Overview of Insider Training Law -

“Insider trading” is an ambiguous and overinclusive term. Trading by insiders includes both legal and illegal conduct. The legal version occurs when certain corporate insiders – including officers, directors and employees – buy and sell the stock of their own company and disclose such transactions to the SEC. Legal trading also includes, for example, someone trading on information he or she overheard from a conversation between strangers sitting on a train or obtained through a non-confidential business relationship. The illegal version – although not defined in the federal securities laws – occurs when a person buys or sells a security while knowingly in possession of material nonpublic information that was obtained in breach of a fiduciary duty or relationship of trust.

Despite renewed attention in recent years, insider trading is an old crime. Two primary theories of insider trading have emerged over time. First, under the “classical” theory, the Securities Exchange Act of 1934’s (“Exchange Act”) anti-fraud provisions – Section 10(b) and Rule 10b-5 - apply to prevent corporate “insiders” from trading on nonpublic information obtained from the company in violation of the insiders’ fiduciary duty to the company and its shareholders. Second, the “misappropriation” theory applies to prevent trading by a person who misappropriates information from a party to whom he or she owes a fiduciary duty – such as the duty owed by a lawyer to a client.