The Anatomy of an Insider Trading Case
You don’t have to be the CEO of Enron, Michael Milken (the Junk Bond King), or Martha Stewart to be charged with insider trading. In fact, some people discover after the fact that they have engaged in this illegal activity without even knowing it. If you are investing, it is important to know what constitutes insider trading and how to avoid it, and in the worst-case scenario, how to defend against the charges.
What Is Insider Trading?
Insider trading can be defined as buying and selling of publicly-traded stock by someone who has material, non-public information about that stock. This gives the insider an unfair advantage. An insider is a person, such as a company director or high-level executive, who has access to non-public information about the corporation or owns stock equaling more than 10% of the company’s equity. While insiders are legally allowed to buy and sell a stock, their transactions must be registered with the Securities and Exchange Commission (SEC).
When Is Insider Trading Legal?
Insiders can buy and sell shares of the company that employs them and any of its subsidiaries. To be legal, however, these transactions are done with advance filings and registered with the SEC. Details can be found on the SEC’s EDGAR (electronic data gathering, analysis, and retrieval) database. Examples of legal insider trading include:
- When a CEO buys back shares of the company
- When employees purchase shares of the company that employs them
When Is Insider Trading a Crime?
The infamous, illegal form of insider trading occurs when non-public, material information is used for profit. This can be done by anyone who has access to information that is not publicly known. For example, if the CEO of a publicly-traded corporation inadvertently discloses information about company earnings to his barber, who trades based on that information, this constitutes illegal insider trading against which the SEC can take action.
How Does the SEC Monitor Illegal Insider Trading?
The SEC monitors insider trading by looking at trading volumes using market surveillance systems. When material information is issued to the public, volumes are expected to increase. On the other hand, if no new public information is issued, yet volumes rise dramatically, it is an abnormal pattern that acts as a red flag to the SEC. This indicator can give rise to an investigation in which the SEC determines who is responsible for the unusual trading volume and whether the trading was illegal.
In its investigation of an abnormal pattern, the SEC will pursue anyone who may be involved in insider trading. The agency can obtain warrants for wiretaps and financial records and use other means in pursuit of evidence. If enough evidence is found to indict an individual for insider trading, that person will be arrested, and the case prosecuted by the U.S. Attorney.
What Are the Penalties for Insider Trading?
Insider trading is prosecuted in criminal court. Penalties upon conviction can include up to 20 years in prison for each act of insider trading and fines of up to $5 million. In actual practice, however, insider trading prison sentences are usually much shorter if the defendant goes to prison at all.
Defenses Against Allegations of Insider Trading
Laws against insider trading are heavily enforced by the SEC. If you have been accused of this crime, it is critical to take immediate action to defend yourself against the charges. Common defenses against insider trading include:
- No confidential information was shared.
- The information shared was not material.
- Although confidential, material information was shared, it did not lead to the purchase or sale of securities.
Get a Southern California Federal Crimes Attorney on Your Side
Although insider trading can be committed inadvertently, it is still a federal offense that carries severe penalties, including a possible prison sentence. If you are facing insider trading charges, your best course of action is to get a team of experienced Los Angeles criminal defense lawyers on your side. At Werksman Jackson & Quinn LLP, we have decades of combined experience in criminal law and are well-known for our federal defense work. Call us at (213) 688-0460 for dedicated advocacy and defense against insider trading charges.