Employees who buy stock in their own company can be accused of insider trading, whether they are guilty of it or not. Some of the accusations might stem from company policy, and others could be because the employee broke federal law. Being ignorant of the law or of your company policy is no excuse. Penalties for insider trading – trading on non-public information – range from firing to jail time. However, if an employee has no inside knowledge, it is not insider trading for him to buy stock in his own company.
For instance, take the case of former Facebook manager Michael Brown. He was fired for insider trading based on his company’s definition of the act, which is buying Facebook stock on the secondary market. Facebook is a private company. Brown not only broke his company’s insider trading policy, he might have broken federal law by buying $100,000 worth of Facebook shares in the knowledge that Goldman Sachs planned to invest $50 billion four months later, according to Business Insider. Whether or not Brown knew about the Goldman Sachs deal, he lost his job because of the accusation anyway.
In the Business
People who are in the business, such as brokers or hedge fund managers, might be tempted to use their specialized knowledge and relationships with various companies for insider trading. Raj Rajaratnam, founder of Galleon Group, was accused of this, and in May 2011 he was convicted of securities fraud. Rajaratnam had been accused of purchasing stock for years based on non-public information he received from companies including Goldman Sachs, IBM and Intel.
Take the scenario of the employee at a large company who is working late one night when company directors and board members think no one is there. Or, maybe you are part of the cleaning staff and you are eavesdropping on a private board meeting. You hear some non-public information and act on that knowledge to buy stock. That is definitely insider trading, according to Andrew Stoltmann, a securities lawyer interviewed in Kiplinger. Your office is not a public place, and in this scenario you are aware that you are hearing private information.
Selling Stock Illegally
An employee can be accused of insider trading not only for buying stock based on private information, but also for selling stock based on private knowledge. That is what happened to Angelo Mozilo, CEO of Countrywide. Mozilo unloaded $140 million of his Countrywide stock when the company was doing well, because he knew that the mortgage company was about to go under and be acquired by Bank of America. Rather than risk prison, Mozilo agreed to pay a fine of $67.5 million.