If the executive comes into possession of material nonpublic information prior to its public dissemination — which the announcement of the FDA approval would surely be — and if the executive leaves the room, only to place an order for Pfizer stock, that executive will be guilty of violating the insider trading laws and can, like Martha Stewart, face jail time and penalties as well as public humiliation.
However, suppose the executive owns stock in Pfizer that, before the board meeting, she's planning to sell.
She goes to the meeting, learns of the FDA announcement and decides not to sell. She has acted on inside information.
—Richard B. McKenzie, "What About Those Who Use Inside Info And Don't Trade?," Investor's Business Daily, November 12, 2002
—William A. Kelly Jr., "The Plague of Insider Non-Trading," The Wall Street Journal, December 11, 1986
With insider nontrading, a person profits by not taking an action based on insider information. In the case explained in the example citation, the insider learns a company is about to get some good news so he or she decides against selling the company's stock. Similarly, if an insider learns that a company is about to get some bad news, he or she could decide against buying the company's stock.
The only real difference between these scenarios? The former is illegal while the latter is legal. But insider nontrading is just as wrong as insider trading. As the earliest citation shows, market-watchers have recognized this for some time, but no one really knows how to prove a "nontrade." The proposed remedies are usually just plain silly. For example, the author of the earliest citation suggests that insiders "must file periodic reports (we suggest monthly) on what trades they did not engage in and why." Yeah, that'll show 'em!.
