The Down and Dirty of Insider Trading

RM – Aug – The Down and Dirty of Insider Trading

Insider Trading in Texas

Insider trading has gotten a lot of coverage in the media over the last few years. Powerful executives and television celebrities have been convicted on charges of insider trading, showing that no one is immune from this kind of conviction. Although it may seem like insider trading is something that only occurs among super rich and powerful people, the reality is that many different types of people can engage in this practice. However, there are very specific laws regarding the definition of this crime.


What Is Insider Trading?

Simply put, insider trading involves the buying or selling of stock in an illegal manner. The Securities and Exchange commission was established in 1934 to monitor and detect fraudulent or illegal activities among shareholders of companies. In order to ensure fairness and honesty in the stock market, the SEC established rules to prevent selling or buying of stocks by people who have an unfair advantage.

The law defines insider trading as the buying or selling of stock based on non-public information. However, not all instances of insider trading are illegal. An “insider” is a person who:

*Owns stock in a company that is worth more than 10% of that company’s equity

*Has access to private information about a company that can be considered valuable

Using this definition, many people who work for or invest in a company can be considered insiders. For example, the CEO, the high-level board members and certain investors may be considered company insiders. It is actually legal for these people to buy or sell shares of a company that employs them as long as they register the trades with the Securities and Exchange Commission.

However, if a person who has private information about a company uses that information to make stock trades before the information becomes public, that person may face insider trading charges.

For example, imagine that John works for the ABC Corporation. He hears from one of the directors of the company that ABC Corporation is about to invest in another company. The investment will cause the stock of the other company to greatly increase in value. John rushes out to buy shares of the other company so that when the investment happens, John’s new shares will become much more valuable. John has engaged in illegal insider trading.


Legal Penalties

The federal government can enact severe penalties against anyone who is convicted of insider trading. Illegal insider trading is a federal offense. In some cases of insider trading, the SEC may take civil action against the defendant. In effect, this means that the federal government will file a civil lawsuit against the defendant.

The fine imposed by the SEC can be based on the amount of money gained or losses avoided by the illegal trades. This amount will be multiplied by three to determine the amount of the fine.

The government may also file criminal charges against a person who is convicted of insider trading. If this occurs, the defendant could face:

*A fine of up to $5 million

*Up to 20 years in federal prison

The SEC takes cases of insider trading very seriously. In these kinds of cases, the SEC may file additional charges of securities fraud or money laundering if the defendant attempted to obscure an illegal trade.


Legal Defenses

It may be possible to create a strong legal defense against charges of illegal insider trading. This defense can be based on several factors, including:

*The insider trading was not illegal

*Any information used to make the trade was public information

*The defendant did not knowingly violate any laws

*The defendant had no knowledge of wrongdoing when providing inside information

In order to get a conviction for insider trading, the prosecution must prove that the defendant willingly and knowingly acted on private information or provided private information to another person who made insider trades. If the defense attorney is able to show that the prosecution does not have enough evidence to prove these points, the charges may be lowered or dropped.