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When is it illegal to trade based on an insider tip?

On Behalf of | May 16, 2022 | White Collar Crimes |

Executives at publicly traded companies in Michigan usually have access to a lot of nonpublic company information. They have insider information about future moves the company is going to make as well as drafts of earnings reports that haven’t been publicly released.

While it’s unavoidable for executives to have insider information, receiving a “tip” from an insider could get you into a lot of trouble. Insider trading is illegal in the U.S., so it’s important to understand what it is.

The Dirks Test

Dirks v. SEC was a Supreme Court case from 1983 that helped to define what is considered illegal insider trading in the U.S. The Dirks Test, which is also called the personal benefits test, is standard guidance that is now used in other securities violations cases.

The Dirks test has two main criteria to determine whether a “tippee” is guilty of insider trading. A tippee is someone who receives and acts on an insider tip. The criteria for the Dirks Test are: 1) the tippee broke confidentiality rules by disclosing nonpublic information, and 2) the tippee committed the breach knowingly.

Personal benefit

In Dirks v. SEC, the Supreme Court also ruled that a person who is accused of insider trading must have personally benefitted from the breach to be found guilty. The tippee is only guilty of insider trading if they knew or should have known that the tipper was breaking company confidentiality rules.

Disputing an insider trading claim

If you were charged for insider trading after acting on an alleged tip from a company executive, you may still be able to dispute the allegation. You will need to prove that you believed the information you received was publicly available and you had no intention of breaching company confidentiality rules.