Insider trading is the buying or selling of a company’s securities by someone who holds material information about the company that the public doesn’t have, in breach of a duty of trust or confidence. Under Section 10(b) of the Securities Exchange Act and the SEC’s Rule 10b-5, it is a federal offense punishable by up to 20 years in prison and civil penalties of up to three times the profit made or loss avoided.1Office of the Law Revision Counsel. 15 U.S. Code 78ff – Penalties The rules exist because fair markets depend on every investor working from the same publicly available information. When someone with privileged access trades on secrets, they take money from the people on the other side of the trade who never had a chance to know what they knew.
No single federal statute spells out “insider trading is illegal” in those words. Prosecutors and the SEC build cases on Section 10(b), which prohibits using any deceptive device in connection with buying or selling securities, and on Rule 10b-5, the regulation that implements it.2Office of the Law Revision Counsel. 15 U.S. Code 78j – Manipulative and Deceptive Devices The specific contours have been drawn by courts over several decades. The Supreme Court’s decision in Chiarella v. United States set the baseline: silence about material facts can amount to fraud, but only when the trader owes a duty to disclose.3Justia U.S. Supreme Court Center. Chiarella v. United States, 445 U.S. 222 (1980) Possessing better information than the market is not itself a crime. Breaching a duty while trading on it is.
What Makes Information Material and Non-Public
Two things must be true about the information behind the trade. It has to be material, and it has to be non-public.
Information is material when a reasonable investor would consider it important enough to change their view of the stock. The Supreme Court’s test asks whether the fact would significantly alter the “total mix” of information available to investors.4U.S. Securities and Exchange Commission. Assessing Materiality: Focusing on the Reasonable Investor When Evaluating Errors A pending merger, a looming product recall, or earnings that will miss expectations are clear examples. Materiality is not purely about dollar size, though. The SEC has said that qualitative factors count: a small accounting error can be material if it hides a change in earnings trends, masks a failure to meet analyst estimates, or conceals an illegal transaction.5U.S. Securities and Exchange Commission. Staff Accounting Bulletin No. 99
Information stays non-public until the company releases it through official channels — a press release, an SEC filing, an earnings call — and the market has had time to absorb it. A whisper from a brother-in-law who heard something in a boardroom is not public, even if a handful of people outside the company now know. The question is whether the information has been broadly disseminated to the investing public, not whether it has leaked.
Who Can Be Charged
The reach of insider trading law is wider than most people realize. It covers corporate officers and directors, but it also catches lawyers, accountants, friends who got a tip, and even people who trade in a different company’s stock based on a secret from their own employer.
Classical Insiders and Outside Professionals
The most obvious targets are officers, directors, and senior employees with direct access to confidential information. These “classical” insiders owe a fiduciary duty to shareholders, and trading on company secrets violates that duty. Liability extends to outside professionals as well. Lawyers, investment bankers, auditors, and consultants who learn confidential facts while serving a client are treated as “constructive insiders.” They assume the same confidentiality obligation as the company’s employees, and they face the same consequences for breaking it.
Misappropriation
You don’t have to work for the company whose stock you trade. In United States v. O’Hagan, a partner at a law firm representing a bidder in a takeover secretly bought stock in the target company and made over $4.3 million when the deal became public.6Justia U.S. Supreme Court Center. United States v. O’Hagan, 521 U.S. 642 (1997) The Supreme Court held that stealing confidential information from any source — an employer, a client, a business partner — and using it to trade securities is fraud, even when the trader owes no duty to the shareholders on the other side. What matters is the betrayal of the person who trusted you with the information.
Tippers and Tippees
If an insider leaks a tip and you trade on it, you can face the same charges as the person who told you. The Supreme Court set the framework in Dirks v. SEC. A tippee inherits the insider’s duty when the insider received some personal benefit from leaking the information, and when the tippee knew or should have known the tip came from a breach of duty.7Library of Congress. Dirks v. SEC, 463 U.S. 646 (1983) The personal benefit doesn’t have to be cash. It can be as indirect as a gift of information to a friend or relative, which the Court treated as the equivalent of the insider trading and then handing the profits over.
Liability also runs down the chain. A second-level “remote tippee” who trades on a tip passed along from someone else can be prosecuted, as long as they had reason to know the information was tainted. The further the tip travels from its source, the harder knowledge is to prove, but the legal theory reaches every link.
