Insider Trading?
I am a flight attendant on a private jet and I hear a bank CEO   discussing a merger or a buyout. I proceed to purchase that stock   before the announcement. The CEO did not tell me to buy it, I just   overheard him. If you are a flight attendant on a private jet that is operated by one of the principals, probably including a bank, attorney, consultant, broker, etc., in the merger or buyout, then you probably have a fiduciary duty to safeguard the information and are prohibited from trading. Please see: http://www.kiplinger.com/article/investing/T052-C008-S001-would-you-be-guilty-of-insider-trading.html You’re a janitor at a major company. You hear members of the company’s   board convening outside the room you’re cleaning and decide to hide in   the closet. The board okays a deal to sell the company for a fat   premium to the current share price. You load up on the shares. Illegal   insider trading? Definitely. This is not a public place, and “you’d be in a position to   understand that confidential information was being disclosed, which   changes the calculus,” says Andrew Stoltmann, a Chicago-based   securities lawyer. Also see: http://meyersandheim.com/how-to-win-an-insider-trading-case/ However, between these two extremes of a bystander with no duty to the   corporation and a corporate officer with a clear duty to the   corporation stood a whole group of people such as printers, lawyers   and others who were involved in non-public transactions that did not   necessarily have a duty to the company whose securities they traded.   To address this group of people the courts developed the   misappropriation theory. The misappropriation theory covers people who   posses inside information and who are prohibited from trading on such   information because they owe a duty to a third party and not the   corporation whose securities are traded. Yours is the perfect example. You owe a duty to your employer to operate in its best interests. As for the broader, more common example, where you overhear information in an elevator, restaurant, in line at the coffee shop, etc., trading on such information was found not to be insider trading in SEC v. Switzer: http://law.justia.com/cases/federal/district-courts/FSupp/590/756/2247092/  In this case, Mr. Switzer overheard information at a track meet and traded on it with profits. The court found:  The information was inadvertently overheard by Switzer at the track meet. Rule 10b-5 does not bar trading on the basis of information inadvertently revealed by an insider. On the basis of the above findings of fact and conclusions of law, the   court orders judgment in favor of defendants. "Nope, its not legal. Easy to explain: If you know something that isn't public known (""inside"") it's called insider trading. Hard to prove (impossible), but still illegal. To clarify: If the CEO says it AND its known in public its not illegal. In any case the CEO could face consequences (at least from his company)."
"Secret formulas are legal, ""privileged information"" is not. And that may be the whole point. People are allowed to trade stocks profitably if doing so results only from their skill. A ""secret formula"" (for evaluating information) is part of that skill. But having ""privileged information"" is not considered skill. It is considered an unfair, illegal advantage. Because company officials (and others) with privileged information are 1) not permitted to trade stocks while that information is privileged and 2) are not allowed to share that information with others. Inevitably, some do one or the other, which is why they are prosecuted. ""Raj"" took the process to new highs (or lows). He not only ""dealt"" in privileged information, he PAID for it. Anything from a new car or house to $500,000 a year in cash. In essence, he had a bunch of strategically placed ""spies"" inside or close to corporations including one on the board of Goldman Sachs, ""selling out"" their companies, and thereby practicing a form of corporate ""treason.""" This was the day traders dilemma. You can, on paper, make money doing such trades. But because you do not hold the security for at least a year, the earnings are subject to short term capital gains tax unless these trades are done inside a sheltered account like a traditional IRA.  There are other considerations as well: wash sale rules and number of days to settle.  In short, the glory days of rags to riches by day trading are long gone, if they were ever here in the first place.  Edit: the site will not allow me to add a comment, so I am putting my response here: Possibly, yes. One big 'gotcha' is that your broker reports the proceeds from your sales, but does not report your outflows from your buys. Then there is the risk you take by the broker refusing to sell the security until the transaction settles. Not to mention wash sale rules. You are trying to win at the 'buy low, sell high' game. But you have a 25% chance, at best, of winning at that game. Can you pick the low? Maybe, but you have a 50% chance of being right. Then you have to pick the high. And again you have a 50% chance of doing that. 50% times 50% is 25%. Warren Buffet did not get rich that way. Buffet buys and holds. Don't be a speculator, be a 'buy and hold' investor. Buy securities, inside a sheltered account like a traditional IRA, that pay dividends then reinvest those dividends into the security you bought. Scottrade has a Flexible Reinvestment Program that lets you do this with no commission fees. I'm having a hard time getting worked up over this case.  The underlying issue is a serious one, but this case is the wrong canary.    &gt; The affidavit was false: simply, nakedly false. The employee had made no such claim.  &gt; The prosecutors alerted a major newspaper about the search, so there are photographs of agents carrying boxes from your office.  That's not government error.  That's malfeasance.  This pisses me off.   &gt; The agent’s statement was false.  The federal agent lied and destroyed a company in the process. The lawsuit was against the prosecutors who acted on good faith.  Why didn't he try to sue the agent who lied?  The prosecutors have qualified immunity, which they need, in order to do their jobs.  Otherwise, they'd be spending all day in court defending themselves rather than prosecuting cases.    &gt; The appeals court said evidence that Ganek knowingly traded on inside information would give authorities probable cause to conduct a search, but it wasn’t needed in order to get a warrant.  &gt; The affidavit alleges that some of Ganek’s employees had traded on inside information and that “there was at least a fair probability to think that his office was among the LG premises where evidence of an insider trading scheme would be found,” the appeals court said, referring to Level Global.  That's why the appeals court threw out the case.  They said the lying officer only accelerated the warrant which would have been issued anyway. "US law dictates that you cannot buy / sell shares in a company you   work for except during open trading windows. I understand lockout   periods when you're in a company but what about after you quit? There's no such law. Trading lockouts are imposed by companies themselves to avoid the complexities of identifying ""insiders"". For large companies it sometimes is easier/cheaper to assume everyone is insider instead of imposing internal data flow controls and limitations. For such companies, their internal policies would also manage how the employees who are leaving should be treated." That's not how a ponzi scheme works. You've just described a totally benign transaction involving shares of a sham company. Plenty of people traded Enron shares before it collapsed, that doesn't mean they were complicit or involved in a Ponzi scheme or fraud.  Here is the wikipedia page for Ponzi Scheme A ponzi scheme is when I give funds to Fund Manager A because he has a good history of strong returns.  Fund Manager A does something with the money I give him, but his financial statements don't represent his true activity or returns.  He maintains his strong returns and Investor B shows up to invest also.  At some point I want my money back for whatever reason.  Since the returns have all been a sham, I'm paid out with the funds that Investor B sent in based on totally fabricated returns. Arguably the money made or lost on the particular stock in question wouldn't have happened without the story. The AIs are just taking advantage of market conditions caused by the story. The person who planted the story bought the stock prior to the story being dropped and sold before the stock dropped back down, which is illegal. "You own a fractional share of the company, maybe you should care enough to at least read the proxy statements which explain the pro and con position for each of the issues you are voting on. That doesn't seem like too much to ask. On the other hand, if you are saying that the people who get paid to be knowledgeable about that stuff should just go make the decisions without troubling you with the details, then choose the option to go with their recommendations, which are always clearly indicated on the voting form. However, if you do this, it might make sense to at least do some investigation of who you are voting onto that board. I guess, as mpenrow said, you could just abstain, but I'm not sure how that is any different than just trashing the form. As for the idea that proxy votes are tainted somehow, the one missing piece of that conspiracy is what those people have to gain. Are you implying that your broker who has an interest in you making money off your investments and liking them would fraudulently cast proxy votes for you in a way that would harm the company and your return? Why exactly would they do this? I find your stance on the whole thing a bit confusing though. You seem to have some strong opinions on corporate Governance, but at the same time aren't willing to invest any effort in the one place you have any control over the situation. I'm just sayin.... Update Per the following information from the SEC Website, it looks like the meaning of a proxy vote can vary depending on the mechanics of the specific issue you are voting on. My emphasis added. What do ""for,"" ""against,"" ""abstain""and ""withhold"" mean on the proxy card or voter instruction form?   Depending on what you are voting on,   the proxy card or voting instruction   form gives you a choice of voting   ""for,"" ""against,"" or ""abstain,"" or   ""for"" or ""withhold."" Here is an   explanation of the differences: Election of directors: Generally,   company bylaws or other corporate   documents establish how directors are   elected. There are two main types of   ways to elect directors: plurality   vote and majority vote. A ""plurality vote"" means that the   winning candidate only needs to get   more votes than a competing candidate.   If a director runs unopposed, he or   she only needs one vote to be elected,   so an ""against"" vote is meaningless.   Because of this, shareholders have the   option to express dissatisfaction with   a candidate by indicating that they   wish to ""withhold"" authority to vote   their shares in favor of the   candidate. A substantial number of   ""withhold"" votes will not prevent a   candidate from getting elected, but it   can sometimes influence future   decisions by the board of directors   concerning director nominees. A ""majority vote"" means that directors   are elected only if they receive a   majority of the shares voting or   present at the meeting. In this case,   you have the choice of voting ""for""   each nominee, ""against"" each nominee,   or you can ""abstain"" from voting your   shares. An ""abstain"" vote may or may   not affect a director's election. Each   company must disclose how ""abstain"" or   ""withhold"" votes affect an election in   its proxy statement. This information   is often found toward the beginning of   the proxy statement under a heading   such as ""Votes Required to Adopt a   Proposal"" or ""How Your Votes Are   Counted."" Proposals other than an election of   directors: Matters other than voting   on the election of directors, like   voting on shareholder proposals, are   typically approved by a vote of a   majority of the shares voting or   present at the meeting. In this   situation, you are usually given the   choice to vote your shares ""for"" or   ""against"" a proposal, or to ""abstain""   from voting on it. Again, the effect   of an ""abstain"" vote may depend on the   specific voting rule that applies. The   company's proxy statement should again   disclose the effect of an abstain   vote." Matt Levine talked about a cute scam that this resembles, a kind of extended short squeeze. You manipulate up the stock of a company, so that it's obviously way above the fundamental value. Word will get out. Then the shorts come in. But the value remains stubbornly high. All the stock is held by a few insiders, but they didn't manipulate the stock price to do a pump and dump. They did it to milk the shorts on borrow cost.