Challenges of Investigating and Prosecuting Inside Traders

Following the stock market crash of 1929, former President Franklin D. Roosevelt signed into law the Securities Exchange Act of 1934. It was under this action that the SEC was created to regulate and monitor U.S. securities markets and create rules to establish a level playing field for all investors. Under The Code of Federal Regulations pertaining to and agreed upon by the SEC, rule 10b5-1 states;
“…the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information”.
(Corresponding Federal Regulations adopted by the SEC: Section 10b5-1)
A person, who possesses nonpublic information, is considered an “insider”.
Insider trading, therefore, is defined by the U.S. Securities and Exchange Commission (SEC) as, “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security” (U.S. Securities and Exchange Commission, 2001). It is both illegal and unethical for vital information, known only by “insiders”, to be shared with investors who can then make timely, informed financial decisions ahead of other “outside” investors. This type of trading is illegal (and rightfully so) because it creates an unfair advantage for investors who have the inside scoop as to what a company’s successes or failures are. This type of information will often have a significant impact on the company’s stock value. So, armed with this information, inside traders can unfairly capitalize and make moves to avoid serious