Editing Insider trading (section)

== Legal Framework ==
Rules prohibiting or criminalizing insider trading on material non-public information exist in most jurisdictions around the world (Bhattacharya and Daouk, 2002), but the details and the efforts to enforce them vary considerably. In the United States, Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider trading. The U.S. Congress enacted this law after the stock market crash of 1929.<ref name=Newkirk/> While the United States is generally viewed as making the most serious efforts to enforce its insider trading laws,<ref>[https://ssrn.com/abstract=967482 "Law and the Market: The Impact of Enforcement"] {{Webarchive|url=https://web.archive.org/web/20110306000649/http://ssrn.com/abstract=967482 |date=2011-03-06 }} by John C. Coffee, University of Pennsylvania Law Review (December 2007)</ref> the broader scope of the European model legislation provides a stricter framework against illegal insider trading.<ref name="Masters" /><ref name="Ventoruzzo">{{cite web|last=Ventoruzzo |first=Marco |date=19 June 2014 |title=Comparing Insider Trading in the US and Europe |publisher=Harvard Law School |url=https://corpgov.law.harvard.edu/2014/06/19/comparing-insider-trading-in-the-us-and-europe/ |archive-url=https://web.archive.org/web/20150630185840/http://corpgov.law.harvard.edu/2014/06/19/comparing-insider-trading-in-the-us-and-europe/ |archive-date=30 June 2015 |url-status=live}}</ref> In the European Union and the United Kingdom, all trading on non-public information is, under the rubric of [[market abuse]], subject at a minimum to civil penalties and possible criminal penalties as well.<ref name="Ventoruzzo" /> UK's [[Financial Conduct Authority]] has the responsibility to investigate and prosecute insider dealing, defined by the [[Criminal Justice Act 1993]].

[[Financial Action Task Force on Money Laundering]] (FATF) can apply to domestic [[politically exposed person]]s.<ref name="FATF2013">{{Cite web |date=June 2013 |title=FATF Guidance: Politically Exposed Persons (Recommendations 12 and 22) |url=https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Peps-r12-r22.html |access-date=2023-06-25 |website=www.fatf-gafi.org}}</ref>

===Definition of "insider"===
In the United States, Canada, Australia, Germany and Romania for mandatory reporting purposes, corporate insiders are defined as a company's officers, directors and any beneficial owners of more than 10% of a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered fraudulent since the insiders are violating the [[fiduciary duty]] that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When insiders buy or sell based on company-owned information, they are said to be violating their obligation to the shareholders or investors.

For example, illegal insider trading would occur if the [[chief executive officer]] of Company A learned (prior to a public announcement) that Company A would be taken over and then bought shares in Company A while knowing that the share price would likely rise. In the United States and many other jurisdictions, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he trades on the basis of this information.

===Liability===
Liability for inside trading violations generally cannot be avoided by passing on the information in an "I scratch your back; you scratch mine" or ''[[quid pro quo]]'' arrangement if the person receiving the information knew or should have known that the information was material non-public information. In the United States, at least one court has indicated that the insider who releases the non-public information must have done so for an improper purpose. In the case of a person who receives the insider information (called the "tippee"), the tippee must also have been aware that the insider released the information for an improper purpose.<ref name="United States v 2014">''United States v. Newman'', 773 F.3d 438 (2d Cir. 2014).</ref>

One commentator has argued that if Company A's CEO did not trade on undisclosed [[takeover]] news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred (albeit by proxy, by passing it on to a "non-insider" so Company A's CEO would not get his hands dirty).<ref name=Harris>Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading"</ref>{{rp|589}}

