The Fault Line of Insider Trading: Information, Fairness, and Market Trust

In every financial market, information is power. Yet when that power is used unfairly, trust in the market begins to erode. Insider trading sits precisely at this fault line between knowledge and integrity. It occurs when individuals trade securities based on material, non-public information — gaining an advantage that ordinary investors cannot match. The offence has long been one of the most debated in corporate and financial law, as it forces us to question what “fairness” truly means in a world driven by access to information.

What Is Insider Trading? In its broadest sense, insider trading refers to the practice of purchasing or selling a publicly-traded company’s securities while in possession of material information that is not yet public information, i.e. any and all information that may result in a substantial impact on the decision of an investor regarding whether to buy or sell the security.

From a legal-academic viewpoint, the core concern is unfairness: if some investors can act on material, non-public information while others cannot, the integrity of the market is undermined. Financial markets rely on the assumption that all participants operate under the same informational conditions, or at least that the playing field is level enough to inspire confidence. When insiders exploit privileged knowledge for personal gain, that assumption collapses. The result is not only an imbalance between informed and uninformed investors, but a broader erosion of public trust in the transparency and efficiency of capital markets.

When Does the Offence Arise? In order for insider trading (illegal insider trading) to be configured, several elements typically must be present:

• Inside information: information that is (i) non-public, (ii) precise or specific enough that a reasonable investor might use it in making an investment decision, and (iii) likely to have a significant effect on the price of the securities if made public. 

• Possession of that information by the person who then uses it for trading (or provides it to someone else who trades).

• A connection between the information and the trading — the person trades (or causes trade) on the basis of that information.

• A duty or relationship of confidence or trust (in many jurisdictions) between the insider and the issuer, or the person who misappropriates the information and the source of the information. 
  

In many civil-law jurisdictions (particularly in Europe), the offence is often structured around the notion of market abuse or abuse of privileged information. For example, in EU law under the Market Abuse Regulation (MAR) and related instruments, a person who uses inside information to acquire or dispose of financial instruments is committing “insider dealing”.

In contrast, in U.S. law the offence is often framed in terms of breach of fiduciary duty (or of trust) combined with trading on material non-public information (under Rule 10b-5 of the Securities and Exchange Commission).

Common Law vs Civil Law Approaches

A comparison between common-law and civil-law approaches highlights how contrasting legal traditions shape the understanding and enforcement of insider dealing.

In the United States, insider trading law has developed largely through case law and regulatory enforcement. The framework rests on Rule 10b-5 of the Securities Exchange Act of 1934 and the court decisions that have interpreted it over time. At its core lies the idea of a breach of fiduciary duty or a duty of trust and confidence — the so-called “classical” insider scenario — or the misuse of confidential information under the “misappropriation theory". In either case, liability typically depends on showing that the person knowingly or intentionally traded on that information. The U.S. approach therefore focuses on duty, trust, and intent.

In contrast, the civil-law tradition — as seen in the European Union — places less weight on fiduciary relationships and more on the principle of market fairness and equal access to information. Under the Market Abuse Regulation (MAR) and related rules, insider dealing occurs when someone who possesses inside information buys or sells financial instruments connected to that information. The existence of a specific duty or relationship of trust is not always required. Depending on the member state, enforcement may involve administrative sanctions or criminal prosecution.

A simple way to frame the difference is this: the U.S. system tends to ask “Did the insider breach a duty by trading on confidential information?” while the EU perspective asks “Did anyone trade while in possession of inside information, thereby gaining an unfair advantage?”

In practice, this divergence means that the same set of facts might be easier to prosecute in the EU, where the focus is on possession rather than duty. Yet, the U.S. system compensates with powerful enforcement mechanisms and a rich body of precedent. Definitions of key terms — such as "inside information", "insider", "trade" and "financial instrument" — also vary between jurisdictions, adding another layer of complexity to cross-border enforcement.

The ImClone Systems Stock Trading CaseOne of the more famous cases involving alleged insider trading is that of ImClone Systems.ImClone Systems was a biotechnology company developing a cancer drug (Erbitux) which had high expectations. 

Toward the end of 2001, after the close of trading on December 28, the U.S. Food & Drug Administration (FDA) announced that it would reject ImClone’s biologics license application for Erbitux. Before that announcement (on December 27), the company’s founder and CEO, Samuel D. Waksal, alerted family and friends to sell ImClone shares, and did so himself. At the same time, several company executives and the insider network sold significant amounts of stock shortly before the public announcement. One high-profile connected person, Martha Stewart, sold about 3,928 shares of ImClone on December 27, 2001, just before the FDA’s adverse decision and consequent drop in stock value (approximately a 16% drop from ≈ $60 to ≈ $46 per share) on December 28.

Legal Issues

From a U.S. legal standpoint, several key questions emerged. The first was whether Waksal and others had acted on material, non-public information. The answer was yes: Waksal knew about the FDA’s imminent decision, which had not yet been disclosed to the public.

Another issue concerned whether he had breached a fiduciary duty or misused confidential information. In this case, Waksal had indeed taken advantage of that knowledge and shared it with family members and acquaintances.

Attention then turned to Martha Stewart and her broker. Had they received a tip and traded on it? According to the Securities and Exchange Commission, Stewart’s broker, Peter Bacanovic, instructed his assistant to inform her that Waksal and his daughter were selling their shares — a message that prompted Stewart to sell hers as well.

Finally, the question of intent became central: was Stewart merely acting under an existing stop-loss order, as her defense claimed, or did she knowingly trade based on inside information?

The sentencingSamuel Waksal pleaded guilty to multiple charges including insider trading; he was sentenced on June 10, 2003, to seven years and three months in prison and to pay fines and back taxes.

Martha Stewart was charged and ultimately convicted (in 2004) of obstruction of justice, conspiracy, and making false statements to investigators — though she was not convicted of insider trading per se. She was sentenced to five months in prison, five months of home confinement, and two years’ probation.

This case is highly legally significant: first, it illustrates how the enforcement of insider trading laws often depends on proving the nature of the relationship between the person who provided the information (the tipper) and the one who received it (the tippee), as well as their intent. Second, it highlights how reputational damage and indirect legal consequences, such as charges of obstruction or making false statements, can arise even when proving the insider trading itself is more complex.

From a broader legal and ethical perspective, insider trading sits at the crossroads of law, finance, and morality. It forces us to confront fundamental tensions between personal gain and market fairness, between information as power and information as property. As global markets become faster and more interconnected, defining what counts as “inside information”, and how far accountability should reach, remains an open challenge. Ultimately, insider trading law is not just about punishing misconduct, but about preserving trust in the system that allows markets to function.