Shadow Trading
A newer theory expands the risk further. In 2024, the SEC won a jury verdict in SEC v. Panuwat, the first successful “shadow trading” case. An employee at Medivation learned that Pfizer was about to acquire his company, then bought call options in Incyte, a competitor whose stock would predictably rise on the acquisition news.8U.S. Securities and Exchange Commission. Matthew Panuwat – Litigation Release The SEC argued, and the jury agreed, that using your own employer’s secrets to trade a competitor’s stock still violates Section 10(b) when the two companies are economically linked. Before Panuwat, most compliance programs policed only trades in the insider’s own employer. The risk now extends to any security whose price would move on the same news.
Civil and Criminal Penalties
Insider trading triggers both civil enforcement by the SEC and criminal prosecution by the Department of Justice. The penalties are deliberately severe.
The SEC’s main civil remedy is disgorgement, which forces the violator to pay back every dollar of illegal profit or loss avoided. On top of disgorgement, the SEC can seek a civil penalty of up to three times the profit gained or loss avoided.9Office of the Law Revision Counsel. 15 U.S. Code 78u-1 – Civil Penalties for Insider Trading Someone who made $1 million on an illegal trade could owe $1 million back plus another $3 million in penalties. The penalty amount is discretionary, so not every case reaches the ceiling.
Supervisors and firms are exposed too. A controlling person who knew or recklessly ignored that an employee was likely to commit insider trading can be penalized up to the greater of $1 million or three times the controlled person’s profits.9Office of the Law Revision Counsel. 15 U.S. Code 78u-1 – Civil Penalties for Insider Trading That gives firms a strong financial reason to build compliance programs that actually work.
On the criminal side, a willful violation of the Securities Exchange Act carries up to 20 years in prison and fines of up to $5 million for individuals. Entities can be fined up to $25 million.1Office of the Law Revision Counsel. 15 U.S. Code 78ff – Penalties Multiple trades can each count as separate violations, so a pattern of illegal trading stacks penalties quickly. Sentences have ranged from probation for cooperators to more than a decade for the most brazen offenders. The SEC can also seek an order barring a violator from serving as an officer or director of any publicly traded company.
How Executives Trade Legally
Corporate officers and directors own large positions in their companies and need some way to sell. The law allows this but demands transparency and advance planning.
Section 16(a) of the Securities Exchange Act creates a public reporting system. New insiders file a Form 3 within 10 days disclosing what they own.10U.S. Securities and Exchange Commission. Insider Transactions and Forms 3, 4, and 5 After that, any change in ownership requires a Form 4 filed within two business days.11U.S. Securities and Exchange Commission. Securities and Exchange Commission – Form 4 All of these filings are public, so anyone can track what a company’s leadership is buying and selling.
The most common tool for legal sales is a prearranged trading plan under Rule 10b5-1. You set up the plan during a period when you don’t possess any material non-public information, locking in how many shares to sell, at what price, and on what dates. Because the trading decisions were fixed before you learned anything sensitive, the plan provides an affirmative defense against later insider trading accusations.12eCFR. 17 CFR 240.10b5-1 – Trading on the Basis of Material Nonpublic Information in Insider Trading Cases
After abuses of these plans, the SEC tightened the rules in 2023. Directors and officers can’t execute their first trade until at least 90 days after adopting the plan, or two business days after the next quarterly or annual earnings filing, whichever comes later, up to a 120-day cap. Non-officer insiders face a 30-day cooling-off period. The amended rule also requires that plans be adopted in good faith and that directors and officers certify they aren’t aware of material non-public information at the time of adoption.
Most public companies impose trading blackout periods around quarterly earnings — typically starting about 15 days before the filing and lifting two business days after the release. Event-specific blackouts apply during pending mergers or major restructurings. Even a valid 10b5-1 plan generally cannot execute during a blackout.
Crypto and Digital Assets
Federal insider trading rules apply to cryptocurrency tokens the SEC considers securities. In 2023, the agency settled charges against a former Coinbase manager and his brother for trading crypto tokens ahead of listing announcements on the exchange. The SEC alleged the manager repeatedly tipped the timing and content of upcoming listings — information that predictably moved prices — and that family members bought tokens before the announcements went public.13U.S. Securities and Exchange Commission. Former Coinbase Manager and His Brother Agree to Settle Insider Trading Charges Relating to Crypto Asset Securities
The legal theory was identical to any traditional case: the employee breached a duty of confidence to his employer by tipping material non-public information, and the tippees traded on it. The SEC classified at least nine of the tokens involved as securities and applied the Section 10(b) and Rule 10b-5 framework used for stocks. The agency has stated that “federal securities laws do not exempt crypto asset securities from the prohibition against insider trading.” Whether a particular token qualifies as a security remains contested, but anyone trading digital assets on tips from exchange employees or project insiders faces the same risk as someone trading on a leaked earnings report.