===Misappropriation theory===
The [[misappropriation]] theory of insider trading is now accepted in U.S. law. It states that anyone who misappropriates material non-public information and trades on that information in any stock may be guilty of insider trading. This can include elucidating material non-public information from an insider with the intention of trading on it or passing it on to someone who will. 
This theory constitutes the background for the securities regulation that enforces the insider trading.<ref>{{cite web |url=https://www.sec.gov/about/oig/audit/aud311.pdf |title=Disgorgements |publisher=Securities and Exchange Commission}}</ref>
Disgorgement represents ill-gotten gains (or losses avoided) resulting from individuals violating the securities laws. 
In general in the countries where the insider trading is forbidden, the competent Authority seeks disgorgement to ensure that securities law violators do not profit from their illegal activity. 
When appropriate, the disgorged funds are returned to the injured investors. 
Disgorgements can be ordered in either administrative proceedings or civil actions, and the cases can be settled or litigated. Payment of disgorgement can be either completely or partially waived based on the defendant demonstrating an inability to pay. In settled administrative proceedings, Enforcement may recommend, if appropriate, that the disgorgement be waived.
There are several approaches in order to quantify the disgorgement; an innovative procedure based on [[probability theory]] was defined by Marcello Minenna by directly analyzing the time periods of the involved transactions in the insider trading.<ref>{{cite journal|url=https://www.sciencedirect.com/science/article/abs/pii/S0378426601002096 |title=Insider trading abnormal return and preferential information |journal=Journal of Banking and Finance  |date=January 2003 |volume=27 |issue=1 |pages=59–86 |doi=10.1016/S0378-4266(01)00209-6 |last1=Minenna |first1=Marcello }}</ref>

===Proof of responsibility===
Proving that someone has been responsible for a trade can be difficult because traders may try to hide behind nominees, offshore companies, and other proxies. The SEC prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several [[stock exchange]]s actively monitor trading, looking for suspicious activity.<ref name=cox>{{cite web |last=Cox |first=Charles C. |title=The Law of Insider Trading - How they get caught |url=https://www.sec.gov/news/speech/1986/112086cox.pdf |publisher=Securities and Exchange Commission |access-date=2014-03-23 |date=1986-11-20 |archive-date=2019-04-12 |archive-url=https://web.archive.org/web/20190412164311/https://www.sec.gov/news/speech/1986/112086cox.pdf |url-status=live}}</ref><ref>{{cite web |last=Levine |first=Matt |title=SEC Insider Trading Investigation Reveals SEC Is Really Good At Insider Trading Investigations, Anyway |url=http://dealbreaker.com/2013/01/sec-insider-trading-investigation-reveals-sec-is-really-good-at-insider-trading-investigations-anyway/ |work=Dealbreaker |access-date=2014-03-23 |archive-date=2019-04-09 |archive-url=https://web.archive.org/web/20190409141331/https://dealbreaker.com/2013/01/sec-insider-trading-investigation-reveals-sec-is-really-good-at-insider-trading-investigations-anyway |url-status=dead}}</ref><ref>{{cite web |title=Market Surveillance |url=https://www.nyse.com/regulation/memberorganizations/1022221394213.html |publisher=NYSE EuroNext |access-date=March 23, 2014 |url-status=dead |archive-url=https://web.archive.org/web/20070624062204/http://www.nyse.com/regulation/memberorganizations/1022221394213.html |archive-date=June 24, 2007 }}</ref> The SEC does not have criminal enforcement authority but can refer serious matters to the U.S. Attorney's Office for further investigation and prosecution.

===Trading on information in general===
In the United States and most non-European jurisdictions, not all trading on non-public information is illegal insider trading.<ref name="Ventoruzzo" /> For example, a person in a restaurant who hears the CEO of Company A at the next table tell the CFO that the company's profits will be higher than expected and then buys the stock is not guilty of insider trading—unless he or she had some closer connection to the company or company officers.<ref name="Shell">{{Cite magazine |last=Shell |first=G. Richard |year=2001 |title=When Is It Legal To Trade on Inside Information? |magazine=MIT Sloan Management Review |volume=43 |issue=1 (Fall) |pages=89–90 |url=http://sloanreview.mit.edu/article/when-is-it-legal-to-trade-on-inside-information-2/ |access-date=2017-02-14 |archive-date=2017-02-15 |archive-url=https://web.archive.org/web/20170215123202/http://sloanreview.mit.edu/article/when-is-it-legal-to-trade-on-inside-information-2/ |url-status=live }}</ref> However, even where the tippee is not himself an insider, where the tippee knows that the information is non-public and the information is paid for, or the tipper receives a benefit for giving it, then in the broader-scope jurisdictions the subsequent trading is illegal.<ref name="Shell" /><ref name="Savage" />

