Insider Trading: Charges, Penalties & Defense

Gavel, scales of justice and insider trading criminal attorney David J. Kramer

In the 1987 movie Wall Street, the character Gordon Gekko famously says “greed…is good.”

If you’ve seen this movie you know it’s one of the most famous fictional stories of insider trading.

Insider trading is one of the most vigorously investigated crimes by the Securities and Exchange Commission (SEC). However, you don’t have to be like Gordon Gekko to commit it. You could be found guilty of insider trading without even trying.

Insider Trading 101

Insider trading is one of the crimes broadly defined as securities fraud. It’s the act of using information that is not public knowledge to make trading decisions. In addition, it gives traders an unfair advantage over other traders.

Before this was made into law Albert Wiggin was the head of Chase National Bank during the 1920s. He made money short-selling shares of stock in his own company and drove it near bankruptcy.

Wiggin was never charged with a crime. However, because he ruined the bank, and other men like him did similar things, the Securities Exchange Act was introduced.

Investment markets need to be a level playing field where everyone has access to the same information. Therefore, the SEC has sought to narrow the definition of insider trading in order to close any loopholes.

Examples of Ways Someone Could be Found Guilty of Insider Trading

Here are some ways someone could be found guilty of insider trading:

Employees or members of a publicly traded company purchasing a security

While employees are given the option to buy shares of the company, there are complicated rules governing what is permissible knowledge to have and what isn’t.

Friends, family, and acquaintances of employees

Corporate employees can get in trouble by sharing information with a small circle of people that isn’t made public.

In the case of Martha Stewart, she and her stockbroker served time in prison for this very reason: he gave her information she shouldn’t have had, and they both acted on it to their profit.

You could get in trouble for innocently sharing information or being party to secret information if you act or cause someone to act on it.

There are other instances where employees attempt to trade through their family or friends thinking these people are less likely to be scrutinized by the SEC.

Professionals who do business with a publicly traded company

Some professionals are privy to information through the work they do with corporations: lawyers, bankers, paralegals, and brokers may abuse this privileged information to make money.

Government officials are another group of people who have access to information they could use illegally in insider trading.

Corporate spies and hackers may try to gain access to corporate information with the express purpose of conducting insider trading.

Penalties for Insider Trading

You may think the SEC gets tips or complaints. However, its main investigative tool for finding perpetrators of insider trading is market surveillance systems.

The SEC actually monitors the markets for abnormal trading patterns. Then it uses that information to obtain warrants. These allow the SEC to use wiretaps, search financial records, and any other means it can get to attempt to indict someone and arrest them for insider trading.

At that point, insider trading is prosecuted like any other crime. If you are convicted, you could face up to 20 years in prison. In addition, you could be fined $5 million for each act. However, sentences for insider trading are often much more lenient than the maximum.

Protect Yourself

If you are an investor, consider taking these precautions against insider trading:

  • Be mindful of the questions you ask about securities to keep from even the appearance of wanting secret information.
  • Check to make sure the source of your information isn’t sharing something they shouldn’t.
  • Report suspected insider information to authorities to make it clear you have honest intentions.
  • Finally, do not repay favors with insider information.

Detroit Insider Trading Defense Attorney

In conclusion, insider trading is considered a serious offense by our government. This white-collar crime that is frequently prosecuted as a felony. Even if you engage in it by accident, you could face severe penalties.

If you are facing charges, it is critical that you have an experienced attorney. Contact my office today.

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