In this case, Raj Rajartnam -- a billionaire who was convicted of fourteen counts of insider trading because he stupidly discussed what he was doing, and acknowledged that he knew he was doing something illegal. This May 11, 2011 New York Times article has the juicy details (as juicy as insider trading gets).
I generally agree with those who argue that insider trading should not be illegal, because it hurts no one. I also agree that it is a bit unseemly to being taking advantage of knowledge that others do not have. If Rajartnam was some desperate little guy who was trying to make enough money to get ahead in life (as some of those who get caught are), I might be a bit more sympathetic. But Rajartnam is a billionaire. His illegal activities made him about $60 million, from what I have read. To you or me, that's big money, but not to a billionaire.
Why would you risk going to prison for less than 6% of your net worth--especially when you have so much money that you could live extravagantly on the annual interest on the annual interest of your net worth? (I'm serious: a billion dollars invested in corporate bonds gives about $50-$60 million a year; the interest on $50 million a year is $500,000 to $600,000 a year.) This is crazy.
UPDATE: The theory of why insider trading hurts no one is this:
1. Mr. R knows that company X is about to go up, and he buys stock in X because he knows that. Mr. Q sells his stock in X, unaware of the information that the stock is about to go up. He has already decided to sell his stock at a certain price, and thus he is out nothing by making that sale.
2. Mr. R knows that company X is about to go down, and sells stock in X because he knows that. Mr. Q buys his stock in X, unaware that the stock is headed down. Mr. Q has already decided to buy that stock at whatever price he pays for it. He is out nothing by making that purchase.
I agree that there is something unethical of Mr. R using that insider information. It certainly creates a real lack of trust in the transparency of our institutions. (Although if you have much trust in this you are a fool.) As I understand it, the U.S. is the only developed nation with an insider trading ban.
I have read that the very first person actually convicted of insider trading was not a Gordon Gecko, He-Man Master of the Universe Wall Street type, but a guy working in a print shop in the 1950s who noticed the prospectus he was printing--and went out and bought shares in the stock that would be affected.