Is insider trading allowed in Washington DC

Insider trading

Insider trading means the use of inside information for stock exchange transactions and is a term used in the financial market, especially the stock market. Insider trading is a criminal offense in Germany and most of the member states of the European Union.

Legal regulation

Ban on insider trading in Germany

Insider trading is carried out by anyone who issues or initiates a securities order and exploits insider information in the process. According to Section 14 of the German Securities Trading Act (WpHG), it is prohibited:

  • using inside information to acquire or sell inside papers for your own account or for the account of a third party or for someone else,
  • to disclose inside information to another without authorization or to make it accessible,
  • to recommend another person to buy or sell insider securities on the basis of inside information or to induce another person to do so in any other way.

Pursuant to Section 38 (1) of the WpHG, these acts are threatened with imprisonment of up to 5 years or fines.


An insider is someone who has price-relevant information about an insider paper or its issuer before this information has become publicly known.

Insiders within the meaning of the Securities Trading Act are persons who

To these so-called Primary insidersthat receive information that is relevant to the course and not publicly known is added to the category of Secondary insider. This is anyone else who has inside information.

Inside information

According to Section 13 of the WpHG, inside information is specific information about circumstances not known to the public that relate to an issuer of insider papers or to the insider papers themselves and which, if they become public, are likely to have a significant impact on the stock exchange or market price of the insider papers.

Examples of such events are takeover bids, a company's research success, unexpected increases in profits or large orders (these usually lead to price increases), an unexpected drop in profits, filing for insolvency due to insolvency or over-indebtedness (the price will fall regularly in this case) as well as company mergers, personnel changes and the like .

In the 2004 revised provision it is clarified that the execution of own orders using the knowledge of already issued customer orders (so-called Front running) is the exploitation of inside information and consequently counts as part of the criminal insider trading.

Like the term "insider fact" used so far in German law, inside information does not include mere opinions and value judgments. The term “inside information” also includes precise information that relates to existing or, with some certainty, future facts.

So-called “scalping” does not always constitute the offense of insider trading, which is a criminal offense. If trading orders are submitted in the knowledge of a later public recommendation, the Federal Court of Justice is of the opinion that price manipulation is prohibited under Section 20a of the WpHG (BGH NStZ 2004, 286). Such a breach is usually unlawful, but can also be punishable if it actually affects the market price (Section 38 (2) WpHG). The BGH justifies its result with the fact that "self-created facts" are not inside information, as these require a "third-party reference". The BGH can also rely on the fact that its opinion ultimately corresponds to the requirements of the Market Abuse Directive, which classifies "scalping" in the aforementioned manner as price manipulation. In the literature, on the other hand, a fundamental suitability of internal circumstances is sometimes assumed as inside information.

In its decision of January 27, 2010 (Az: 5 StR 224/09), the Federal Court of Justice expressed itself on criteria that could be classified as inside information relevant to the course affect.[1] After that, fixed thresholds could not be established. The decisive factor is an individual assessment of the information from the point of view of the time (ex ante). In view of the large number of factors that regularly contribute to pricing in addition to the offense, no excessive requirements for evidence should be placed on the determination of such price-relevant circumstances. It is not necessary to interview market participants. Tenor: In principle, it is sufficient to take a look at the course of the share price and the turnover.[2]

Insider paper

Insider securities are securities in which insider trading is prohibited.

According to § 12 WpHG, insider papers are financial instruments,

  1. those on stock exchanges or an organized market in Germany or
  2. are admitted to trading in a member state of the European Union (EU) or the European Economic Area (EEA) or
  3. whose price depends directly or indirectly on exchange-traded financial instruments.

Are also integrated into the term

  • Rights to subscribe for, purchase or sell securities (option transaction),
  • Rights to payment of a difference based on the performance of securities (contracts for differences),
  • Futures contracts and rights to futures contracts on stock or bond indices or interest rate futures contracts, as well as other futures contracts that oblige you to buy or sell securities (futures contracts).

According to the definition extended by the Investor Protection Improvement Act in 2004, insider papers are now also financial instruments whose price depends on financial instruments traded on the stock exchange. This means that values ​​that are not traded on an exchange, if their price is determined by exchange-traded financial instruments, are recorded as insider securities.

Monitoring insider trading

The task of insider surveillance is to prevent insider trading. To this end, national stock exchange and securities supervisory authorities are active in the western states. Its aim is also to ensure the functionality of fair markets for securities and compliance with legal requirements. One element of their monitoring tasks is the detection and prosecution of prohibited insider trading.

