Federal Criminal Insider Trading and Stock Market Irregularities
Insider trading occurs when someone with inside company knowledge uses that information to trade stocks.
It's generally described as the buying or selling of a security that breaches a duty of trust and confidence when they knew the information about the security was not public information.
The people who might have access to confidential inside information include company personnel, brokers, stock analysts, and investment bankers.
Put simply, federal law makes it a crime for people with inside information to buy or sell stocks based on their special knowledge that is not publicly known.
The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) who are responsible for regulating the United States financial market.
They enforce the securities laws prohibiting insider trading. A conviction for insider trading will normally result in huge fines and even time in a federal prison.
As noted, insider trading involves buying or selling stocks by somebody with access to private information that is not available to the public.
It's legal to trade stocks by an insider if their trading doesn't take advantage of information not accessible to the public, but becomes illegal when trading occurs with private information.
Federal insider trading charges are a serious matter to your freedom and reputation. Our federal criminal defense lawyers are reviewing the law more closely below.
Breach of Fiduciary Duty or Relationship of Trust
Most often, people engaging in insider trading will have acquired the inside information they traded for a profit by having a relationship of trust with the corporation. They are frequently:
- company executives,
- board members,
- employees, and
- lawyers.
They all have a legal obligation to use the inside information for the corporation's benefit.
This is a primary form of fiduciary duties, and violations of this duty by the use of private company information for trading purposes is a common way people will become criminally exposed to insider trading charges.
As discussed above, insider trading is the trading of public securities by corporate directors or others with public information, but becomes illegal, however, when the information used in the trade is material and nonpublic.
All corporate directors owe a fiduciary duty to their shareholders, meaning these individuals must act in a manner that benefits the shareholders.
It is illegal for fiduciaries to make decisions that benefit themselves at the expense of those to whom they owe a fiduciary duty. Illegal insider trading violates this fiduciary duty.
Importantly, you do not have to be a corporate executive to commit insider trading crimes. Someone who receives illicit insider trading tips from a fiduciary can also be found guilty.
For example, if a director on the board of a publicly traded company discloses nonpublic information to her child's teacher, and that teacher uses the information to buy or sell stock, then the teacher could be convicted of insider trading.
Insider Trading is a White Collar Crime
Insider trading is considered a white-collar crime. T he federal government is quick to investigate it with the full force of the Securities and Exchange Commission (SEC) and sometimes even the FBI.
In corporate insider cases and those outsiders, the financial gain from the trading is seen in their stock portfolio.
Corporate insiders who only share inside information can also face insider trading liability, even when they don't personally make use of the material and nonpublic information.
Federal criminal penalties for insider trading are severe if convicted and include:
- Up to $5 million in fines for individuals,
- Up to $25 million in fines for businesses,
- Up to 20 years in federal prison.
Those investigated for insider trading may further find that their reputation credibility suffers, even when there is no conviction.
SEC Tracking Tools
While some may think they can get away with insider trading by getting in and out quickly on a one-time deal, it is important to understand that the SEC utilizes sophisticated tracking tools to keep tabs on market trends and irregularities.
Those one-time deals often involve big paydays, and you can be almost certain that the SEC will flag the transaction through the use of their surveillance technology.
When is Insider Information Considered Material?
Insider trading that occurs based on nonpublic information can trigger a federal investigation when that information is material. If this nonpublic, or secret, information would be beneficial to a stockholder when they decide to buy or sell, then it is most likely material.
Readers should note that not all material information is confidential, and not all non-public information is material.
Information that might affect the revenue of a business will normally be considered material in determining whether an individual committed the criminal act of insider trading, such as:
- Impending mergers,
- joint ventures,
- bankruptcy filings,
- board room transitions.
Federal Securities and Commodities Fraud
Those accused of insider trading are often charged with violating 18 U.S.C. 1348.
This securities and commodities fraud imposes severe penalties on a person who “knowingly executes, or attempts to execute, a scheme or artifice” — to either:
- “defraud anyone in connection with any commodity for future delivery, or obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property connected with the purchase or sale of any commodity for future delivery.”
Section 1348 also applies to “any option on a commodity for future delivery, or a security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)).” 12 U.S.C. § 617 defines the crime of illegal commodities trading and price fixing.
Securities Defined
Securities are negotiable financial instruments that themselves hold value. In large part, securities fall into three broad categories:
- Equity,
- Debt,
- Debt-Equity hybrid.
Generally, securities involved in insider trading come in the form of stocks, bonds, notes, certificates of interest, or options—though this is not an extensive list.
Related Federal Crimes
When individuals are accused of insider trading, they are often accused of similar crimes that frequently occur under the same set of facts.
For example, federal fraud investigations will result in charges under multiple statutes, including:
- 18 U.S.C. 1341 – mail fraud,
- 18 U.S.C. 1342 -fictitious name or address,
- 18 U.S.C. 1343 – wire fraud,
- 18 U.S.C. 1344 – bank fraud,
- 18 U.S.C. 1349 – attempt and conspiracy.
- 18 U.S.C. 1350 – failure of corporate officers to certify financial reports.
Each of these crimes is serious and requires an equally serious defense.
Defending Against Insider Trading Charges
Mounting a competent defense is key in avoiding an insider trading conviction. There are several potential defenses for allegations of insider trading.
The critical components of federal insider trading violations are:
- Confidential information was shared, and
- That confidential information was material, and
- The sharing of that material, confidential information resulted in the buying or selling of securities.
Federal prosecutors have the burden of proving each element of the crime you are accused of.
If they cannot prove that you shared information that was confidential, material, and led to the purchase or sale of securities, they have a weak case. Some common defense strategies include:
- Lack of knowledge the material information was confidential,
- No possession of material and non-public information,
- There was a corporate disclosure before use of the information.
If you are under investigation, already indicted and arrested for insider trading, or facing a civil lawsuit, contact our firm to review the details and legal options moving forward.
We will need to thoroughly review the details and then discuss the case with the federal prosecutor to evaluate whether negotiation is a viable option for a favorable outcome.
Eisner Gorin LLP is located in Los Angeles County with two office locations. You can contact our firm for an initial consultation at 877-781-1570.