Insider trading refers to the trading of stocks or securities by people who have access to information that is not open to the public. By taking advantage of privileged access to this information, you are considered to be breaching your fiduciary duty.
You also can be convicted of insider trading if you tip friends off about non-public information. If you receive a tip from a friend, you have the same duty as the insider – which is to not make trades using that information. But if you did not know that the information was privileged, a successful prosecution is unlikely.
Insider trading is considered a serious federal offense in most cases. The underlying theory is that it is unfair to investors who do not have the benefit of the same insider information. This type of fraud is different from other types of investment fraud. That is, it does not target an individual investor as a victim. Instead, the worker or individual is able to act upon secret information that is unavailable to other investors. This gives that person an unfair advantage and the chance to reap a windfall of profits.
The SEC both investigates and prosecutes insider trading and various other types of securities fraud. It does so with many different federal statutes and regulations.
Federal laws define an insider as a director or officer of a publicly traded company, and also beneficial owners of in excess of 10% of any part of the stock of a company. Corporate officers and directors have a fiduciary duty to the shareholders of the company. Using inside information to enrich one’s self breaches the duty. People who can access insider information, including someone who gets a tip from a director or officer, is considered an insider as well. He could be subject to prosecution for insider trading.
Employees of a company that is publicly traded can trade securities of their own company, even though they have access to inside information. However, they must meet the reporting requirements that have been established by the SEC.
Insider Trading Laws
Congress recently voted to eliminate a key requirement in insider trading laws for the majority of federal employees. It passed legislation that exempted such workers from a new rule that would mandate online posting of certain financial transactions. This has caused some controversy in Washington DC, but some said the changes were needed to avoid serious security risks to federal employees who would have to reveal personal information. The law is known as the STOCK Act. It was signed into law by President Obama in 2013.
The US government has to prove that the defendant bought or sold a security on the basis of nonpublic information about the security. Prosecutors also have to show that the defendant received information and that the information was nonpublic and material. It also must be shown that the information influenced the trade. A defendant can make a defense that he was part of a binding contract that was entered in good faith, to buy or sell some amount of the security, and that this agreement was in place before he knew of the information.
In recent years, the SEC and federal courts have been expanding the meaning of insider trading. It can now include trading by a regular person on the street, if the SEC thinks he got the information from a person who should not have been in possession of the information.
The SEC states that detecting and prosecuting insider trading is one of its most important enforcement priorities. It notes that all investors need to be aware of the danger of trading on a potential insider information tip.
Insider Trading Sentencing Guidelines
The Justice Department and the local US attorneys’ offices that can bring criminal prosecution against those suspected of insider trading. According to the Securities Exchange Act of 1934, you can face up to 20 years in prison for every willful act of securities fraud. You also can be fined up to $5 million for each violation.
Only fines, rather than imprisonment will apply if you can demonstrate that you had no knowledge of the rule violated. Corporations can be fined as much as $25 million.
Note that many people who are charged with insider trading also are charged with wire and mail fraud, which also can bring a 20 year prison sentence. Other possible federal charges include racketeering, tax evasion and obstruction of justice.
Prison terms for insider trading are getting longer – the Wall Street Journal reported recently that the median jail term for insider trading in 2011 was 30 months, which is higher than the term of 18 months that was common from 2000-10.
Insider Trading Cases
Some examples of insider trading that have been prosecuted by the Department of Justice and the SEC include:
- Corporate officers and directors who traded company securities after they found out about confidential developments
- Friends, family members and business associates who traded such securities on that information
- Employees in law, banks, brokerages and printing who were provided with the information to provide services
- Government employees who discover such information because of the agency they work for
One of the most famous cases of insider trading was with Martha Stewart. In 2001, Stewart sold 4000 shares of ImClone Systems stock. A day later the FDA stated that they were denying the company’s application for a new type of cancer drug. The company’s stock dropped by 20% on the news.
The federal government indicted Stewart and her stockholder in 2003 on several counts of securities fraud, and this included insider trading. The government claimed that they had sold the stock based upon an advanced notice of the decision by FDA. They claimed that they had agreed to sell the stock if it went under a certain price. Stewart was convicted by a jury of securities fraud in 2004.
Insider Trading News
- SEC Settles Insider Trading Case in Miami – The SEC settled a case involving a Miami-based trader, who was charged with insider trading in stock for a company in China.
- EADS Managers Facing Insider Trading Charges – Seven current and former execs of European Aeronautic, Defence and Space Co. are facing charges of insider trading.
- Feds Going After Insider Trading Ring in Apparel Industry – An employee of Carter’s stands accused of feeding non-public information to hedge funds who invested in the manufacturer of baby apparel.
Insider Trading Laws by State
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming