Insider trading, like what Rep. Chris Collins is accused of engaging in, is one of the sexier crimes in securities law.<\/b>
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Rep. Chris Collins walks out of a New York court house after being charged with insider trading on August 8,2018 in New York City.
By Jena Martin, West Virginia University and Karen Kunz, West Virginia University
The arrest of Congressman Chris Collins shines light on one of the sexier crimes that the securities laws has to offer: insider trading.
It\u2019s the subject of many iconic movies like \u201cWall Street,\u201d television shows like \u201cBillions\u201d and real-life scandals involving celebrities, politicians and others.
But despite all the media attention, very few people actually know what insider trading is under the law and how it gets people into trouble. As finance experts, we are here to fill that gap.
As its most basic, insider trading is when someone \u2013 usually a corporate insider \u2013 buys or sells securities such as a stock or bond based on \u201cnon-public information.\u201d
For instance, Martha is a board member at Company X and learns of an incredible breakthrough at her company that hasn\u2019t been disclosed to the public. If she then uses that information to buy her company\u2019s stock \u2013 knowing that the stock price will go up after the announcement \u2013 Martha is likely guilty of insider trading.
Under current laws, the insider can also get into trouble if he or she shares that information with others \u2013 who could face prosecution as well if they make a trade using the information.
For much of the 20th century in the U. S., insider trading was not generally considered illegal. It was only in the 1950s that various court rulings strengthened the power of Wall Street\u2019s beat cop \u2013 the Securities and Exchange Commission \u2013 to go after inside traders under federal securities law.
Under the classical legal theory for insider trading, an insider \u2013 whether an employee or a corporate director \u2013 has a fiduciary obligation to a company to keep secret information secret. Insiders who breach that duty by either trading on the information or sharing it for personal benefits violate that duty. This appears to be the case with Collins.
But what if the stock you traded wasn\u2019t from a company to whom you owed a fiduciary duty?
That was at the heart of a 1997 Supreme Court case that spawned something known as the misappropriation theory, which broadened what was considered illegal insider trading. In that case, attorney James O\u2019Hagan used information he gained from his position at his firm to trade in another company\u2019s stock. Since it wasn\u2019t O\u2019Hagan\u2019s client, he argued, there was no duty and, hence, no breach.
The court disagreed. Since O\u2019Hagan used confidential information that was given to him to perform his job and instead used it for his personal gain, he breached his duty and was therefore found guilty of insider trading.
Since then, prosecutors have used this theory to find wives who trade based on marital secrets, therapists who trade based on therapy sessions and even hackers who trade based on computer theft all to be guilty of insider trading.
As for Collins, he sat on the board of biotechnology company Innate Immunotherapeutics. He was also the Australian company\u2019s largest shareholder. When Collins learned that a trial involving a new multiple sclerosis drug failed, he allegedly sold shares in the company \u2013 to avoid significant losses \u2013 and passed along that information to his son, who in turn, shared it with others.
Jena Martin, Professor of Law, West Virginia University and Karen Kunz, Associate Professor of Public Administration, West Virginia University
This article was originally published on The Conversation. Read the original article.
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