Insider trading is the buying or selling of a publicly traded company's stock by someone who has nonpublic material information about that stock. Throughout the entire history of the U.S. stock market, there have been many individuals who have used their access to insider information to gain an unfair edge over other investors. William Duer is widely considered the first to have used his privileged knowledge in a scheme that involved speculating on bank stocks. Duer was appointed by Alexander Hamilton to serve as the assistant secretary of the Treasury in 1789. Six months later, he resigned from his position after it was discovered that he was taking advantage of his access to confidential information in order to speculate on stocks and bonds.
Although the Securities and Exchange Commission (SEC) has rules to protect investments from the effects of insider trading, incidents of insider trading are often difficult to detect because the investigations involve a lot of conjecture. As such, when insider trading is discovered, it is often controversial and may be disputed. Cases of insider trading also tend to capture lots of media attention, especially if the accused person is a public figure whose reputation may be at stake. Here are four notable cases of insider trading, beginning in the early 20th century and spanning into modern times.
- Insider trading is when an individual or group of individuals with nonpublic information about the stock of a public company buys or sells that stock.
- Although the SEC has regulations against insider trading, incidents of it can be difficult to detect and prosecute.
- Cases of insider trading often capture the attention of the media, particularly if the accused party is a public figure.
- Four cases that captured a significant amount of media coverage in the U.S. are the cases of Albert H. Wiggin, Ivan Boesky, R. Foster Winans, and Martha Stewart.
Albert H. Wiggin
After the Wall Street Crash of 1929, it was revealed that Albert H. Wiggin, the respected head of Chase National Bank, had shorted more than 40,000 shares of his own company.
Using companies that were owned by his family to hide the trades, Wiggin built up a position that actually gave him a vested interest in running his company into the ground. At the time, there were no specific rules against short-selling stocks of your own company. So, in the aftermath of the 1929 crash, when many different investors exited their positions of Chase National Bank stock at the same time, Wiggin legally made over $4 million. In addition to the profits he made from the short-selling of his own company's stock, Wiggin had also accepted a pension of $100,000 a year for life from the bank. He later declined the pension as a result of protests from the public and the media outcry.
The behavior of Wiggin and other high-profile bankers was made public during what came to be known as the Pecora Investigation, headed by Ferdinand Pecora, a former New York deputy district attorney. Through subpoenas and hearings, Pecora exposed the legal but ethically questionable behavior of banks and their top executives in the lead-up to the 1929 crash.
Wiggin was not the only corrupt actor during this time; the Securities and Exchange Act of 1934 was passed in part as a response to the widespread corruption that was revealed in the aftermath of the crash. It was intended to increase transparency in the financial markets and decrease incidents of fraud or manipulation. In fact, it has been said that drafters of the Act nicknamed Section 16, which addresses various regulations that attempt to prevent and prosecute incidents of insider trading, the anti-Wiggin section.
Ivan Boesky is an American stock trader who became infamous for his role in an insider trading scandal during the 1980s. This scandal also involved several other corporate officers, employed by major U.S. investment banks, who were providing Boesky with tips about upcoming corporate takeovers. Boesky had his own stock brokerage company, Ivan F. Boesky & Company, and starting in 1975 when he opened his firm, he made vast amounts of money speculating on corporate takeovers.
In 1987, after a group of Boesky's corporate partners sued Boesky for misleading legal agreements detailing their partnership, the Securities and Exchange Commission (SEC) began investigating Boesky. It was later revealed that he was making his investment decisions based on information received from corporate insiders. These included Michael Milken, the Wall Street "junk bond king," and the investment firm Drexel Burnham Lambert. Both the firm and Milken also became the subjects of SEC investigations.
Boesky ended up cooperating with the Securities and Exchange Commission (SEC) and became an informant, providing information to the SEC which eventually led to the case against Milken. Boesky was convicted of insider trading in 1986. He received a prison sentence of 3.5 years and was fined $100 million. Although he was released after only two years, Boesky has been permanently banned from working with securities by the SEC.
R. Foster Winans
R. Foster Winans was a columnist at the Wall Street Journal who wrote a column called "Heard on the Street." In every column, he would profile a certain stock, and the stocks featured in the column often went up or down according to Winans' opinion. Winans arranged a deal where he leaked the contents of his column—specifically the stock that he was going to detail—to a group of stockbrokers. The stockbrokers would then purchase positions in the stock before the column was published. After the brokers were able to make their own profits, they allegedly gave some of their gains to Winans in return for his intelligence.
Winans was eventually caught by the SEC. His case was tricky because the column was the personal opinion of Winans, rather than material insider information. However, the SEC eventually convicted Winans based on the claim that the information about the stocks contained in the column belonged to The Wall Street Journal and not to Winans himself.
Martha Stewart and ImClone
In December 2001, the Food and Drug Administration (FDA) announced that it would not approve a new cancer drug called Erbitux from the pharmaceutical company ImClone. Because it was expected that this drug would be approved, it represented a major portion of ImClone's future plan for growth. As a result, the company's stock dropped rapidly. While many investors experienced losses as a result of the drop, family, and friends of the CEO of Erbitux, Samuel Waksal, were unharmed. The SEC later discovered that prior to the announcement of the FDA's decision, numerous executives had sold their stock based on the instructions of Waksal, who had also attempted to sell his own stock.
In fact, just days before the announcement was made, the American retail businessperson Martha Stewart had sold around 4,000 shares of the company. At this time, the stock was still trading at a high level and Stewart made nearly $250,000 on the sale. After the announcement, the stock price dropped sharply over the following months.
Stewart claimed to have a pre-existing sell order with her broker, but she was convicted of insider trading for having sold her shares after receiving a tip that ImClone's stock was likely going to drop. Stewart eventually resigned as the CEO of her own company, Martha Stewart Living Omnimedia. Waksal was arrested and sentenced to more than seven years in prison and fined more than $5 million in penalties. In 2004, Stewart and her broker were also found guilty of insider trading. Stewart was sentenced to a minimum of five months in prison and fined $30,000.
Why Is Insider Trading Illegal?
Using confidential or non-public information to make profitable trades is considered a breach of fiduciary duty. It gives the insider an unfair advantage and disadvantages investors and traders who don't have access to the same information.
Is Insider Trading Always Illegal?
Insider trading is not always illegal. "Insiders" who are part of the company whose stock they own are allowed to trade that stock. However, trading by insiders becomes illegal when they make their trades based on information that is not publicly available to all investors.
How Do People Get Caught Insider Trading?
The Securities and Exchange Commission uses a variety of methods to uncover insider trading, including market surveillance and reports from self-regulatory bodies. Insider trading also is frequently uncovered through tips from whistleblowers who know about the trading or from those who have been caught and cooperate with government investigators.
The Bottom Line
Insider trading is when an individual or group of individuals buys or sells stock in a company based on confidential or non-public information about that company. It is illegal but can be difficult to detect.
Insider trading is often covered in the media, especially if it involves public figures or well-known companies. Four insider trading cases that received a lot of media coverage in the U.S. were those of Albert H. Wiggin, Ivan Boesky, R. Foster Winans, and Martha Stewart.