Insider Trading Examples: What Makes it Illegal?

Trading on secret information is illegal in the U.S.; that much is clear. 

Insider trading occurs when someone buys or sells a security (like stocks or options) based on material, nonpublic information in breach of a duty of trust. In simple terms, it means using confidential, market-moving news to your advantage. 

In practice, this applies not just to corporate executives, but to anyone (consultants, lawyers, government employees, even friends) who gets important nonpublic tips.

We’ll break down each part of this definition, illustrate it with recent U.S. insider trading examples (2020–2025), and show why even the appearance of “getting ahead” of news is forbidden.

The Classic Insider Trading Pattern

The traditional insider trading case follows a predictable pattern. Someone inside a company learns about an upcoming event, e.g, a merger, earnings miss, FDA approval, major contract, and trades their company’s stock before the news goes public.

The Core Elements of Insider Trading

For something to qualify as illegal insider trading, specific conditions must be met simultaneously. Without all elements present, the activity might be unethical or suspicious, but it won’t meet the legal definition of insider trading. These are:

• Material, non-public information is involved
• A breach of a duty of trust or confidence occurs
• A securities trade happens while the person is aware of that information

Here’s a breakdown of insider trading elements:

Material, Nonpublic Information

A key ingredient of insider trading is “material nonpublic information” (MNPI). 

“Material” means the news would likely affect an investor’s decision or change the stock price, for example, news of a big acquisition, earnings miss, clinical trial results, or a lucrative government contract. 

“Nonpublic” means the information isn’t already out in the market. In short, it’s confidential corporate news or data that could move the stock price once revealed. 

By law, it doesn’t matter how a person got the information, only that it wasn’t public and was important. Investing on that info is illegal.

Common Examples of Material Info

Material news can include M&A, trial results, unpublished earnings guidance, merger talks, regulatory approvals/denials, major contracts, or even disasters like recalls.

Anything that a reasonable investor would consider important to a company’s value can count as material. 

For instance, knowing a company is secretly being bought at a premium is material; learning an executive is stepping down under a cloud might also be material. If that news isn’t out to all investors yet, it’s off-limits.

Insider Trades Examples That Involved Material, Nonpublic Information

Index Committee Leak (2020)

In September 2020, the SEC charged an index manager at a global fund (Yinghang “James” Yang) who secretly learned which companies would be added to a popular stock index. 

He bought call or put options on those firms before the public announcement. When the index was adjusted, the trades jumped in value, yielding over $900,000 in profits. 

Here, the inside tip (which stocks join an index) was certainly material (index inclusions can cause big moves) and nonpublic, and Yang knew he was violating a duty of confidentiality.

Drug Trial Results (2021)

In late 2021, the SEC charged a medical researcher (Daniel Catenacci) who was the lead clinical investigator for a biotech company’s cancer drug trial. 

After learning privately that the trial results were positive, he quietly bought shares of the drugmaker. When the firm announced the positive results in November 2020, the stock immediately jumped over 300%, and Catenacci sold his shares for a $134,000 profit. 

The SEC noted that “clinical drug trials often involve highly sensitive and valuable information” and that Catenacci was required to “safeguard the material nonpublic information” and not trade on it. 

Breach of Trust 

This is the secret sauce that turns trading on material non-public information into illegal insider trading. There must be a breach of some duty either to the source of the information or to the trading party.

An executive or employee generally has a duty to the company and its shareholders to keep certain information confidential. When that trust is broken, whether by trading or tipping, it triggers insider trading liability. 

The SEC often underscores that an insider “had an obligation to keep [information] confidential” and “betrayed that trust” by trading on it. 

The breach of trust can manifest in several specific ways, each representing a different method of violating the fundamental duty of confidentiality:

Ignoring Company Policy / NDA

Eric Watson of Long Blockchain was explicitly under a confidentiality agreement when he told others about a major corporate strategy (pivoting to blockchain). 

The SEC charged Watson with insider trading after he tipped friends with a draft press release, who then bought stock before the announcement. 

Since Watson “signed a confidentiality agreement not to disclose the company’s business plans,” his disclosure was a clear breach of trust.

Misusing a Safe-Harbor Plan

Companies allow insiders to sell stock under pre-set trading plans (Rule 10b5-1 plans) to prevent accusations. However, if an insider sets up such a plan while already holding secret news, it can be deemed a fraud. 

A notable recent case is Terren Peizer, Executive Chairman of Ontrak. Peizer set up two 10b5-1 plans in 2021 to sell millions of shares of his company.

Unbeknownst to the public, his largest customer was about to cut ties (more than half the company’s revenue). By the time Ontrak announced the contract termination in August 2021, Ontrak’s stock plunged 44%. Peizer “avoided more than $12.7 million in losses” because he had sold in advance. 

The SEC alleges he lied on his plan certifications by claiming ignorance of material info he had. In other words, using a trading plan as a cloak doesn’t work if you drafted it with inside knowledge.

Breaking a Fiduciary Duty

Any violation of a fiduciary duty (like directors’ duty to shareholders) can trigger insider liability. This covers trading on confidential boardroom knowledge, as the Collins case showed. 

Also, in mid-2023, the Justice Department indicted five people in a scheme involving a pharma M&A. 

The lead defendant was a biotech board director who got confidential merger proposals and passed tips to others. Authorities emphasized that as a director, he owed duties to Company-1, and by trading (and tipping) on negotiations with Company-2, he broke that duty.

