Stock market manipulation and insider trading have been subject to many Hollywood films and TV shows. First, there was the 1987 classic Wall Street starring Michael Douglas. Another lesser-known film that received good reviews was Boiler Room, released in 2000. More recently, there have been notable blockbuster films such as The Wolf Of Wall Street, which depicted how corruption and greed can lead to fraud on a mass scale.
Hollywood can sometimes exaggerate the truth, and the specifics is something they often leave allowances for. The burning question is, what constitutes insider trading? Today we will give you a detailed explanation of the complexities of insider trading.
Depending on the region of the world you’re in, insider trading can carry huge penalties, including lengthy prison sentences. In addition, the definition can assume different forms depending on the country where the activity occurs. Still, today we will cover the basics of trading and an example of insider trading.
What Is Considered Insider Trading?
Many fraudulent traders who have been entangled in complex insider trading scandals all have one thing in common. Well, two, actually. The first thing is that they are all fraudulent operators. However, many proclaim innocence due to the ambiguity of the insider trading definition.
Often the case of desperate appeals, these rebukes are dismissed quickly by the presiding Judge. Is there some truth to this, though? Do insider trading laws leave some of the law open to interpretation, or are these chances simply trying one last throw of the dice to get themselves off the hook?
Insider trading definition is somebody who encourages or participates in the illegal practice of trading on the stock exchange to their advantage by using confidential information.
For many sceptics, wealthy stockbrokers have often been considered a fair target as people who don’t operate within the confines of the law and usually have enough money to get out of trouble. Famous comedian George Carlin once said, “It’s a big club, and you ain’t in it!”
Reading between the lines of this statement could lead one to believe that there’s an interconnectivity between giant corporations, Wall Street and other huge investment organisations.
Often the heads of successful organisations will know each other through networking events or by attending University together. Confidential information, so long as it is not used to make a profit in trading, isn’t insider trading.
Who Investigates Insider Trading?
The Securities & Exchange Commission are a federal agency in the United States that has investigated insider trading on the stock market for decades. In the United Kingdom, it is the Financial Conduct Authority (FCA) – each region will often have its own regulatory body that enforces these laws.
The SEC will proactively investigate potential stock market manipulation in the United States. Elon Musk is the most high-profile name the SEC has targeted recently.
SEC insider trading has a clear definition. The whole existence of the SEC stems from the 1929 Wall Street Crash. Then, the United States government created the agency to protect retail investors and beginner traders from market manipulation.
How does the stock market work for beginners looking to avoid the pain of a manipulated stock where they lose money? It involves performing ample due diligence, research and looking at some of the company’s investing in the same asset. Of course, this isn’t a guaranteed method to stop yourself from falling foul of this despicable activity, but prior research can help you.
Examples Of Insider Trading
With many examples to choose from, one of the most significant cases of fraud and insider trading came in 1986 when Ivan Boesky was charged with insider trading and sentenced to multiple years in prison and fined $100 million.
This case is infamous because insider trading laws were rarely punished up until this point. However, given the scale of Boesky’s profit, and his fine , it set a precedent for future cases. Michael Douglas’s main character Gordon Gekko, from Wall Street (1987), who had a penchant for greed, is thought to have been based on Boesky.
Another prominent example of insider trading was the main premise of the Martin Scorsese film The Wolf of Wall Street in 2014. The film highlighted the perverse activity at Jordan Belfort’s Stratton Oakmont firm throughout the 1990s.
Belfort used confidential information to pump up the price of a stock that he majority owned. Then, in a scam known as boiler room fraud, he would have his team of fraudulent stockbrokers sell the stock to unsuspecting retail investors.
Some lost thousands and are still waiting for their money back decades later despite Belfort profiting handsomely from the film about his life and vast criminal exploits.
Although the textbook definition of illegal insider trading is profiting off confidential information, you can still apply this to Belfort. By pumping up the price of worthless stocks (most of which he owned), the confidential information he had access to was that he was the chief owner of the useless stock and had plans to defraud them all.
