The Penalties and Defenses for Insider Trading
Advice from a Florida securities fraud attorney
on November 6, 2018
Updated on February 8, 2021
“Insider trading” is one of those terms you often see in the news but don’t fully understand. One common misconception is that all insider trading is illegal. Not so. In the broadest sense, insider trading refers to any situation where a corporate insider—such as the chief executive officer—buys or sells shares in his own company. Such trades are generally perfectly legal, so long as they are reported to the U.S. Securities and Exchange Commission (SEC).
Where insider trading crosses the line from legal to illegal is when that same CEO, or another corporate officer, employee or director, makes a trade based on information that is not disclosed or available to the general public. For example, in 2018, a Florida resident entered a guilty plea in federal court in connection with a $2 million insider trading scheme. According to the U.S. Department of Justice, the former investment bank insider shared nonpublic information regarding “contemplated but unannounced merger and acquisition transactions” with friends, who in turn executed trades for their financial benefit.
The defendant in this case faces a maximum sentence of five years in federal prison and a fine of $250,000, or up to twice his “gross gains” from the illegal insider trading. If that sounds like a harsh sentence, consider that in other insider trading cases a conviction can lead to 20 years in prison and a maximum fine of $5 million. And in the case of corporations or other “non-natural persons,” the maximum possible fine skyrockets to $25 million. Additionally, the SEC can seek civil sanctions to “disgorge” the defendant of up to three times the financial gains related to the insider trading.
Understanding the Elements of Insider Trading
As with any crime, the prosecution had the burden of proving the defendant’s guilt beyond a reasonable doubt. In the context of insider trading, this means proving several elements, including:
- there was an actual purchase or sale of securities
- the trade occurred while the defendant was “in possession of” nonpublic information
- that information was “material”
All of these elements are necessary to sustain a conviction. So, depending on the facts or circumstances of a given case, a defendant may have multiple defenses available.
For instance, the information cited by the prosecution may have, in fact, been public knowledge as the result of previous media leaks or reports. Or the information itself may not meet the legal definition “material”—that is to say, there was never a “substantial likelihood” that a “reasonable investor” would have considered the information relevant when deciding whether to buy or sell the security in question.
“It is very likely an investigation for insider trading will start on the civil side,” says Tampa white collar criminal defense attorney Mark O’Brien. “If you aware you are being investigated, contact a federal criminal defense attorney immediately because, often times, early negotiations can prevent a criminal prosecution.”
Ultimately, insider trading is a highly fact-specific charge. This is why it is critical to seek out the advice of a qualified attorney if the SEC or federal prosecutors suspect you have done something wrong. Do not assume that insider trading is nothing more than a “misunderstanding” that you can clear up on your own. For more information about this area, read our securities and corporate finance law overview.