Trading While Aware of the Information

The last piece of the puzzle is action. A trade must happen while the person already knows the material, non-public facts. Holding inside information on its own isn’t a crime; it becomes illegal only when someone acts on it.

So, who’s at the center of this story? Who brings all the elements together? The insider.

Who Is an “Insider”? 

An insider is anyone obligated to keep company information private. Typically, insiders are top executives, board members, or employees who owe loyalty to shareholders or have signed confidentiality agreements.

But insider trading laws extend further, reaching outsiders such as advisors, or even family and friends of insiders, if they owe any duty of trust or receive sensitive information from an insider and then trade on that tip.

The SEC has made it clear that insider trading isn’t limited to company officers or directors; it can also involve friends, business associates, family members who’ve received tips, and professionals from law firms, banks, and brokerages who trade on confidential information obtained through their work.

Who exactly are the people behind these perfectly timed trades?

Corporate Insiders

CEOs, directors, or any employee who learns confidential developments in the course of work. 

In a recent case, a biotech board director (Ross Haghighat) tipped co-conspirators about a pending merger proposal. 

The DOJ charged that Haghighat “obtained material nonpublic inside information” about an acquisition and then bought stock and tipped others to do the same.

Non-Employee Insiders

Lawyers, consultants, investment bankers, accountants, or anyone helping the company can become “temporary insiders” if they sign an NDA or are given confidential access. 

For instance, a finance consultant at Goldman Sachs learned of the firm’s imminent acquisition of a fintech startup (GreenSky) while advising on the deal. 

The consultant, Puneet Dikshit, then bought call options on the target company before the acquisition was announced. 

The SEC charged him, pointing out he breached duties to both his employer and the client by misusing their confidential deal information. Even though Dikshit wasn’t a full-time employee of either firm, his insider role and duty made trading illegal.

Index & Fund Professionals

Employees at financial firms who know sensitive information also count. The index manager Yang (above) was one. His breach of duty came from his employment: he had a responsibility to keep index changes secret. When he traded ahead of them, he broke that trust.

Government Officials

U.S. government workers and politicians can owe a similar duty under laws like the STOCK Act. 

While most congressional trading isn’t prosecuted, the rules forbid using undisclosed legislative or nonpublic national security information for profit. 

Only one member of Congress (Rep. Chris Collins) has ever been convicted of insider trading. 

In Collins’s 2020 sentencing, DOJ noted that as an Innate Immunotherapeutics board member, Collins learned confidential drug trial results and “was obligated to keep the Drug Trial results secret until Innate publicly released them,” but instead he tipped his son. 

This shows that even for lawmakers, trading on confidential info breaks the law.

In practice, many congressional trades have drawn criticism but not charges, partly because proving intent is hard.

For example, high-profile names like former Senator Richard Burr, Rep. Dan Crenshaw (Texas), RepMarjorie Taylor Greene (Georgia), Senator Kelly Loeffler, and more recently Representative Nancy Pelosi have been scrutinized for well-timed trades around COVID-19 news, tech legislation and other important financial releases.

 Pelosi’s recent NVIDIA stock trades made through her husband’s investment account around the CHIPS Act votes have been especially controversial; see Pelosi’s case study for details.

The bottom line is that elected officials have the same prohibition on insider trading. 

In Congress, this duty is enforced by disclosure rules and ethics committees, but criminal or SEC cases are possible if someone used undisclosed legislative or security information to trade.

Tippers and Tippees

Even if you aren’t a formal insider, passing along inside information for trading is as bad as trading on it yourself.

The SEC definition explicitly includes “tipping,” giving material nonpublic information to someone else, as insider trading. 

For example, in San Francisco, a bank finance employee (Mounir Gad) tipped his friend about upcoming company acquisitions. Gad had learned the info at work and was required to keep it secret. 

He used a coded messaging app to tell his friend, who then bought the target’s stock. Both were charged: Gad for breaching his bank’s trust, and the friend (even though not an employee) as a tippee. 

This illustrates the point: if a tipper breaches a duty to share MNPI, the tippee who trades on it can also be guilty, especially if they know the info came from a breach of trust.

Even hints can count if they convey material, secret information.

For example, if a corporate insider casually remarks to a friend, “Our deal will definitely close next week,” and the friend buys stock, that is tipping. 

The key is whether the insider knew the info was confidential and significant, and whether the tippee knew (or should have known) it was not public.

The “Mosaic Theory” Exception

However, not all trading by insiders is illegal. 

The “mosaic theory” recognizes that analysts and investors can piece together public information and industry knowledge to make informed trades. The key is that each piece of the mosaic must be public or non-material.

But when one piece of that mosaic is material non-public information, the entire analysis becomes tainted. You can’t “launder” inside information by mixing it with public research.

The Bottom Line

Insider trading is prosecuted not because trading itself is wrong, but because it undermines the integrity of the markets. When insiders cheat or even seem to ordinary investors lose faith that the market is fair. 

To recap, a trade will qualify as illegal insider trading in the U.S. if all the following are true:

• The information was material (important enough to move the stock price if public) and nonpublic (not generally known).
  
• The trader (or tipper) had a duty of trust or confidence to the source of the information (as a corporate insider, consultant, employee, etc.), and they misused that duty.
  
• The person either traded (or arranged a trade) while knowing that information, or tipped someone else who did, with the benefit of that breach.

 In each case, the pattern is the same: secret news + breach of trust = illegal profit.

The key lesson is that if you know something that outsiders don’t, and you owe someone a duty to keep it secret, you cannot trade or help others trade on it. Violating that principle is insider trading, and it can bring serious legal consequences