As information is still nonpublic.” Insider trading is defined

As described by Investopedia, Insider Trading is defined as “The buying or selling of a security by someone who has access to material nonpublic information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic.”

Insider trading is defined as a malpractice wherein a company’s securities’ trade is undertaken by people who, by virtue of their work, have access to non-public information which can be important for making investment decisions. 

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What is an ‘insider’?

“Insider is a term describing a senior officer or director of a company, as well as any person or entity that beneficially owns more than 10% of a company’s voting shares. For purposes of insider trading, the definition is expanded to include anyone who trades a company’s shares based on material nonpublic knowledge. Insiders have to comply with strict disclosure requirements with regard to the sale or purchase of the shares of their company.”

When insiders such as key employees or executives who have access to the strategic important information about the company, use it for trading in the company’s stocks or securities, it is called insider trading and is highly discouraged by the Securities and Exchange Board of India (SEBI) to promote fair trading in the market and for the advantage of the common investor. 
Insider trading is an unfair practice, wherein the other stock holders are at a great disadvantage due to lack of important insider non-public information. However, if the information has been made public and all concerned investors have access to it, that will not be a case of illegal insider trading. 

Legal Aspect

Legal trades by insiders are common, as employees of publicly traded corporations often have stock or stock options. These trades are made public in the United States through Securities and Exchange Commission filings, mainly Form 4.

In the United States, U.S. SEC Rule 10b5-1 clarified that the prohibition against insider trading does not require proof that an insider actually used material nonpublic information when conducting a trade; in fact, the possession of such information alone is sufficient to violate the provision, and the SEC would infer that an insider in possession of material non-public information used this information when conducting a trade. However, SEC Rule 10b5-1 also created for insiders an affirmative defense if the insider can demonstrate that the trades conducted on behalf of the insider were conducted as part of a pre-existing contract or written binding plan for trading in the future.

For example, if an insider is expecting to retire after a specific time and, as part of his/her retirement planning, he/she has adopted a written binding plan to sell a specific amount of the company’s stock each month for 2 years, and the insider later gets possession of material non-public information about the company, any trade based on the original plan might not constitute insider trading.


Arguments for Legalization:

Some economists and legal scholars (such as Frank H. Easterbrook, Henry Manne, Milton Friedman, Thomas Sowell and Daniel Fischel ) have argued that laws against insider trading should be repealed. Their argument is that insider trading based on material non-public information benefits investors, in general, by more quickly introducing new information into the market.

Friedmann, laureate of the Nobel Memorial Prize in Economics,stated: “You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.” Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure in itself is information for the market.

Some critics argue that insider trading does not have a victim: a willing buyer and a willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to this view) having been made between the parties to refrain from trading if there is any asymmetric information present. The Atlantic described the act as “arguably the closest thing that modern finance has to a victimless crime”.

Advocates of legalization make arguments about free speech. Communicating about a development pertinent to the next day’s stock price and getting punished for it might seem an act of censorship. If the information being conveyed is proprietary information and the corporate insider has signed a contract to not expose it, he has no more right to communicate it than he would to tell others about the company’s confidential new product designs, strategies, or bank account passwords.

Advocates of legalization also question why, in “trading”, where one party has more information than the other is legal in other markets (a case of information asymmetry), such as real estate, but not in the stock market. As an example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Alex’s land, he may be entitled to make Alex an offer for the land, and buy it, without first informing Farmer Alex of the geological data. Nevertheless, circumstances can occur when the geologist will be committing fraud if, because he owes a duty to the farmer, he did not disclose the information to him.

Some authors have used these arguments to propose legalizing insider trading on negative information (but not on positive information). Since negative information is often not disclosed to the market, trading on such information has a greater value for the market than trading on some positive information.

