Insider trading activity involves the illegal purchase and sale of securities by individuals with privileged access to material, non-public information about a company. Insider trading activity can be extremely difficult to detect, as it often goes undetected until it is reported in the news. This article will explore the signs and signals of illegal insider trading and provide insight into how to identify and detect it. Additionally, it will provide guidance on how to respond when insider trading activity is suspected or detected. Finally, it will discuss the recent news of insider trading activity, including the implications of the most recent insider trading news.
Signs and Signals of Illegal Insider Trading
Unusual Trading Volume
One of the most common signs of illegal insider trading is when a stock experiences an unusually high amount of trading volume. This could indicate that a large number of investors are buying or selling the stock based on non-public information, which would be a violation of securities laws. If a stock suddenly increases in price with no explanation, someone with inside information may be trading on it.
Unexplained Stock Movements
Another common sign of insider trading is when a stock experiences unexplained movements. This could be a sign that someone with inside information is trading on the stock, as the price movement is not being driven by public information. It is important to note that unexpected stock movements can also be caused by non-insider-related factors, such as company news or macroeconomic events.
Unusual Options Activity
Options trading is another area where insider trading may be occurring. Options traders can purchase call or put options contracts to speculate on the future price of a stock. If there is an unusually high amount of options trading activity, it may be a sign that someone with inside information is trading on the stock.
Selling Before Bad News
When a company experiences a sudden drop in its stock price, this can indicate that someone with inside knowledge of the company’s upcoming bad news may have been trading on the stock before the news was released. If a company has a sudden and significant decline in its stock price, it is possible that someone with inside information was trading on it before the news was released.
Buying Before the Good News
Just as someone with inside knowledge may be trading on a stock before bad news is released, they may also be trading on a stock before the release of good news. If a company experiences a sudden and significant increase in its stock price, it is possible that someone with inside information was buying the stock before the news was released.
Use of multiple brokerage accounts
One of the most obvious signs of insider trading is the use of multiple brokerage accounts. When an individual or firm has multiple accounts at different brokers, it is often a sign that they are trading on information that is not available to the public. By splitting up trades into multiple accounts, it is easier to conceal the activity and avoid detection.
Trading in a family member’s account
When an individual or company invests in an account belonging to a family member, this is another indication of insider trading. If a person has access to non-public information, they may exploit it to their advantage by engaging in financial transactions under the guise of a member of their own family. Although it may be challenging to identify, this is a clue that there may have been insider trading activity.
Unusual short selling
Short selling is a type of trading in which an investor borrows a security and then sells it, hoping to buy it back at a lower price and profit from the difference. When an individual or firm engages in an unusual amount of short selling, it could be a sign of insider trading.
Tipping others off
An individual or firm who has access to non-public information may attempt to tip off others to gain a financial benefit. This could include sending emails, making phone calls, or even providing physical documents with details about the security. If an individual or firm is suspected of tipping others off about non-public information, it is a sign of possible insider trading.
Leaving a job shortly after trading
An individual or company engaged in insider trading may have left their previous position immediately after trading security. It is possible that the person was seeking to evade detection or was trading on non-public information if they left their position shortly after engaging in trading activity.
Regulatory Actions and Penalties
SEC Enforcement Actions
The SEC has the authority to take a variety of enforcement actions against those who violate insider trading laws. The SEC may issue cease-and-desist orders, which require the accused to stop any illegal activities and pay a fine. The SEC can also issue an injunction, which is an order to stop engaging in a particular activity. The SEC may also impose a civil penalty, which is a monetary fine for violating the law. The SEC may also suspend or bar individuals from certain activities, such as serving as an officer or director of a public company.
Anybody found guilty of insider trading has the possibility of facing criminal penalties in addition to the civil fines imposed by the SEC. The penalties can take the form of monetary fines, time spent in jail, or both. Criminal sanctions, in contrast to civil sanctions, can carry sentences of up to 20 years in jail and a fine of up to $5 million. In addition to the criminal penalties, those who are found guilty of insider trading may be required to pay back any profits they obtained through unethical trading through a process known as disgorgement.
The SEC has the authority to issue both criminal and civil penalties for insider trading violations. Possible kinds of civil punishments include monetary fines, the return of illegally obtained funds, and the suspension or outright restriction from engaging in certain activities. While civil fines are typically less severe than criminal penalties, they can nonetheless have a significant effect. The Securities and Exchange Commission (SEC) may impose civil penalties of up to three times the amount of ill-gotten gains.
Overall, insider trading activity is a complex and potentially illegal activity that can have serious consequences for those involved. Investors, companies, and regulators need to be aware of the signs and signals of illegal insider trading. By understanding the laws and regulations governing insider trading, companies and investors can take steps to ensure compliance and protect themselves from potential liability. Additionally, by using technology to monitor trading activity and by engaging in best practices, companies and investors can help to reduce the risk of insider trading.