MGST 451: Insider Trading

Insider trading

When an “insider” uses price-sensitive, non-public

information to inform their trading decisions, or tips someone off to this information

Why is insider trading a bad thing?

creates an uneven playing field

Why may insider trading be a good thing?

. . . Signals whether something good or bad is happening at a company.

• May helps create pricing efficiencies.

• This is a contrarian POV. Inside trading is ILLEGAL.

Who is an insider?

An “insider” is a person who has material, non-public information about a company and owes a duty to keep it confidential.

Who can it include?

• Directors

• Officers

• Employees

• 10% Shareholder

• Lawyers

• Accountants/Auditors

• PR Firms

• “Tippee”

Tippee

• If your friend is an insider and tells you information that you knew or should have known was inside information (material, non-public), you may not trade on it

• Your friend has committed inside trading by tipping

3 criteria to assess insider trading

• material

• non-public

• duty to keep confidential

material info

Price sensitive

• Information that, if it entered the public domain, would materially affect the price of the corporation’s shares

• Can include info on regulatory approval or rejection (ex: Martha Stewart selling IMClone shares)

• Information about a hack (Equifax)

• Information about an acquisition (BP case)

non - public info

• Not published

• Not in the public domain

• Not disseminated broadly to the investing public and absorbed by the market

duty to keep confidential

do you have the duty to keep this confidential?

What happens when executives want to trade?

blackout periods

blackout periods

A blackout period is a specific window of time when insiders (like

executives, directors, and employees with access to material non-

public information) are prohibited from trading the company’s stock

• Companies impose blackout periods—often before earnings releases or major announcements—to prevent insider trading

Rule 1051-b

• Instruct a third-party broker to execute purchase or sale of shares when certain conditions are met (price, timing, formula, etc.)

• After that, insider has no say over the transaction

• Can be modified or cancelled in good faith, subject to cooling off periods

• Cannot have material, non-public info when adopting or amending plan

• Must fill out forms disclosing the trade