There are very limited laws against “insider trading” in the commodities markets if, for no other reason than that the concept of an “insider” is not immediately analogous to commodities themselves (corn, gasoil, sugar, etc.). However, activities such as front running are illegal under US commodity and futures trading laws. For example, a commodity broker can be charged with fraud for receiving a large purchase order from a client (something that is likely to affect the price of that commodity) and then purchasing that commodity before processing the client’s order in order to benefit from the anticipated price increase.




Insider Trading in various Nations:

European Union

In 2014, the European Union (EU) adopted legislation (Criminal Sanctions for Market Abuse Directive) that harmonizes criminal sanctions for insider dealing. All EU Member States agreed to introduce maximum prison sentences of at least four years for serious cases of market manipulation and insider trading, and at least two years for inaccurate disclosure of insider information.


In 2009, a journalist in Nettavisen  was sentenced to 4 months in prison for insider trading. The longest prison sentence in a Norwegian trial where the main charge was insider trading, was for 8 years (2 of which suspended) when the person concerned was convicted in a district court on December 9, 2011.

United Kingdom

Although insider trading in the UK has been illegal since 1980, it proved difficult to successfully prosecute individuals who have been accused of insider trading. There were a lot of cases where individuals were able to escape prosecution. UK regulators have instead relied on fines to punish market abuses.

These fines were widely perceived as an ineffective warning and there was a statement of intent by the UK regulator, the Financial Services Authority, to use its powers to enforce the legislation (specifically the Financial Services and Markets Act 2000).

United States

in 2012 , Rajat Gupta, who had been managing partner of McKinsey & Co. and a director at Goldman Sachs Group Inc. and Procter & Gamble Co., was convicted by a federal jury of leaking inside information to a hedge fund manager Raj Rajaratnam. Preet Bharara, United States Attorney for the Southern District of New York, office prosecuted the case.

With the guilty plea by Perkins Hixon in 2014 for insider trading from 2010-2013 while at Evercore Partners, Bharara said in a press release that 250 defendants whom his office had charged since August 2009 had now been convicted.

A federal appeals court overturned the insider trading convictions of two former hedge fund traders, Todd Newman and Anthony Chiasson, on December 10, 2014, based on the “erroneous” instructions given to the jurors by the trial judge. The decision was expected to influence the appeal of the separate insider-trading conviction of former SAC Capital portfolio manager Michael Steinberg and the U.S. Attorney and as a result of that, the SEC in 2015 did drop their cases against Steinberg and others.

In 2016, Sean Stewart, a former managing director at Perella Weinberg Partners LP and vice president at JPMorgan Chase, was convicted on grounds that he had tipped his father on some pending health-care deals. The father, Robert Stewart, previously had pleaded guilty but didn’t testify during his son’s trial. It was argued that as compensation for the tip, the father had paid more than $10,000 for his son’s wedding photographer.

In another incident in 2017, William T. Walters, Las Vegas sports bettor, was convicted of making $40 million on private information of Dallas-based dairy processing company Dean Foods. Walters’s source, company director Thomas C. Davis employing a prepaid cell phone and sometimes the codified words “Dallas Cowboys” for Dean Foods, helped him from 2008 to 2014 make profits and avoid losses in the stock, the Federal jury found. In the trial, investor Carl C. Icahn was cited in relation to Walters’s trading but was not charged with wrongdoing. Golfer Phil Mickelson “was also mentioned during the trial as someone who had traded in Dean Foods shares and once owed nearly $2 million in gambling debts to” Walter. Mickelson “made roughly $1 million trading Dean Foods shares; he agreed to forfeit those profits in a related civil case brought by the Securities and Exchange Commission”. Walters’s lawyer said he would appeal the verdict.


Police uncovered an insider trading conspiracy in 2008 involving Bay Street and Wall Street lawyer Gil Cornblum and another lawyer, Stan Grmovsek, who were found to have gained over $10 million in illegal profits over a span of 14 years. Cornblum committed suicide before criminal charges were laid. Grmovsek pleaded guilty and was sentenced to 39 months in prison. This was the longest term ever imposed for insider trading in Canada. These crimes were explored in Mark Coakley’s 2011 in his non-fiction book, “Tip and Trade”.


