Insider trading is a topic that you may be familiar with from news headlines. It happens when someone who works for a company or owns shares of stock in that company trades on what they know about the company’s performance.
There have been some high-profile cases where insiders have made millions from their insider knowledge.
This article discusses what federal insider trading is, along with how it is punishable by law. We will also touch on what constitutes insider trading, provide insider trading examples, and discuss some possible defenses that an insider trading lawyer might use when representing someone facing charges.
What is Insider Trading?
Insider trading is the act of making a trade based on what you know or think you know about what may happen in the future. The term usually refers to large-scale stock market manipulation by people who have access to private information.
The person with access may be an employee, executive officer, director, or outside shareholder with special rights. Insider trading can also involve shares in one’s own company.
Insider trading also includes tipping off friends with private information to make trades before public disclosure of this news occurs.
Is insider trading illegal? Yes. It is illegal for employees or directors of any public company to use what they know about the business for their financial gain. They may not trade based on what they know before this news becomes publicly available.
If insiders do buy or sell shares, then what they’ve done must be reported within two business days using a Form 4. The disclosure includes a description of what the insiders know and how they obtained their information.
Why is Insider Trading Illegal?
Is insider trading illegal? Yes. Why? Because it gives the insider an unfair advantage and harms investors who do not have the same information.
It can result in a lack of fairness and a misunderstanding about what is going on with a company’s stock price, which makes it difficult for individual investors to stay informed during periods of volatility.
Trading on insider information can lead to other types of white-collar crime, such as bribery and extortion – causing even more damage.
Insider Trading Examples
In what’s been called the largest insider trading case in history, a former McKinsey & Co. partner was convicted of illegally trading on information he learned while at the consulting company.
Rajat Gupta was found guilty of passing confidential information about Goldman Sachs to business associates who traded on it before the public knew what would happen.
On June 15, 2012, Rajat Gupta was convicted on three counts of securities fraud and one count of conspiracy for insider trading. He is the first-ever director at a major American corporation to be convicted of an insider trading charge.
One of the most well-known insider trading examples is what happened with Martha Stewart. She traded shares in ImClone Systems Inc. after learning about what proved to be a failed clinical trial for an experimental cancer drug called Erbitux.
Stewart was indicted on securities fraud charges and convicted on July 16, 2004. She was sentenced to prison for seven years and three months.
There are many other lesser-known cases of insider trading, such as:
A former CEO who provided a friend with details of non-public merger information was charged with insider trading.
Five doctors were charged with insider trading of a company where one of them served as chairman of the board of directors.
The pharmaceutical company insider and a former hedge fund manager were charged with insider trading based on non-public information about an upcoming acquisition.
Insider Trading Penalties
Anyone found guilty of trading stocks, securities, or other instruments based on material non-public information may face insider trading penalties of up to 20 years in prison and may also be required to pay a fine from $5 million to $25 million.
Insider trading can be illegal or legal, depending on your country and the type of information used for the trade. Insider trading that does not involve unlawful means, like hacking into computer systems or bribery, may only be subject to civil penalties, including fines and disgorgement (paying back profits).
If criminal charges are filed, then there may be prison time as well as fines and disgorgement. Some people have gone to jail because they were convicted of insider trading after being found guilty at trial, but many more have been convicted by way of a plea bargain.
Defending Against Insider Trading Charges
Insider trading can have severe consequences for any person who participates in it. Insider trading penalties include not only lengthy prison sentences but significant fines; they can also do serious damage to one’s reputation, making it difficult to move on with your life later.
There are several possible insider trading defense strategies your legal team might pursue. In order to successfully litigate a case of insider trading, the prosecution must prove beyond a reasonable doubt that certain elements are present; if any of the required elements cannot be proven, then the transaction in question is not a criminal insider trading offense. Specifically, the prosecutor must show that a purchase or sale of securities occurred and that material, non-public information was shared.
Your insider trading defense attorney may rebut the charges by claiming that, although material, non-public information was shared, there was not a subsequent purchase or sale of securities. Another possible defense strategy is that, although a trade occurred and non-public or confidential information was shared, the information itself was not “material,” as defined by the underlying regulations.
It is also possible to defend against insider trading cases by showing that you were not aware of the insider information until after the trade occurred, or that another party made the transaction in question without your knowledge.
If you’ve been charged with insider trading, a Zoukis Consulting Group insider trading attorney can help you defend yourself in court. We have the knowledge and experience necessary to prove your innocence. Call us today to schedule a free consultation with an insider trading lawyer.
Published Feb 15, 2022 by Christopher Zoukis, JD, MBA | Last Updated by Christopher Zoukis, JD, MBA on Feb 1, 2023 at 3:10 pm