Transactions in insider securities are checked daily by the Federal Financial Supervisory Authority (Bafin) with the help of special IT programs, both automatically and manually, for conspicuous price movements or suspicious transactions. These filter out anomalies from the daily turnover on the stock exchanges and over-the-counter trading. Investment services companies, such as banks and savings banks, must report transactions that give rise to the suspicion that the ban on insider trading or the ban on price manipulation has been violated.

The stock market in the USA is also closely monitored. The Securities and Exchange Commission (SEC), an independent federal authority in Washington (D.C.) founded in 1934, is responsible for the discovery of illegal insider trading in addition to the listing of securities and investor protection. Under gentle pressure from this authority, the regulations were tightened in Europe in the 1980s.

Preventive measures against insider trading

Listed companies are obliged to publish insider information promptly (so-called ad hoc publicity) in order to forestall possible dissemination of the insider information to third parties and thus prevent insider trading. As a further measure to prevent insider trading, from July 1, 2002, section 15a of the WpHG introduced the statutory obligation to immediately report transactions by members of the management and supervisory boards of listed companies and their family members in securities of one's own company and to issue this notification (on the part of the company) publish (so-called directors' dealings).

European Union

In the member states of the European Union, the use and disclosure of inside information - with minor differences - is prohibited to the same extent as in Germany. Because the Market Abuse Directive (Directive 2003/6 / EC) obliges the nation states to issue corresponding bans and to sanction violations.

United States

The USA is considered the "motherland" of the ban on insider trading. As early as the early 1930s, insider trading was perceived and discussed as a regulatory problem within the framework of capital market legislation. The prohibition was standardized for the first time with the Securities Exchange Act of 1934. However, the regulatory approaches underlying the US insider trading ban still differ from the European concept. According to the European concept, the prohibitions serve to protect the capital market. In the USA, the prevailing theory so far is that the exploitation of insider knowledge represents a breach of loyalty to the other market participants (“fiduciary duty theory”). Recently, American insider law has followed the “misappropriation theory”, according to which insider trading is an act similar to unfaithfulness: the insider “embezzles” the inside information vis-à-vis the issuer. With this approach, the American insider ban is aligned with corporate law.

Insider trading in practice

In practice, noticeable price movements can often be observed before the official disclosure of inside information on the stock markets. However, BaFin's investigations rarely lead to convictions before the courts. In addition, the boundaries between price-influencing and non-price-influencing information are fluid and are often misjudged by insiders.

One of the few and at the same time best-known examples of uncovered insider trading was the exploitation of an information advantage by the then IG Metall boss Franz Steinkühler in 1993. As a member of the supervisory board of Daimler-Benz AG, he was aware that Mercedes shares had to be exchanged for Daimler shares was imminent. It was foreseeable for him that once this information became known, the price of the Mercedes share would rise significantly. He therefore recommended that relatives buy this stock. This action had no legal consequences, since it was not until August 1, 1994 that the exploitation of information advantages in stock trading was made a criminal offense. About a year after the criminal provision came into force, the first insider trading proceedings in court became public in Germany.[3]

The largest known insider trading to date was uncovered in the US in October 2009 when the FBI arrested six alleged accomplices after three years of wiretapping. Those arrested were high-ranking employees of large public companies, including Robert Moffat (IBM Global System and Technology Director and Senior Vice President), Rahiv Goel (Intel), two hedge fund managers Danielle Chiesi and Mark Kurland (Bear Stearns), billionaire Raj Rajaratnam (Galleon hedge fund (alleged main culprit)) and Anil Kumar (a director of McKinsey & Company). It is said that inside information about companies such as Google, Sun Microsystems, IBM, AMD, Moody's, Hilton Hotels, Peoplesupport and Polycom have been exploited. [4][5] Rajaratnam was convicted for this and for conspiracy, and in October 2011 the sentence was set at 11 years' imprisonment.[6][7] 34 accomplices had previously been convicted by May 2011.[8]

See also


Individual evidence

  1. ↑ Decision of the Federal Court of Justice of January 27, 2010 on insider trading - pdf file
  2. ↑ see also: Criminal Option Trades - Selling at the wrong time is insider trading in: "Frankfurter Allgemeine Zeitung" of February 23, 2010
  3. The mirror, Issue 34/1995, page 88: Loophole in law, accessed on November 26, 2010
  4. ↑ RP-online: After charges of insider trading: IBM and Intel managers Moffat and Goel on leave, accessed on October 28, 2009
  5. ↑ Wall Street Scandal: Insider Trading in IT Stocks, accessed on October 28, 2009
  6. ↑ Judge punishes Wall Street. In: Spiegel Online from October 13, 2011
  7. ^ Raj Rajaratnam - Galleon Group Founder Convicted in Insider Trading Case. In: The New York Times, October 13, 2011
  8. ↑ US billionaire Rajaratnam is supposed to go to jail in: Spiegel Online from May 11, 2011

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