Inside Job: A Guide to U.S. Insider Trading

U.S. insider trading is relatively easy to commit but extremely difficult to prove. Here is a primer for fraud examiners explaining the problem, how to tell if a trade is illegal, and what can be done to detect and prevent this popular crime. 

A chemist is surprised at the swift progress of a new drug his pharmaceutical company is developing. Anticipating a successful market release of the drug, the chemist purchases several hundred shares of his company’s stock. One week later, the company issues a press release announcing the significant advancement of its drug. The value of the company’s stock increases by 30 percent in one day. The chemist sells his shares the following day for a gain of nearly $25,000. Does the profit sound too good to be true? It should, because it is illegal. The chemist purchased shares on the basis of material non-public information. Therefore, insider trading occurred.