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What is insider trading and when is it illegal?

Insider trading is a strange thing that many people who aren’t actively involved in stock trading and investing fail to fully understand. The average person doesn’t usually have to worry about insider trading simply because they lack the knowledge needed to benefit from it. The idea behind insider trading is that someone who has a great deal of insight into a company deliberately takes steps to alter the value of the business’s stocks specifically so they can benefit. Had the person not had special insight into the company, they would not have made the same investment choice.

One of the most common forms of insider trading involves a practice that’s called tipping. This happens when someone with inside knowledge, such as a corporate executive who knows a large merger is in the works tells a family member about the situation. This inside information, or tip, inspires the family member to invest heavily in the company. This investment is a direct violation of stock exchange laws.

A perfect example of tipping is the case of Ishan Wahi. For a time, Wahi worked for Coinbase as a product manager. During his time there, Wahi allegedly tipped his brother some information about some new cryptocurrencies. The information prompted Wahi, his brother, and a friend, to stock up on the cryptocurrencies so they could later sell them for a profit. Wahi was recently arrested for insider trading. He has been charged with wire fraud conspiracy and wire fraud.

The SEC is always on the lookout for signs of insider trading. The slightest hint that insider trading has occurred and the SEC launches an investigation. Because the SEC does most of the detective work on insider trading cases many assume that the SEC is the organization that handles the arrest and prosecution of individuals who commit insider trading but that’s not the case. While the SEC has the power to investigate an insider trading case, they lack the legal ability to make an arrest. For an arrest to occur, the SEC has to hand the results of its investigation over to the U.S. Department of Justice.

“There are two main ways to enforce insider trading laws,” Robert C. Hockett, a lawyer and law professor at Cornell University said. “Someone can decide to sue the insider and say they defrauded them and took advantage of them by selling them securities that they knew would lose value shortly after.”

Insider trading is a serious offense. It’s a federal crime. The exact sentence connected to a guilty conviction depends on how much money was involved in the situation, the exact charges that have been filed, and previous convictions. The penalties for insider trading range from fines, the loss of license, and even jail time. In some extreme situations, a person who has been convicted of insider trading could be sentenced to 20 years in federal prison.