Two "old friends" were arrested last week for alleged securities fraud and insider trading. The Wall Street Journal reports that Scott Allen of Atlanta, Georgia, was a financial consultant who received inside information about acquisitions by pharmaceutical companies. Allen then released that information to his friend, John Bennett of Norwalk, Connecticut, an independent film producer and former investment professional. Bennett profited over $2.6 million in pharmaceutical stocks while giving Allen $100,000 in kickbacks.
An "insider" is typically someone who is either a company's officers, directors, or someone who has control of at least 10% of a company's equity securities. A company is required to report trading by corporate officers, directors, or other company members with significant access to privileged information to the Exchange Commission or to have it be publicly disclosed.
Insider trading is when an individual has inside access to confidential or non-public information and takes advantage of such information. Insider trading violates a fiduciary duty that a company has given an insider. Insider trading can also increase the cost of capital for securities traders and therefore have a negative effect on economic growth.
As was the case with Allen and Bennett, when an insider "tips" off a friend about non-public information, the friend then has the same fiduciary duty as the insider, i.e., they now cannot make a trade based upon the inside information. But in order for a friend to be convicted, it must be proven that they knew or should have known that the information was company property.
Both Allen and Bennett were released on $500,000 bond and could face up to 45 years in prison and more than $10 million in fines.