Insider Trading
Illegal insider trading means trading on important secret information in breach of a duty to keep it confidential. Here is what counts, what does not, famous cases and the rules for company insiders and members of Congress.
Legal vs. illegal
Insiders, like executives and directors, can legally buy and sell their company’s stock if they report trades. Form 4 filings are due within two business days. Trading becomes illegal when someone uses material, nonpublic information, such as an unannounced merger or earnings miss, in breach of a duty of trust. Passing a tip to someone else who trades, called tipping, is also illegal.
Famous cases
| Case | What happened |
|---|---|
| Raj Rajaratnam, 2011 | The hedge fund founder was sentenced to 11 years in prison for insider trading |
| Martha Stewart, 2004 | Convicted of obstruction and lying to investigators about a stock sale, not insider trading itself |
| Congress, 2012 | The STOCK Act required members of Congress to report stock trades within 45 days |
Public-record history.
Rules in 2026
Insiders often trade through prearranged plans, called 10b5-1 plans, which now require directors and officers to wait 90 to 120 days after adopting a plan before trading under it. On July 22, 2026, the House passed the Stop Insider Trading Act, 232 to 198, which would further restrict stock trading by members of Congress; it awaited action in the Senate as of September 2026.
Company filings are where material information becomes public.
Penalties and practical rules
- Civil penalties can reach three times the profit gained or loss avoided.
- Criminal cases can bring prison time and large fines.
- If a friend at a company tells you secret news, do not trade on it.
- Watching public Form 4 filings is legal and useful research.
Key takeaways
- Insider trading is illegal when based on material nonpublic information.
- Insiders can trade legally if they report it.
- 10b5-1 plans now have cooling-off periods.
- Never trade on a secret tip.