What is the Insider Trading Act of 1988

The Insider Trading Act of 1988 was established to increase the liability penalties to all involved parties to insider trading. This act came into being due to the increase in high-profile insider trading cases, as well as the increase in monetary values of the trades. The act allows the SEC to order a penalty of up to three times the profit of insider trades, and the guilty parties may serve significant jail time according to the extent of their crime.

BREAKING DOWN Insider Trading Act of 1988

The Insider Trading Act was signed into law on November 19, 1988, by then-President Ronald Reagan. Its full name was the Insider Trading and Securities Fraud Enforcement Act of 1988, or ITSFEA. The act enabled insider traders to be jailed up to five years, and fined up to the greater of 300% of the amount of money made on the trades or $1 million. People who illegally disseminate inside information leading to an insider trade may also be imprisoned and fined.

Since 1988, there have been many notable cases of insider trading. In 2003, the SEC charged Martha Stewart with obstruction of justice and insider trading for her part in the 2001 ImClone case. Stewart ended up serving five months in a federal corrections facility. In September 2017, former Amazon financial analyst Brett Kennedy was charged with insider trading. In exchange for $10,000, Kennedy allegedly gave a friend information about Amazon's 2015 first-quarter earnings before the earnings report was released.

The history of insider trading

Insider trading occurs when members outside of an establishment are given information which is not available to the public as a whole, and use it to increase their wealth through buying or selling stock. It tends to occur when an unexpected event occurs that significantly impacts a company's value. Insiders may be accountants, lawyers, stockholders or anyone who possesses private information related to a company's stock price. While it is not illegal to possess such information, it is illegal to disseminate it or trade on it. Additionally, some insider trading is not against the law and happens regularly.

In 1914, the New York Stock Exchange responded to Goodrich Rubber's failure to disclose important information regarding a dividend by requiring companies to promptly report actions relating to dividends and interest. Twenty years later, the Securities Exchange Act of 1934 significantly advanced laws surrounding the disclosure of transactions of company stock. Thanks to that act, directors and major owners of stock are required to disclose their stakes, transactions and change of ownership.