What Defines Insider Trading and When Is It Illegal?

It’s obvious to most people that insider trading is cheating and ought to be a crime, though it can be difficult to prove and prosecute. Ivan Boesky and hedge fund billionaire Raj Rajaratnam famously went to jail for doing it and George Soros paid a big fine. Still, the cases can be murky: You don’t need to actually trade to be guilty of insider trading, and not every trade on inside information is a crime. Still, prosecutors argue their famous cases — such as one filed in New York this year against UK billionaire Joe Lewis — build trust in the financial system and ultimately ensure a level playing field for all investors.

It needs two things to happen. First, to be considered an insider, you have to be in possession of information that isn’t public; Perhaps that’s advance notice of a company’s earnings, or results of a drug trial. If you take this information and trade on it or give it to others and they trade on it, you can expect prosecutors to take an interest. If no trade occurred, then don’t worry about insider trading, though the leak could still be a breach of other laws or an employer’s code of conduct. Prosecutors don’t have to show a motive but in the Lewis case, where he’s charged with passing tips to his personal pilots, among others, they came up with a novel explanation: the inside information was allegedly a substitute for a formal retirement plan. (Lewis’s lawyers say the charges are “ill-conceived.”)