People who have a fair amount of money to invest look for an investment advisor who can navigate them through the twists and turns of the economy, stock and bond markets and U.S. dollar fluctuations. They want professionals who can foresee upcoming changes as much as possible.
When someone acts on information that was not supposed to be shared, however, that can be considered “insider trading.” The “tipper” (the person who shares the information) and the “tippee” (the person who receives and acts on the information) can both face serious criminal charges.
What kind of information is illegal to share?
Insider trading doesn’t involve just any information. It must be material nonpublic information (MNPI). Further, the tipper typically must be aware that they’re breaching their fiduciary duty by sharing that information with someone who isn’t authorized to have it.
Finally, the tipper must be sharing the MNPI for some type of personal benefit. For example, maybe a broker wants a client to invest in a particular company or stock, so they disclose information they have about an upcoming acquisition or merger, a new product or something bad that’s about to befall a leading competitor.
The “personal benefit” element is critical when it comes to criminal liability. This is referred as the Dirks test – named for a U.S. Supreme Court case. The personal benefit doesn’t have to be monetary. Some unethical investment professionals share MNPI simply to impress others or in expectation of receiving an insider tip in return.
Can a tippee be charged with insider trading for receiving the information?
If a client receives MNPI, understands that it’s information they shouldn’t have and directs their advisor to make a purchase or trade based on it, they can find themselves charged with insider trading.
Even if they don’t act on it but share it with someone else, that can still be considered insider trading. That’s because once they’ve received the information, they have assumed a fiduciary duty to guard it. What a person who isn’t an investment professional knew or should have known about the confidentiality of a piece of information can be key to a criminal case.
The best way to avoid problems if someone receives MNPI may be to cut ties – at least as a client or a business colleague – with that person and remove any assets from under their control. If it’s a friend or relative sharing insider information, that can be trickier. Whatever the situation, it’s smart to get early and experienced legal guidance.
