InsiderFlow › Guides › Legal vs Illegal Insider Trading: Where the Line Runs
"Insider trading" evokes handcuffs and scandals, but most insider transactions are perfectly legal — and public. Understanding the line unlocks one of the markets' most valuable information sources.
Buying or selling on material, non-public information: the unreleased earnings report, the merger under negotiation, the rejected drug. It applies to executives but also to anyone receiving the tip. US penalties: up to 20 years and multi-million fines.
Executives may buy and sell their company's shares in permitted windows, disclosing everything to the SEC within two days (Form 4). There are also 10b5-1 scheduled plans: automatic sales decided months in advance, precisely to avoid suspicion.
Ivan Boesky (1980s, inspired Gordon Gekko), Martha Stewart (2004, convicted for lying and obstruction, not the trade itself), Raj Rajaratnam (2011, 11 years: the biggest hedge fund case).
Voluntary purchases are the most studied signal: those who know the company better than anyone are putting their own money on the stock. Academic research finds positive abnormal returns after aggregate insider buying, especially "cluster buying" by several executives at once. All public, all trackable: InsiderFlow follows and explains it daily.