Insider Trading: The Securities Exchange Act Of 1934

The stock market plays a very important part in the lives of investors and companies. Similarly, it is the cornerstone of many historical events. The market allows investors to be partial owners of companies, thus contributing to its growth or even helping it survive. In return, dividends are paid to investors when the company is thriving. Often, those who play an important role in the financials of the company learn information that will dramatically change the future. If one of these people buys or sells stock based on this information, then it creates a type of conundrum called insider trading.
Insider trading is making stock market transactions based on undisclosed, important information. This occurs when individuals buy stock to
The Securities Exchange Act of 1934 enabled the government to convict inside traders. Section 10b5 of this act defines exactly what constitutes illegal insider trading (Yoon & McGee, 2012). It was not until the first insider trading conviction in 1961 that people started to question whether this was ethical or unethical (Shrestha & Sawicki, 2008). Later, in October of 2000, Sections 10b5-1 and 10b5-2 defined the term “insider,” and detailed insider trading, and explained what makes the act illegal. As a result, stricter regulations were established; for example, corporate management must now complete a form whenever they buy or sell company stock. Since then, there has been controversy on whether to tighten or loosen regulations on insider
Perhaps the most famous insider-trading example in recent history is Martha Stewart. It was all based around a biotech company named ImClone. ImClone had a cancer medication that they learned the FDA decided not to approve. When the CEO Sam Waksal learned this, he called his stockbroker to sell his stock, and then his stockbroker notified Martha Stewart (Hoffman, 2007). This caused both Waksal and Stewart to sell all of their stock in ImClone. The next day, the announcement about the cancer drug was publicized. To add insult to injury, once the SEC began to investigate Martha Stewart, she lied about the events leading up to the sales of stock. Martha Stewart was charged with a number of crimes, including insider trading (Hoffman, 2007)). While Stewart was not an “insider,” she did act on nonpublic information, earning her the