In finance, insider trading refers to the buying and selling of security by a person who has access to material non-public information about security. In the United States, the Securities and Exchange Commission (SEC) classifies insider trading as securities fraud if a person buys or sells a security before the material information is made public. Among the most famous people accused of illegal insider trading are Martha Stewart, Jeff Skilling and Raj Rajaratnam.

In 2004, Martha Stewart, a famous TV personality and media owner, was convicted for insider trading related to her sale of ImClone stock. In December 2001, ImClone's new cancer drug was rejected by the Food and Drug Administration (FDA) and its stock price declined by almost 90%. Based on the tip from ImClone's CEO, Samuel Waksal, Martha Stewart made a selling order right before the ImClone's stock price took a dive. She was sentenced to 10 months imprisonment and fined $30,000.

Jeff Skilling, the CEO of Enron Corporation, was charged with an SEC violation of illegal insider trading for his sale of Enron's shares before the energy giant collapsed. Skilling was also found guilty on numerous other counts of securities fraud and conspiracy and was sentenced to 24 years in prison.

In 2009, Raj Rajaratnam, a billionaire hedge-fund manager and founder of the Galleon Group, was accused of illegal insider trading that involved 19 other individuals from companies such as Bear Stearns, McKinsey, Goldman Sachs, IBM, Google and Berkshire Hathaway. The illegal scheme was estimated to earn $60 million in profits. As of 2009, Rajaratnam was the 236th richest American and his estimated net worth was $1.8 billion. In 2011, Rajaratnam was sentenced to 11 years in prison.

  1. Why did the Department of Justice launch an inquiry into the sale of ImClone shares ...

    On December 28, 2001, the FDA announced that it was rejecting ImClone's new cancer drug, Erbitux. The drug represented a ... Read Answer >>
  2. What are some CEO characteristics/behaviors that could lead to a drop in stock prices?

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  3. What exactly is insider trading?

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  4. What is the difference between wash trading and insider trading?

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  5. Can you accidentally engage in insider trading?

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  6. What happens to the fines collected by the Securities and Exchange Commission?

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