Illegal insider trading is defined as the buying or selling of equities or investments based on knowledge not available to the general public. Trades may be made for profit, or to avoid a loss. Persons convicted of insider trading can be fined and/or sent to prison.
Illegal insider trading has been rampant in recent years, and persons convicted of the crime have been sentenced to long prison terms and have paid heavy fines. Among the more notable insider trading cases of recent years was that of Raj Rajaratnam, a billionaire hedge fund operator convicted in one of the biggest such cases in history.
Rajaratnam was sentenced to 11 years in prison, the longest insider trading sentence ever imposed. The government claimed that he profited and or avoided losses of $72 million based on information not publicly available, a violation of insider trading laws. In addition to prison time, Rajaratnam was ordered to forfeit $53.4 million and pay a $10 million fine. These severe penalties demonstrate how seriously the crime of insider trading is regarded by the government and judiciary.
SEE: Top 4 Most Scandalous Insider Trading Debacles
Until recently, the insider trading laws did not apply to members of Congress. The House and Senate were exempt from insider trading restrictions and were free to profit without limit from their insider knowledge and trades.
When the news recently broke about these special perks for members of Congress, the negative reaction from the voting public was swift and severe. Why should citizen legislators have a license to reap profits from an act declared illegal for the rest of us, especially in these troubled economic times with unemployment still a national problem?
In February, the House of Representatives passed the Stop Trading on Congressional Knowledge bill - called the STOCK Act for short - outlawing insider trading by a member of Congress by a vote of 417 to 2. Similar legislation was passed by the Senate by a 96 to 3 vote. The legislation also included strict new ethics regulations.
Under provisions of both bills, members of Congress, Congressional aides, and other officials of the legislative, judicial and executive branches of government, are banned from buying and/or selling stocks and other securities based on information not available to the general public.
Disclosure requirements were also imposed, mandating that members of Congress and others to whom the bills apply reveal any purchase or sale of stocks, bonds, commodity futures or options, or other investment vehicles within 30 to 45 days of the transaction. This data would be published on the Internet and available to the public. Persons convicted of violating the laws would be subject to monetary fines, prison time and loss of government pensions.
Among the reasons that impelled Congress to enact this legislation, aside from the negative public reaction to the practice of insider trading and its illegality, is the impact of big government on the economy.
"Big government can move markets," said Congressman Lamar Smith, (R., Texas). "That's why we need strong rules to reassure the public that decision makers are not enriching themselves by investing based on insider knowledge of government policies."
Not all lawmakers, however, were satisfied with the bills. Republican Representatives John Campbell of California and Rob Woodall of Georgia, voted against the legislation.
"This is an ambiguous bill that could potentially and unintentionally cause constituents and members of Congress to break the law simply by asking or answering a question about the prospect of federal legislation."
The Bottom Line
The stepped-up government probe is expected to lead to additional arrests and indictments, with an eventual reduction in the crime. Restrictive laws have been on the books for centuries, in every civilized nation of the world, and yet crimes continue to be committed everywhere.