Insider trading includes both illegal and legal conduct. Legal insider trading occurs when corporate insiders buy and sell stock within the corporation. This includes officers, directors, employees, and shareholders.
Securities trades must be reported to the Securities Exchange Commission (SEC). Insider trading is defined as when a person with special access to or knowledge of unpublished corporate information uses that information to make a profit by selling or buying securities. The trader has committed insider trading if that person improperly obtains this nonpublic information. A person can be guilty of insider trading for “tipping,” publicizing nonpublic corporate information, or trading securities based on it.
It is also possible to commit insider trading without any affiliation with a corporation. The SEC has filed insider trading cases against:
- Officers, directors, and employees who traded the corporation’s securities after discovering major, nonpublic corporate developments
- Outsiders who traded securities after receiving “tips” from corporate officers, directors, or employees
- Employees of other professional practices (e.g., law, banking, brokerage, and printing) who traded corporate securities on the basis of confidential information provided to them in exchange for services
- Government employees who traded securities on nonpublic corporate information they had access to as a result of their employment with the government;
- Financial printers who traded corporate securities based on confidential information they learned at work
- Other persons who misappropriated and misused confidential information from their employers
Shareholders who own more than five percent of a company’s voting stock are considered insiders. Furthermore, insiders are any employees of a company who have access to confidential information. The information that affects a company’s stock price or that might influence investor decisions, and that is not public is considered important confidential corporate information.
To be considered legal insider trading, insiders must file with the Securities Exchange Commission and report their trading activity.
What Is an Insider?
Shareholders who hold more than five percent of a company’s voting stock are considered insiders. Any corporate employee who has access to confidential information is considered an insider.
The information that affects a company’s stock price or can influence investor decisions is considered important confidential corporate information. The SEC requires insiders to file and report their trading activity.
What Are Some Of The Legal Penalties For Insider Trading Violations?
Insider trading can result in various legal penalties. Due to insider trading transactions causing the company significant financial losses, the employee or corporate director responsible for the act may be liable for the losses caused by the insider trade. The worker may be required to return their profits to the company, as well as pay for additional expenses associated with the trade.
Insider trading is generally considered a white-collar crime under criminal statutes. A white-collar crime is a subset of criminal law that addresses crimes committed by people in business or government. In general, these crimes are non-violent in nature and motivated by financial gain.
Prosecutors typically prosecute white-collar crimes based on the nature of the crime and the information provided by the arresting officers’ police reports. To determine whether to charge felons, prosecutors may use grand juries.
The legal penalties for white-collar crimes, such as insider trading, may include, but are not limited to:
- Compensation payment made to the victim;
- Mandatory community service;
- Fines;
- Incarceration in a county jail facility, generally not to exceed a sentence of one year;
- Incarceration in a federal prison facility for sentences that exceed one year; or
- Probation.
The sentencing judge will consider several factors when deciding the punishment for white-collar crimes:
- The nature of the crime;
- Input from the prosecutor for especially serious felonies;
- The defendant’s criminal history, or lack thereof; and
- The defendant’s social, economic, or other personal circumstances.
The crime of insider trading is generally considered a misdemeanor, punishable by fines or jail time. Furthermore, the defendant may face other consequences outside of the law, such as losing their job and having difficulty finding work in a similar field.
Are There Any Defenses To Insider Trading Transactions?
One of the most common defenses to insider trading charges is that no fiduciary duties were violated. A properly reported inside trade can prevent legal claims and save both the employee and their company a considerable amount of time and resources.
You should either refrain from making a trade if you are uncertain of its legal status or ensure that the trade will not be considered illegal. In order to determine the legal status of a financial decision or corporate action, it may be necessary to consult with an attorney. Furthermore, it is important to remember that insider trading laws can frequently change over time.
What Is Securities Law?
A security is a general term referring to:
- Shares of stocks;
- Bonds and debentures; and
- Interests in which the return is primarily or exclusively determined by a person other than the investor.
Security law refers to the multiple federal laws and regulations that govern the sale, purchase, and creation of security interests. Each rule is based on a straightforward concept: that all investors, whether they are large institutions or individuals, should have access to detailed information about an investment before they purchase it. People can only make sound investment decisions by receiving timely, comprehensive, and accurate information.
The Securities and Exchange Commission, or SEC, is responsible for enforcing securities law throughout the United States. In general, the SEC’s mission is to protect investors and maintain the integrity of the securities market. Public companies are required to disclose meaningful financial and other associated information to the public, enabling them to evaluate security investments.
The SEC takes between 400 and 500 civil enforcement actions each year against individuals and companies who violate securities law. Typical infractions include:
- Insider trading;
- Fraudulent accounting; and
- Giving false or misleading information about securities or companies issuing them.
Violations of security laws are considered serious criminal offenses that can result in incarceration as well as substantial criminal fines.
What Are Some Remedies Regarding Securities Fraud?
Investors have a variety of options if they wish to receive compensation or punish companies/individuals that commit securities fraud. These options include:
- Reporting the incident to law enforcement, as the Justice Department has a long and distinguished history of pursuing federal securities fraud prosecutions.
- The injured investors can start a class action lawsuit when their interests are harmed by insider trading or poor accounting practices by a company.
- The SEC can be contacted.
What Steps Can I Take to Protect My Investments?
An investor can take a variety of steps. Some of them are:
- Make sure your brokerage firm is licensed
- You can find information about brokers and licensing at the Central Registration Depository (CRD)
- Keep in touch with your broker
Have You Been Accused of Insider Trading?
Criminal and civil penalties for insider trading are severe. Securities attorneys can help you discuss your legal options and defenses if a securities regulatory agency has accused you of insider trading. A criminal lawyer can also help guide you through the complicated legal system and procedures necessary to mount a proper defense. Use LegalMatch to find the best criminal lawyers in your area today and start defending yourself.
