Illegal profits: A look at insider trading

Published on NewsOK Modified: June 10, 2014 at 4:27 pm •  Published: June 10, 2014
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NEW YORK (AP) — Few crimes on Wall Street generate more headlines than insider trading.

The definition is straightforward: An investor profits on non-public information at the expense of others.

But proving that someone did it can be complicated without direct proof that they cheated. Difficulties have dogged investigations surrounding high-profile individuals over the years, from Michael Milken and Martha Stewart to SAC Capital's Steven Cohen.

That's worth keeping in mind amid the swirl of news about a federal investigation into trades by Hall of Fame golfer Phil Mickelson. A federal official briefed on the investigation told The Associated Press that the FBI and Securities and Exchange Commission are looking at stock trades that Mickelson and Las Vegas gambler Billy Walters made involving Clorox when activist investor Carl Icahn was attempting to take over the company. There have been no charges filed against the three men and the investigation could lead to nothing.

Here are the basics on insider trading and the Mickelson case:

Q: WHAT IS INSIDER TRADING?

A: It's when investors use confidential or advanced information that is not available to the market as a whole to make a profit or avoid a loss. People with inside information — such as company officers, directors or employees — can legally buy or sell their company's stock, but only after significant information becomes publicly known. They must report their purchases or sales to the SEC, the government agency that oversees Wall Street.

Government regulators take insider trading allegations seriously and often investigate even if there's just a hint of illegal trades. Insider trading threatens an essential element of any financial market: trust that it is a fair place to invest.

Q: WHAT'S THE LEGAL WAY TO GET INFORMATION OUT?

A: Every publicly traded company in the U.S. is required by law to disclose aspects of its business, so the public can decide whether to invest. This information can be as simple as how much profit a company earned, who was elected to its board of directors, or who made significant purchases of company stock. Companies disclose these important events by filing forms with the SEC. How and when those disclosures happen are factors in many insider trading cases.

Q: HOW ABOUT AN EXAMPLE?

A: Let's say ABC Drug Co. is working on a new drug that it believes could bring in big profits. But the drug is discovered to have life-threatening side effects when it's under review by the Food & Drug Administration.

ABC Drug decides this is "material information" that investors should have. It files a document, known as an 8-K, with the SEC detailing the side effects. It also issues a press release so the information is spread quickly through the media.

The drug's side effects are now public information instead of insider information, and investors can sell ABC stock.

That's how the process is supposed to work.

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