The Enron scandal was the most significant individual corporate scandal in the history of the United States. At the time, Enron was one of the top companies in the country, with a turnover of billions of dollars, allegedly.
Once the fraudulent accounting practices started to unravel, the executives began to jump ship. Clearly, Enron was collapsing due to the total fabrication of its assets. Unfortunately, one of the central men in charge, Jeffrey Skilling was responsible for one final despicable act.
Skilling was almost entirely responsible for the crash. He then sold his stock before the news began to break, compounding the misery.
Not only had he profited from this colossal fraud for years, but once the penny dropped and the fraud was due to become public, he sold his overpriced shares in light of the confidential information.
Skilling’s fraud was so vast and complex to comprehend, given the size of Enron. Nevertheless, its subsequent collapse was one of the biggest news stories of the early 21st Century, culminating in a 24-year prison sentence in 2006.
These are just a few examples of what is illegal insider trading on a mass scale.
Is Insider Trading Illegal?
Yes, insider trading has been illegal since 1980. However, some people have argued about where the line is drawn regarding insider trading. For example, big corporate CEOs and top traders often go to the same social events, gatherings or other locations such as golf clubs.
If information is accidentally divulged or subconsciously hinted at during these types of gatherings, then it can be complicated to prove in a court of law. However, the SEC have a rigid set of rules.
In America, if you are trading off the back of nonpublic information and profiting off it, then you are on very thin ice. As we discussed in our previous section, some punishments can range from multi-million dollar fines to decades in prison.
Does Inside Trading Only Happen In Stocks?
This is a fair question considering it has been our key focus today. Insider trading can happen in any market. There are so many examples of stockbroking because it is easier to prove and is a malpractice that has occurred for much longer.
However, if you’re looking to become a successful forex trader, knowing what insider trading can look like in an actual news item could save you from losing money. Although no laws expressly forbid insider trading in the forex market, there are some alleged examples of when it occurred, but it is rare.
During the September 2022 “mini-budget” in the UK, the then Chancellor of the UK, Kwasi Kwarteng, has been facing accusations from dozens of MPs of facilitating a budget enabling hedge funds, billionaire investment bank managers and institutions to short the pound.
Many other members of Parliament are calling for an investigation into the occurence. As a result, the Great British Pound sunk to all-time low levels against the US Dollar.
Shorting is a type of trading where forex traders trade the likelihood of the currency depreciating. If the currency drops in value compared to other major currencies, such as the US Dollar, then traders who use this method profit handsomely.
Do Other Markets Experience Insider Trading?
Given the nature of insider trading, the rules often refer to confidential information and using that information to profit. Ultimately, this definition is more prominent for stocks. Given corporations have a select few at the top who have access to the information, it is more prominent.
Forex trading is a difficult market to prove illegal activity in. Still, the UK example in the previous section would be insider trading if proven in court. However, there are no examples of anybody facilitating insider trading in the forex market.
The same applies to other markets, such as commodities. The commodities market is tangible products, which include wheat, oil, gas and water. But it also comprises other markets such as precious metals like steel, gold and silver.
The newest and most volatile market out there is cryptocurrency. Goldman Sachs labelled Bitcoin as the top-performing global asset in January 2023. However, due to the lack of regulation around digital assets, it can be challenging to prove insider trading.
There are many scams in the world of finance, and cryptocurrency hosts many of them. However, it would be foolish to suggest there isn’t evidence of a serious financial crime in stock trading, as history has proved on multiple occasions.
Unfortunately, insider trading will always likely exist. The cutthroat nature of institutional stock trading is unlikely ever to go away. The type of characters it can attract means that the environment sometimes creates people looking to make money via any means necessary.
Luckily, the SEC in America and the FCA in the United Kingdom regularly investigate this type of activity. Moreover, given that a lot of trading is now automated and everything is logged securely on computers and servers and subject to tight legislation, it is easier to monitor.
In addition, any unexpected price activity can automatically trigger warning signs and red flags. With so much automated trading in today’s society, it is easier than ever to have warning signals set up when assets inflate or deflate over a specific margin. Hopefully, technology will advance to a stage where so this behaviour