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When does a tip count as insider trading?

The future is uncertain, and if you are an investor, you may know this truth better than most people. Nevertheless, your future goals depend on your success as an investor, whether it means your plans for your kids' educations, your own comfortable lifestyle or a secure retirement. You may try to balance your investments so that you are earning as much as possible without risking everything.

Of course, it is always helpful to hear tips about the securities that might provide you with the best outcome. You may read articles from savvy advisors, study the market and watch the signs. Occasionally, you may get a good tip from a friend or colleague. However, when do these tips cross the line into insider trading?

Is it illegal?

Insider trading occurs when you are privy to confidential information about a security or its company, and you use that information to influence your trades. Not every tip you receive constitutes insider trading. However, you may be at risk of committing a serious federal crime that may place your future in jeopardy. If you are in the habit of using tips to make your trades, you may want to know as much as possible about the elements of insider trading, including the following:

  • Insider trading means benefiting from information that is not available to the rest of the public or to other shareholders.
  • If other reasonable investors had the information about the security or its entity, they would likely act on it by trading the security.
  • You received this information knowing it was not public and with the intention of using it to your benefit through trading securities, and you did indeed make those trades.
  • The tip you receive may be illegal if the person who shares it is in violation of a fiduciary duty or a duty of trust to the issuer of the security or to the shareholders of the entity.

Ohio and federal courts assume traders do reasonable research on the legitimacy of the tips they receive. Therefore, even if you are unaware that the information was a breach of trust, the court may still convict you of insider trading. The crime involves the trade and not necessarily the knowledge of how the informant got the information. Because the penalties for this offense can be severe, you would be wise to have solid and experienced legal representation as early as possible.

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