On October 1, 2015, a Chinese fund manager Xu Xiang got arrested due to insider trading.


Insider Trading in India is an offense according to Section 195 of the Companies Act, 2013 and Sections 12A, 15G of the Securities and Exchange Board of India Act, 1992. Price sensitive information is information that is supposed to materially affect the value of the securities. The penalty for insider trading is imprisonment which may extend to five years, minimum of five lakh rupees (five hundred thousand) to twenty five crore rupees (two hundred and fifty million) or three times the profit made; whichever is higher.

















Rajat Gupta Case


Who is Rajat Gupta?

Rajat Gupta joined McKinsey & Company, the elite management-consulting firm as an earnest, under-stated young man, fresh out of Harvard Business School, and IIT Delhi before that. He rose rapidly through a competitive system, going on to rule boardrooms, chair nonprofit boards, and move with CEOs and heads of state from Bill Gates to Bill Clinton. Rajat Gupta brought hope when he broke through racial glass ceilings in the corporate world in a way that no other Indian and few people of colour had done before.
Upon retiring from McKinsey, in 2007 after nine years as its managing director, Mr Gupta was a sought after figure on corporate and nonprofit boards, and joined those of Goldman Sachs, Procter & Gamble, American Airlines, and Harvard Business School.


In one of his first public comments on his insider trading conviction after completing his prison term in March last year, Gupta told an IIT alumni meet in California he regrets that five years of his life were taken away from him and he hoped to tell his side of the story “in due course” once his appeal was decided upon back then.

“While I continue to fight the injustice in my case, I have to candidly admit that I made errors and misjudgements and for that I take full responsibility,” Gupta said, addressing the second annual ‘IIT Bay Area Leadership Conference’ held in Santa Clara last month that was hosted by the 11000-member strong IIT Bay Area Alumni Association and attended by hundreds of top executives and entrepreneurs who had graduated from the prestigious Indian engineering institution. 


The case of Insider Trading


On 11 March 2016, Rajat Gupta, the former managing director of the global consulting firm McKinsey was released from prison after serving a 2 year sentence for insider trading. At the time of his arrest in 2010, Gupta was one of the most popular white-collar American professionals of Indian origin. He had had a stellar corporate career at McKinsey, and also served as a board member for a number of major corporations, including American Airlines, Procter & Gamble and Goldman Sachs. He had also, along with Anil Kumar, a senior partner at McKinsey, helped set up the Indian School of Business in Hyderabad. He worked closely with a number of philanthropic ventures, including the Global Fund to Fight AIDS, Tuberculosis and Malaria. In 2012, a jury found Gupta guilty of passing confidential information from Goldman Sachs board meetings to Raj Rajaratnam, the CEO of the Gallion Group, a multi-million dollar hedge fund, who traded on and profited from it.

“They made me who I am and I was also fortunate enough to play a leadership role that shaped many of these institutions but most importantly I aspired to be a role model for many of the young people who were part of these institutions, who looked up to me”, said Gupta.



In 2011, 2 years after his arrest, following a 2 month trial in which Kumar was a key witness, a 12-member jury found Rajaratnam guilty on all the 14 counts of securities fraud and conspiracy on which he had been charged. The court found that Rajaratnam had again and again conspired to attain privileged information from a diversity of highly placed insiders in banks, corporations and technology firms, and had traded using that information to capitalize on profits and prevent losses.

Prosecutors also taught their guns on a far more well-known target: Rajat Gupta, the former global head of McKinsey, who was then probably the best known and most appreciated American white-collar professional of Indian origin. Gupta had had a astronomical corporate career at McKinsey, and also served as a board member for a number of major corporations, including American Airlines, Procter & Gamble and Goldman Sachs. Rajaratnam was sentenced to 11 years for his crimes, while Gupta was sentenced to two.

