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Insider Trading Penalties:Should You Invest With Insider Information?

Posted on January 3, 2014 by Mintzer Law

Insider trading laws are meant to protect corporations and investors from those individuals who attempt to profit from possessing information that is not available to members of the public. The laws are based upon the principle that allowing some investors to buy or sell securities on information that others do not have access to gives them an advantage over other investors. Illegal insider trading is a criminal act that is punishable by imprisonment, fines or probation alone or in combination with each other.

Trading by Insiders is not Always Illegal

Not all insider trading is illegal. Employees frequently buy or sell stock of the companies for whom they work based on the information they acquire while working there. Trading on information that is available to the general public is not prohibited, but there are laws mandating reporting such trades to the Securities and Exchange Commission by certain categories of traders connected to the corporation including:

  • Corporate officers
  • Directors
  • Key employees
  • Shareholders with significant holdings in the company

Illegal Insider Trading

Generally, buying or selling stocks or bonds using information gained while in a position of trust or confidence is illegal when the information is not publicly known. People who obtained the information through deception or other illegal means and used it to buy or sell securities might also be prosecuted for insider trading.

Insider trading is illegal because it undermines the integrity of the securities markets and can cause damage to corporations attempting to raise money through the sale of securities to the public. A key element of a prosecution for insider trading is that the person prosecuted must have made the purchase or sale of the securities in reliance of the nonpublic information.

Insider Trading Punishments

The prosecution, conviction and punishment of illegal insider trading are priorities for the SEC, law enforcement agencies and federal prosecutors. The purpose of punishment is meant to deter others from committing the same or similar offenses in addition to punishing the individual who is convicted of the crime. For that reason, judges are authorized by federal law to impose harsh sentences on those convicted of illegal insider trading.

Criminal penalties for insider trading under section 32(a) of the Securities Exchange Act and the Sarbanes-Oxley Act include:

  • Confinement in a federal prison for up to 20 years
  • Fines up to $5 million for each violation
  • $25 million in fines for corporate violators

The sentences imposed can be much greater than the penalties for just a conviction of insider trading. Prosecutors can charge a person suspected of insider trading with additional charges including:

  • Wire fraud
  • Mail Fraud
  • Racketeering
  • Tax evasion
  • Obstruction of justice

Penalties for additional charges can include long prison sentences, fines and civil penalties in addition to other punishments imposed at sentencing on the insider trading charges.

If you have been accused of insider trading, then you need help. Give Rand Mintzer a call at 713-862-8880.