Introduction•Legal Issues Related to Insider Trading•It is legal for current employees of the two merging company to buy stock in the new company that isbeing formed. However, these transactions, must be properly filed and processed through the Securitiesand Exchange Commission (Hall, 2018, para. 2,3). There are strict laws in place that govern the process.It is important that all investors understand and abide by these laws. The rationale is outlined below:•Defined: Insider Trading is defined by the federal government as, “buying or selling a security, in breachof a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublicinformation about the security” ("Insider Trading," n.d. para. 1). Or more simply, “the illegal use of non-public material information for profit” (Hall, 2018, para. 4).•Reason for the Laws: Insider trading undermines investor confidence in the fairness and integrity of thesecurities markets ("Insider Trading," n.d. para. 9). In essence, it gives the insider an unfair advantageover other potential investors and traders•The Insider Trading and Securities Fraud Enforcement Act of 1988 states that insiders must “disclose orabstain” from trading a firm’s securities. The law imposes penalties up to $1 Million and up to 10 years inprison. It also established a bounty program where informants could collect up to10% of the insider’sprofits. Moreover, it holds top management liable for insider trading of subordinates (Gaughan, 2008, p.
