The insider trading laws in the state of Massachusetts closely follow the federal insider trading laws. The crime happens when a trade is influenced by being in possession of privileged corporate information that is not available to the public. This information is not known by any other investor, which means that the defendant is attempting to gain an advantage in the market.
Laws and Penalties
In 2000, new rules were adopted by the U.S. Securities and Exchange Commission (SEC), and these affected both state and federal laws. The new rules stated that insider trading is a type of security transaction in which one person is aware of non-public material information. That person has a duty to keep this knowledge confidential and insider trading is a direct violation of that.
Interestingly, until the start of the 20th century, insider trading actually wasn’t illegal anywhere in the country. It wasn’t banned until the stock market excesses in the 1920s and the subsequent decade of depression.
The penalties for insider trading vary depending on how serious the case is and how large the trades were. Usually, a fine is involved, as well as some time in jail. Additionally, the SEC is currently trying to make sure no one convicted of insider trading can ever again work in a publicly traded company.
In Massachusetts, it is not unheard of to face at least 20 years in prison for securities fraud. Furthermore, most defendants will also face a wire and mail fraud case. This can also lead to up to 20 years in prison. Furthermore, general securities fraud, with which they can also be charged, carries a prison sentence of up to 25 years.
Financial penalties are also included as per the SEC Act of 1934. Usually, convicts will have to return the profits they earned through their illegal trades. Furthermore, they can face a penalty of up to three times the profits they made. The Sarbanes-Oxley Act of 2002 amended the SEC Act of 1934 so that a fine of up to $5 million for each act can also be included.
The state of Massachusetts, together with SEC, will only prosecute if they can show that the defendants had a fiduciary duty to the firm and that they intended to obtain gain by buying or selling shares using insider information. Essentially, it must be proven that the defendants had knowledge unavailable to the general public and that they used this knowledge for financial gain.
It is important to understand that there are also some legal forms of insider trading. This is when stock is bought and sold within a single company. This is a common type of trading completed by employees who own stocks in their own company. However, these trades have to be reported to SEC within 10 days of the end of the month in which the transaction took place. Nevertheless, even these trades can only happen once the information influencing the trade has been made public.
There is also a new law in Massachusetts on insider trading. This came into force when hedge fund managers started to create expert networks, which quickly became very popular. If an expert network is used, it has to certify that no confidential information is being provided to the investment adviser by the consultant.
Insider Trading Defenses
Defense attorneys for an insider trading case will first have to find out all the details about the trade in question and demonstrate why the trade took place. They must also have a full understanding of the role of the defendant within the company. They will often try to prove, for instance, that the defendants did not use insider information but rather based their decision on favorable news articles or analyst reports.
A common defense is to discredit existing information. The state must prove:
- The purchase or sale of securities
- The ‘in possession of’ requirement
- Material information
- The misappropriation theory
A good attorney will try to bore holes in one of those four elements, thereby having the entire case thrown out.
Statute of Limitations
Although insider trading is a non-capital offense, the statute of limitations is six years, rather than five years. This was changed in March 2012 by the Supreme Court. It is also important to remember that the statute can be tolled if the defendant spends time outside of Massachusetts.
Insider Trading Cases
- Universal Insurance Holdings engages in legal insider trading. Sean P. Dowes sold 20,000 shares of Universal Insurance Holdings, which were purchased by the chief executive, who now owns 1,754,611 shares in the company. The company also operates in Massachusetts. The trade was fully reported to the SEC within the given time limit.
- Lawyer from Massachusetts avoids going to prison after trading based on tips from a golfer – The lawyer was instead sentenced to eight months of home confinement. The lawyer traded based on information that a golfer had been able to gather through insider sources on American Superconductor Corp.
- Rajat Gupta once was an insider trader, now he washes dishes in jail – Rajat Gupta, former Goldman Sachs director, is currently serving a prison sentence at the Federal Medical Center Devens, where he has the task of washing dishes. This is a far cry from his previous executive job.
- Boston Beer Co Inc engages in legal insider trading – Form 4 was filed in time with the SEC in relation to a legal insider trade.