Is It Insider Trading If I Didn’t Sell?
The Hidden Liability: Can You Commit Insider Trading By Not Selling?
What if I told you that you could commit insider trading without ever clicking “sell” on your brokerage account? It sounds absurd, but this quiet loophole is a ticking time bomb for thousands of unsuspecting investors, employees, and even friends or family members.
You’ve probably heard that insider trading means buying or selling a stock based on confidential company information. The entire compliance industry, financial media, and even federal enforcement agencies focus relentlessly on the transaction — the moment you take action. But what if you don’t? What if you already own shares, receive a tip, and simply sit tight? Could “doing nothing” land you in federal prison?
Real-Life Scenarios (That Happen Every Day)
1. The Loyal Employee
Sarah is a mid-level manager at a public tech company. She’s granted 2,000 RSUs (restricted stock units) as part of her compensation. Her vesting schedule stretches over four years, and she’s excited to watch her savings grow. One morning, Sarah receives an internal email about a product recall that hasn’t been announced yet. The stock will likely plunge when the news breaks, but she’s not planning to sell — her stock is still vesting anyway.
Sarah’s assumption: “I’m not selling. How can this be insider trading?”
The hidden trap: If Sarah decides to hold (or not sell) based on that material, nonpublic information (MNPI), her inaction may still be considered “trading” under federal law. The SEC and DOJ have argued that continuing to hold is a conscious investment decision made in reliance on inside information.
2. The Family Tip
John’s cousin works at a pharmaceutical company. Over Thanksgiving, John hears that the company is about to get FDA approval for a blockbuster drug. John already owns 500 shares and was thinking about trimming his position, but after hearing the tip, he decides to hold on. He never places an order.
John’s assumption: “I didn’t buy or sell, so what’s the problem?”
The hidden trap: The law doesn’t care if you “acted” in the traditional sense. If John refrained from selling because of the tip, he may have violated insider trading laws. The crime is in the use of the information, not just the act of placing a trade.
3. The Passive Investor
Linda is a passive investor with a diversified portfolio. Her financial advisor mentions, in passing, that a specific company is about to announce a major merger. Linda owns shares in that company through an index fund. She doesn’t buy more, but she doesn’t sell either.
Linda’s assumption: “I’m just a small fish in a big pond. This doesn’t apply to me.”
The hidden trap: Even passive investors can be caught in the net. If Linda consciously decides not to rebalance her portfolio because of the tip, she may have used MNPI to her advantage, even though she never interacted with her brokerage account.
The Legal Grey Zone: What the Law Really Says
The Letter vs. The Spirit of the Law
Insider trading is governed by Section 10(b) of the Securities Exchange Act and Rule 10b-5, which prohibit the use of MNPI in connection with the purchase or sale of a security. The key word is “use.” The courts have interpreted “use” broadly, meaning any decision influenced by MNPI can constitute a violation, even if it’s a decision to do nothing.
The SEC’s Stance
The SEC has repeatedly argued that deciding to hold (or not sell) based on nonpublic information is a form of trading. In enforcement actions, they’ve targeted employees and executives who held onto stock options or RSUs after learning bad news, even if they never executed a trade.
The DOJ’s Approach
While the Department of Justice (DOJ) tends to focus on more egregious cases involving large sums, they have prosecuted individuals for derivative trades (such as options) and for refraining from hedging or selling based on inside information.
The Compliance Industry’s Blind Spot
1. Obsession with Transactions
Every compliance training, every broker-dealer policy, and every HR memo focuses on buying and selling — the visible transactions. The entire system is built around monitoring trades, not monitoring decisions. This creates a false sense of security for employees and investors who believe that “doing nothing” is safe.
2. No Detection Mechanism
How do you monitor a decision not to trade? There’s no audit trail, no transaction report, and no compliance flag. This makes it nearly impossible for companies to detect — until a whistleblower comes forward or the SEC launches an investigation.
3. Cultural Blindness
The corporate culture often encourages employees to “hold” during bad news cycles to avoid panic or to show confidence in the company. This cultural norm can inadvertently lead to widespread violations if employees are holding based on MNPI.
The High-Profile Cases That Should Have Been Red Flags
The Real Danger: One Whistleblower, One Email, One Investigation
Imagine an SEC investigator looking at your trading history. They see you didn’t sell during a market downturn while everyone else did. An email surfaces showing you received MNPI. Suddenly, your inaction becomes evidence of a deliberate decision. You’re now facing an investigation, legal fees, and potential criminal charges — all because you thought “doing nothing” was safe.
How to Protect Yourself (When the Law Isn’t Clear)
1. Document Your Decisions
If you receive any information that could be considered MNPI, document your decision-making process. Show that your choice to hold was based on pre-existing investment strategies, not the new information.
2. Implement a Pre-Clearance Process
Work with your broker or compliance department to establish a pre-clearance process for all investment decisions, including holding or not selling. This creates a record and demonstrates good faith.
The Bottom Line: Inaction Is Not Innocence
The next time you hear a tip, receive an internal memo, or stumble upon confidential information, remember: not selling can be just as dangerous as selling. The law doesn’t care about your intent; it cares about your use of information. In the world of insider trading, silence is not safety — it’s a potential crime.
Don’t let the compliance industry’s blind spot become your legal nightmare. Understand that inaction is not a shield, and always seek professional guidance before making any decision based on MNPI.
