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tf/stocks•Posted by u/newbie_investor•

What actually counts as insider trading? My coworker says he traded on a "tip" and I'm worried for him

My coworker works at a biotech company. He overheard his manager talking about a drug approval that hasn't been announced yet, then bought a bunch of call options the same day. He told me about it like it was no big deal.

Is this textbook insider trading? What are the actual consequences if the SEC catches you? And how DO they catch people — like do they monitor every single trade? I'm genuinely concerned for this guy but also want to make sure I don't get implicated just for knowing about it.

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macro_man·edited

Yes, this is literally the textbook definition of insider trading. Material, non-public information (MNPI) + trading on it = federal crime.

Consequences: Up to 20 years in prison and up to $5 million in fines for individuals. The SEC also pursues civil penalties of up to 3x the profit gained or loss avoided.

How they catch people: The SEC has sophisticated surveillance systems. They look for unusual options activity before major announcements. If a random person suddenly buys 500 OTM calls on a biotech the day before FDA approval, that triggers an investigation. They then subpoena phone records, emails, and employment records.

For you: Do NOT trade on this information. If you already know about it, the safest thing legally is to not touch that stock at all. And maybe tell your coworker he's an idiot.

312
chart_wizard·edited

Adding to this — even receiving a tip and trading on it is illegal. You don't need to be the insider yourself. The "tippee" is just as liable as the "tipper." Classic example: the SEC went after everyone in the Raj Rajaratnam insider trading ring, not just the sources.

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algo_trader_42·edited

Also worth noting: it's not just stocks. Trading options, telling a friend who then trades, even crypto in some cases — all can be prosecuted under insider trading laws.

87
options_queen·edited

I work in compliance at a brokerage. The number of people who think they won't get caught is staggering. We literally have automated systems that flag exactly this kind of pattern. Unusual options volume + subsequent material news = instant referral to FINRA and the SEC. Your coworker is going to have a bad time.

198
commodity_chris·edited

Tell your coworker to lawyer up, seriously. If the trade was already made, the cat's out of the bag. A securities attorney can at least help him figure out his options (no pun intended). And you — keep your mouth shut about this to anyone else and don't trade that ticker.

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