Insider trading was made illegal during the reforms that followed the stock market crash of 1929 and the onset of the Great Depression.
The practice of insider trading involves using information that isn't available to the general public in order to profit in the stock market. So...you know that a company is about to announce that it's agreed to be purchased by its biggest rival. You buy the stock ahead of the general announcement. When the news hits, the stock skyrockets and you make a fortune.
Even though insider trading became illegal during the 1930s, the penalties weren't very stiff. For a long time, a person could use insider information to make money in the stock market, get caught, pay the fine, and still end up earning a profit on the whole transaction (even taking the amount of the fine into account).
The Insider Trading Sanctions Act Of 1984 was meant to change that. It was the 1980s, after all, the time of Gordon Gekko and Patrick Bateman. People were running around in boxy suit coats and slicked-back hair, yelling buy and sell orders into brick-sized cellular phones...just insider trading like crazy.
The 1984 update to the insider trading laws was meant to change that. It made it easier to prosecute insider trading, and increased the financial penalties related to conviction.
Just ask Charlie Sheen at the end of Wall Street.
Related or Semi-related Video
Finance: What is Inside Information?5 Views
Finance a la shmoop what is inside information?
all right well inside is here the boardroom where secrets are kept outside [Board room door opens]
is here Wall Street where secrets are well sometimes
illegally exploited inside legal fiduciary duty to keep your mouth shut
about mergers, acquisitions, how business is doing whether or not the CEO did in
fact film himself planking naked on the roof of the Mercedes dealership all of [Man planking on roof of Mercedes building]
that is kept inside that's inside information outside yeah Regulation FD
full disclosure everything that is disclosed to everyone at the same time
that's outside information or acceptable information for all.. Inside information
is knowledge you have that would let you invest with an unfair advantage over
everyone else you have to act as an investor, advisor or anyone in the wall
street dance on a fair and level dance floor otherwise if they catch you yes
you go to jail so the big fat red line that delimits what inside is versus [Pen draws a red line]
outside is well simply the question does everyone know this or could everyone
have known this had they simply looked at or did the math.....
you happen to be at Verizon having lunch with a buddy who did something bad in a [Man having lunch with friend at Verizon]
former life and now has to work in customer service there you leave to take
a whiz while you're standing there streaming broadband you see the CEO of
Verizon, you recognize him from the distinctive comb-over stand and well
you stream next to him the two of you streaming there in stereo he has the one [Man and CEO peeing at urinals]
hand on the steering wheel and the other is holding his iPhone it's volume is
turned up loudly nobody else is in the men's room there and you can hear the
voice on the other end say okay it's confirmed Goldman is committed now to
helping you raise twenty billion dollars to buy Netflix and the Verizon CEO says
I'm very excited let's get this process started tomorrow okay now you have [CEO discussing money on iPhone]
inside information you heard something you shouldn't have heard you can't short
Verizon and you can't buy Netflix now at least without landing yourself in the
slammer neither can any of the people you work with or friends or family they
are now liable because they are what is called covered parties which means that
they are covered by the same rules that you're covered by which means that
they're obligated to follow the same set of strictures and are essentially
treated as if they more or less are you well what do you do well you immediately
finish the streaming zip up wash using soap and then phone your compliance [Man washes hands and exits the restroom]
lawyer and tell her to stop trading in either stock until you can come in and
explain all the facts and details to her and her buddies there inside information
is not illegal to have it's only illegal to use as a basis to trade and make
money so fingers crossed you're good at keeping secrets [Man crosses his fingers]
at least well better than this guy
Up Next
What is insider trading and the Securities Fraud Enforcement Act of 1988? It's nothing too complicated, if this minute long video is any indication.
What is Regulation Full Disclosure? Publicly traded companies are required by SEC rules to release full disclosure of all info related to material...
Why do companies buy back or repurchase their own stock? Companies buy back their own stock because it helps them to increase the value of stock an...