Insider Trading Act of 1988

What is the Insider Trading Act of 1988?

Understanding the Insider Trading Act of 1988

The Insider Trading Act was signed into law on Nov. 19, 1988, by then-President Ronald Reagan and, essentially, increased the liability penalties to all involved parties to insider trading. Its full name was the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA). 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. People who illegally disseminate inside information leading to an insider trade may also be imprisoned and fined.

The act allows the SEC to impose stiff monetary penalties, usually in multiples of the profit generated from insider trades, and the guilty parties may serve significant jail time, up to five years, according to the extent of their crime. The actual maximum of the fines imposed was capped at either 300% of the amount of money made on the trades or $1 million, whichever amount was larger.

Since 1988, there have been many notable cases of insider trading. In 2003, the Securities and Exchange Commission (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 Sept. 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 that 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.