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How insider trading is determined

On Behalf of | May 20, 2022 | White Collar Crimes

Many California residents have heard of the Dirks Test, which is used by the Securities and Exchange Commission (SEC) to determine if inside trading is occurring. The one who acts on insider information has the name “tippee,” as in the person who received a tip, and the person who shares the information is called the “tipper.” Insider trading occurs when the tippee knows or should know that a breach of trust and reliance took place. The Dirks test looks at whether the tippee has a breach of company trust and whether they did so knowingly.

The origins of the Dirks Test

The 1983 Supreme Court case Dirks v. SEC created the Dirks Test. This case determined that disclosing material nonpublic information that facilitates a beneficial inside trade is enough for someone to be liable for illegal insider trading. The test determines whether family and friends or strangers received tips. The cases have different treatment.

Sharing material nonpublic information

You could be guilty of insider trading if you share advance information about an upcoming earnings report, a stock split, merger or acquisition or an upcoming public offering. Sharing advance information regarding a Food and Drug Administration decision about a new drug is also a no-no.

You do not have to be a company employee

Friends and family with information may be guilty of insider trading. If they disclose it, they can have the charge of committing an illegal act, considered under white collar crimes statutes.

Although they may not be directly involved, a tipper may be guilty. They could receive “consulting fees” in the form of a large amount of money. If aren’t sure about whether information that you’re receiving is legitimate, it may be a good idea to consult a professional so that you don’t unknowingly violate any laws.