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When one talks of insider trading one usually refers to the activity whereby the insiders buy and sell securities based on the information they obtained as an employee. With this definition of insider trading springs forth the definition of insiders. Insiders are commonly perceived to be those employees of the corporation that have access to the corporation’s private, confidential and material information. The insider’s come upon these data because of their work. But did you know that the law has a broader definition of who insiders are? Insiders are not merely the corporate officers, directors or employees. The law has been interpreted by courts to mean that insiders can also be people that are not necessarily employees of the corporation or even remotely related to the corporation at all. Such definition, which has been given by the courts, is based largely on the fiduciary-duty theory as well as the information misappropriation theory. In this article I will discuss who are covered by the prohibition imposed by the Insider Trading Law. I will discuss not only the conventional understanding of what an insider is but the broader, legal definition of an insider as interpreted in decided cases by the Supreme Court.

The broader definition of insiders finds its basis on the arguments of the fiduciary obligation of the people that come into contact with the corporations as well as the argument on information misappropriation. The fiduciary-duty theory and information misappropriation theory is also the basis for the conventional definition of insiders. According to the fiduciary-duty theory, directors, officers and employees have a fiduciary obligation to the corporation by virtue of their position as an employee of the corporation. This means when the director, corporate officers and employees agreed to be an employee they are taking it upon themselves not only to perform their assigned work but also to hold in trust any information, money, important documents, or contracts they obtained by virtue of their office. The employees are trusted by the corporation to keep the private and confidential corporate data in trust. An off-shoot of the fiduciary-duty theory is the information misappropriation theory which states that since it is the corporation who is the true owner of the non-public, material information, the employee who uses them in trading is misappropriating the information. The insiders, therefore, according to these two lines of thought, is guilty of breaching his fiduciary duty as well as misappropriating the company’s information that he holds in trust. From this line of reasoning we can deduce that anybody, not only corporate employees, directors or officers can also be liable for insider trading if he breaches his fiduciary obligation with the company and trades securities using the private information. Not only employees of the corporation have a fiduciary duty. There are other non-employees that obtain confidential and material information and have the fiduciary duty to keep them. Such persons are those that are contracted by the corporation and by the nature of their work they come across sensitive, confidential information. They are the company’s lawyers, accountants, investment bankers, investment consultants and the like. Like corporate employees, therefore, they are also covered by the prohibition on insider trading.

This entry was posted on Thursday, October 7th, 2010 at 7:05 am and is filed under General Stock Market . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.