Insider trading involves buying or selling stocks or other securities based on material information that is not available to the public. It becomes illegal when someone uses confidential corporate information to gain an unfair advantage in the market. For instance, if a company employee learns about a major earnings report before it is released and trades based on that information, or tells someone else to, that is insider trading.
State-specific laws
New Jersey prosecutes insider trading under the New Jersey Uniform Securities Law. The law prohibits deceptive or manipulative acts in connection with the sale or purchase of securities, which includes the use of non-public information. State authorities can pursue both criminal and civil penalties, and in some cases, individuals may face charges at both the state and federal levels. Punishments can include steep fines, restitution, and even prison time.
Federal oversight and penalties
On the federal side, insider trading is primarily enforced by the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Rule 10b-5 of that Act bars any act of fraud in securities transactions. The Insider Trading Sanctions Act of 1984 allows courts to impose civil penalties up to three times the profit gained or loss avoided. Federal prosecutors may also seek prison sentences and permanent bans from holding executive roles in public companies.
Common triggers for insider trading charge
You do not have to be a corporate insider to be charged. People can get into legal trouble if they receive non-public tips and act on them, share inside information, even without trading, and trade on material information they “should have known” was confidential. SEC enforcement actions show that even casual conversations can lead to investigations if trading follows closely behind.
Conclusion
Insider trading does not just hurt investors, potentially, could damage public trust in the fairness of financial markets. Laws that prohibit it are designed to protect transparency and ensure that everyone plays by the same rules. Though, this does not mean that those accused do not have recourse.