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Determining Who Is an Insider

Trading on material nonpublic information is illegal only if the trader is an insider or obtained the information from an insider who has breached a duty of confidentiality to the company. For example, assume that a general practitioner who has no involvement with any research, owns no stock, and is not a party to any drug company consulting agreements is seated next to the executives of a drug company in a crowded restaurant. The executives are loudly celebrating a new discovery, and the physician cannot help overhearing that at a press conference the next morning they will be announcing the discovery of a new antiulcer drug. The physician has no relationship with the company; he may legally trade on the information, calling a broker and purchasing the stock before the press conference.

Most physician-researchers realize that insider trading is illegal; they do not realize when they may become an insider for security law purposes, however. This is simple for employees; all employees are insiders concerning their employer's information. More problematic is the status of independent contract physicians who have a relationship with the company. The closer this tie is to the company, the greater is the probability that the physician is an insider. Clearly any physician party to a formal research agreement with a company is an insider for any information that would be material to the company. The more difficult question is how far this relationship extends: Does it include every physician in a medical school department that signed the agreement? Every physician in the medical school? Every physician in the university? The answers to these questions depend on the nature of the research agreement. If the agreement is limited to part of the time of one physician, it may not make other members of the department insiders. If is signed by the university and involves many physicians and several departments, it probably makes everyone at the university an insider.

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