally extends to an individual’s spouse, family members and others sharing close contact. If an individual has access to nonpublic information and shares it with a relative, that individual now also owes a duty of care to refrain from trading until the information becomes public. 

Federal prosecutors filed conspiracy charges against the son of a former pharmaceutical company board member. As reported by ABC News, the 27-year-old son pleaded guilty to selling his stocks after his father provided him with nonpublic information about the failure of one of the company’s drugs. Before the news reached the public, the son sold his shares and avoided a loss of approximately $800,000. His sentence included a $150,000 fine, five years of probation and 500 hours of community service.