The U.S. Securities and Exchange Commission (SEC) oversees and regulates the orderly operation of American securities markets. The agency looks for instances of fraud, manipulation of the market, and illegal insider trading. In many cases, the SEC shares evidence of wrongdoing with the U.S. Department of Justice, triggering the initiation of federal criminal prosecution.
Some insider trading of securities is lawful. Defining exactly which trades are legal and which are prohibited requires an expert understanding of the law and an in-depth familiarity with complex federal regulations. Only a criminal defense attorney with extensive experience in the federal courts should be trusted to defend serious federal criminal charges like insider trading.
What Is Insider Trading?
Insider trading includes any purchase or sale of an interest in or shares of a publicly traded company by a corporate director, officer, employee, or their associate, based on nonpublic, material information. But insider trading is legal under certain conditions.
Legal insider trading involves stock transactions by insiders authorized by their contractual relationship with the company, or permitted by other rules established by the SEC. A sale by a corporate officer of company shares as part of their compensation package is legal as long as the details of the transaction were properly reported. If a company officer bought shares based on secret inside information that a major merger was imminent, then such a transaction would be a criminal violation of the insider trading law.
Investors depend on the integrity of securities markets. Any purchase or sale of stocks by someone privy to confidential corporate information breaches their fiduciary duty to shareholders who have only publicly available information. The penalty for criminal insider trading is up to 20 years imprisonment and a $5 million fine.
Learn More> The Ins and Outs Of Insider Trading
Proving Illegal Insider Trading
As with all criminal charges, the prosecution bears the entire burden of proof. For an insider trading charge, the government must prove the following beyond a reasonable doubt:
- defendant executed a purchase or sale of a security in publicly traded company,
- defendant had material information
- the material information was not publicly known or available
- defendant had fiduciary duty to make the information known or refrain from the transaction.
When a third party or someone who was “tipped” by an insider about material, nonpublic information and then executes a trade, that person can be criminally liable. Though they may personally have no relationship with the company, they are deemed to have a “derivative” duty received from the insider.
Defenses to Insider Trading Charges
Criminal prosecutions commenced by the Department of Justice are extremely serious. Defending charges of insider trading in the federal courts requires an exceptional level of legal expertise on the part of your defense attorney. With the assistance of a qualified insider trading defense lawyer, one or more of the following defenses can be raised:
The Insider Trade Was Legal — The law provides for an affirmative defense that the transaction in issue was executed pursuant to a previously scheduled agreement such as part of the insider’s employment compensation package. SEC rules also designate “windows” of time during which corporate insiders may execute trades without violating the rules.
If the transaction was either prearranged or was scheduled to occur regardless of the existence of the inside information, then that information could not have been a factor in the transaction.
Your criminal defense attorney should be thoroughly conversant with these regulatory requirements and recognize the distinction between legal and illegal transactions.
The Information Was Known or Available to the Public — Only information to which the public is denied access is deemed to be sufficiently “inside” to support a criminal prosecution for insider trading. What may not be known to a casual observer may have been accessible and available to closer followers of the market.
When a company’s board of directors is widely known to be dissatisfied with the CEO’s performance, a suspected change in corporate governance could affect the price of the stock. Would any sale of stock by an insider during this period be based on “nonpublic” information? Couldn’t any close observer of the market glean the same information and sell shares before the CEO is fired?
Producing evidence that the information was not private or unknowable by the public is an effective defense to alleged insider trading.
The Information Was Not “Material” — The U.S. Supreme Court has ruled that the inside information supporting a criminal insider trading charge must be such that “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision.
If the information cited by the government in an insider trading prosecution is shown to be beneath a level of significance that would be “important” to someone making an investment decision, the prosecution could not result in a conviction.
No Criminal Intent — One of the basic principles of criminal law is the requirement of what the law calls “mens rea.” It refers to a guilty state of mind, an awareness that one is engaging in wrongdoing. But it is always difficult to prove what was in someone’s mind.
In the realm of insider trading prosecutions, if the defendant knew of closely held information at the time of the securities transaction, then the law “presumes” they relied upon the information when they decided to execute the trade. An experienced insider trading defense lawyer can offer evidence rebutting that presumption if the facts support the defendant’s innocent intent. Such evidence may be circumstances where no windfall occurred, or when the trade was consistent with an established pattern of the transactions unrelated to the alleged material, insider information.
Insider Trading and Securities Fraud Defense Attorneys
Stechschulte Nell, Attorneys at Law, has extensive experience representing Tampa and Hillsborough County residents accused of serious crimes in the United States District Court and in the Eleventh Circuit Court of Appeals.
Our many years of federal court practice informs our detailed approach to all federal financial crimes, including indictments charging insider trading, securities fraud, wire fraud, obstruction of justice, and other related crimes that are often charged in separate counts of an insider trading indictment.