Notwithstanding, information about a [[tender offer]] (usually regarding a merger or acquisition) is held to a higher standard. If this type of information is obtained (directly or indirectly) and there is reason to believe it is nonpublic, there is a duty to disclose it or abstain from trading.<ref>17 C.F.R. 240.14e-3</ref>

In the United States in addition to civil penalties, the trader may also be subject to criminal prosecution for fraud or where SEC regulations have been broken, the U.S. Department of Justice (DOJ) may be called to conduct an independent parallel investigation. If the DOJ finds criminal wrongdoing, the department may file criminal charges.<ref>{{cite web|last=Raiser|first=Steve|title=Raiser & Kenniff|url=http://www.raiserkenniff.com.php53-5.dfw1-2.websitetestlink.com/insider-trading-when-is-it-civil-or-criminal/|url-status=dead|archive-url=https://web.archive.org/web/20131105020113/http://www.raiserkenniff.com.php53-5.dfw1-2.websitetestlink.com/insider-trading-when-is-it-civil-or-criminal/|archive-date=2013-11-05}}</ref>

===Commercialisation===
The advent of the Internet has provided a forum for the [[commercialisation]] of trading on insider information. In 2016 a number of [[dark web]] sites were identified as marketplaces where such non-public information was bought and sold. At least one such site used [[bitcoin]] to avoid currency restrictions and to impede tracking. Such sites also provide a place for soliciting for corporate informants, where non-public information may be used for purposes<ref>Such purposes include [[competitor analysis]] for [[competitive advantage]], providing a basis for [[sabotage]], and gaining advantage in [[Intragroup conflict|internicine feuding]].</ref> other than stock trading.<ref>{{Cite news|last=Uchill |first=Joe |date=1 February 2017 |title=Report: Leakers sell inside trading tips on dark web |newspaper=The Hill |url=https://thehill.com/policy/cybersecurity/317377-report-leakers-sell-inside-trading-tips-on-dark-web/ |archive-url=https://web.archive.org/web/20170214195423/http://thehill.com/policy/cybersecurity/317377-report-leakers-sell-inside-trading-tips-on-dark-web |archive-date=14 February 2017 |url-status=live}}</ref>

===Arguments for further prohibition===
A study of political insider trading found existing regulation including [[STOCK Act]] results in [[conflict of interest]] and contributes to social [[distrust]].<ref name="c099">{{cite journal | last=Hanousek | first=Jan | last2=Jo | first2=Hoje | last3=Pantzalis | first3=Christos | last4=Park | first4=Jung Chul | title=A Dilemma of Self-interest vs. Ethical Responsibilities in Political Insider Trading | journal=Journal of Business Ethics | volume=187 | issue=1 | date=2023 | issn=0167-4544 | pmid=36259070 | pmc=9560883 | doi=10.1007/s10551-022-05265-0 | doi-access=free | pages=137–167}}</ref> [[Information asymmetry]] enjoyed by politicians was found to be high, which does not confirm the predictions of [[social contract]] theory.<ref name="c099"/> Political insider trading by persons which are not required to report according to [[STOCK Act]] was found.<ref name="c099"/> Higher insider trading was found when [[legislature]] is in session and in periods with higher [[Political risk#Geopolitical risk|geopolitical risk]].<ref name="h933">{{cite journal | last=Karadas | first=Serkan | last2=Schlosky | first2=Minh Tam Tammy | title=What explains trading behaviors of members of congress? Evidence from over 100,000 congressional stock trades | journal=International Review of Economics & Finance | volume=96 | date=2024 | doi=10.1016/j.iref.2024.103591 | page=103591}}</ref>