Wikipedia defines it as "trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company".
What Paulson did was create an instrument that he was planning to bet against later. Paulson used this information to short the instrument and made a billion out of it. The fact that this information - that the instrument was designed to fail - was not made available to the buyer makes it potential insider trading. The fact that Goldman Sachs abetted this action makes it party to insider trading.
-Techdoctor
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