Kumar got off with a trial period of two years and a fine of $25,000, apart from forfeiting the $2.26 million that was calculated to be his illicit gain. Prosecutors had pitched in heavily in his support, describing his cooperation as “absolutely essential in two of the most important securities fraud trials in history.” Other plotters also cooperated or established with the authorities and were spared jail terms.

The Rajaratnam case was a protuberant, early win in a streak of more than 80 successful prosecutions against insider trading led by Preet Bharara, the US attorney for the southern district of New York. Bharara’s aggressive pursuit of these cases bolstered his reputation as a no-nonsense defender of the public good. He was propelled into the national limelight, and onto the cover of Time magazine.

But as careers were made and crushed in the courtrooms, Manju Das, Kumar’s housekeeper, was forgotten. In November 2009, a few weeks after Kumar’s arrest, his family terminated her employment and sent her back to India. After more than a decade of earning a relatively stable income in the United States, she was cast back into a life of crushing poverty in rural West Bengal.

In 2011, a journalist and friend of Rajaratnam’s began attending his trial, driven by curiosity about his fate. When Manju Das’s name came up in court, however, his friend was transformed from a curious bystander to someone deeply invested in a secondary tale. The documents unearthed after Kumar’s arrest in 2009 offered an astonishing glimpse into how a millionaire barefacedly stole the identity of his incalculably less privileged housekeeper, and exploited it to his own ends.

In a wiretap recording of a call between Rajaratnam and Rajat Gupta in 2008, the Galleon CEO boasted that he had been giving Kumar “a million dollars a year for doing literally nothing,” and that the payments had been going out “for the last three or four, I mean, four or five years … after taxes, offshore cash.” Gupta responded, “I know. I think you’re being very generous.” Apart from suggesting that Gupta—who was a “senior partner emeritus” at McKinsey at the time—knew Kumar was on Rajaratnam’s payroll, this conversation also offers a glimpse into what Manju Das might once have been worth.

For a few days of the trial, Das’s name reverberated between the prosecution and defence, each seeking to use it to their own ends. Kumar claimed that it had been Rajaratnam’s idea to make payments in her name, while Rajaratnam’s defence upheld that he knew nothing about Kumar’s use of his housekeeper’s identity. The defence also attempted to disrepute Kumar by claiming that he had used proxies to receive payments in the past. It produced a consultancy agreement from Mindspirit, a company Kumar and Gupta started together while they were both employees of McKinsey. Rajaratnam’s lawyers claimed that as part of this agreement, Kumar had acknowledged compensation in the name of his wife, Malvika, while Gupta had received payment in the name of a family trust.

At one point, the question arose of whether Manju Das herself should have been part of the investigation. During a cross-examination, John Dowd, Rajaratnam’s lead defence lawyer, asked Kumar if he had sent Das back to India after he was arrested and charged. Kumar replied that she had long wanted to go, but that her return was hastened after his arrest because his “life was in such trauma.” “Did you make her available to be interviewed by the FBI?” Dowd asked. “I was not asked, sir,” Kumar replied. Dowd persevered: “Well in light of what we’ve reviewed over the past day or so, she is an important witness in this case, isn’t she?” At this, a prosecution lawyer raised an objection, which was sustained by the judge.


Hence, we see how someone of immense repute and respect in the US community and everywhere else, Rajat Gupta, fell for the trap of valuing personal relations more than the professional ones, as a result of which, he was found guilty and prosecuted. What we learn from the course that as we move up in the hierarchy of an organization, the value of business ethics only gets more important and in times like these, it is only advisable to maintain professional sanctity and take decisions which are in the best interest of the organization. This case exemplifies the importance of Business Ethics in organizations and reinforces the fact that no matter how powerful or influential one gets, anyone not adhering to the principals of Business Ethics will not be able to survive and flourish in a corporate ecosystem.