Acting on a hot tip might sound like a good idea when investing but if that hot tip is inside information, it might lead to heavy fines or prison time.
What is insider trading?
Insider trading is when you trade in a financial product (for example, shares, options or derivatives of a listed company) while knowing information that is not public. Your trade could impact the value or price of the investment.
It’s also insider trading if you act on sensitive information that could affect the value of a company’s competitor or supplier.
When you have inside information, it is also illegal to recommend, suggest, or ask others to buy, sell or even not to trade the investment. Also, you must not tip off anyone who would be likely to trade on that information.
Examples of inside information include:
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details of an upcoming takeover or merger
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details of upcoming financial results
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knowledge of major customer contracts or strategic partnerships
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knowledge of changes in executive leadership or board restructure
Even if you trade on inside information and it turns out to be false, you can still be charged with insider trading. You could also be charged if you tried to get someone else to trade for you, even if that person did not act on it.
Who has access to inside information?
Company insiders are often the source of inside information. They typically include the Board of directors, the executive management team, and staff with access to sensitive information (for example, they work in the finance department).
Other people who may have access to inside information are those advising a company on a fundraising transaction or other confidential company business. They may include financiers, consultants, brokers, lawyers, and major shareholders.
Penalties for insider trading
The Australian Securities and Investments Commission (ASIC) monitors Australian markets in real-time for insider trading and other market misconduct. By combining trading data with other data sources, ASIC can identify traders, networks of connected parties and analyse trading patterns.
If you are found guilty of insider trading, you may face up to 15 years in prison. You could be fined up to $1.565 million or three times the profits gained, or the loss avoided, whichever is greater. You could also be disqualified from managing a company for up to 5 years. The penalties for insider trading are even greater for companies.
Sam and Kelly are charged with insider trading
Sam works for a stockbroking company. He received confidential information about the sale of a “Company B” and new directors being appointed. This information would likely cause the share price to increase.
When Sam attends a BBQ with his friends, he casually mentions Company B to Kelly. Sam says it’ll cause a significant increase to the share price and discusses it with Kelly.
Sam has already bought shares in anticipation of an announcement by Company B. Kelly also decides to buy shares in Company B, before it has made a public announcement.
As expected, Company B’s share price surges when it announces the sale and the appointment of new directors. Immediately following the news, Sam and Kelly sell the shares and they both make a big profit.
A few weeks later, Kelly receives a call from the Australian Securities and Investments Commission (ASIC). They ask her to come in for questioning about Company B. Kelly finds out from Sam that he is being investigated by ASIC for insider trading.
ASIC takes Sam and Kelly to court and charges them with insider trading. They face penalties of up to 15 years in prison and heavy fines.
Why insider trading is illegal
Insider trading undermines fairness and trust in Australia’s financial markets. It has impacts beyond those who invest directly in financial products, for example, those who have superannuation.
In a transparent market all participants should receive access to information at the same time. Someone who uses non-public price sensitive information to trade gains a financial advantage over the rest of the market.
Australia has one of the cleanest financial markets in the world and maintains this through tight legal restrictions.
How to avoid insider trading
As an individual:
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Do your own research and make your investment decisions based on publicly available information.
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Never trade based on inside information received from others.
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If you come across inside information, do not share that information with others, and do not act on that information yourself.
As a finance professional or company insider:
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Familiarise yourself with your company’s share trading policy, blackout periods and trading windows.
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Do not share sensitive information about the company with others.
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If you are a director or major shareholder, disclose your trades and holdings to the market to ensure transparency.
If you are unsure about trading in any financial product, speak to us first.
Source: Moneysmart
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at www.moneysmart.gov.au
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
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