What Is Insider Trading?
Insider trading is when a person buys or sells stocks or other securities based on material, non-public information. It can also be when a person provides non-public information to another person who then buys or sells stock based on the information. In an insider trading case, the government must show that the information was shared in breach of a fiduciary duty. It must also show that the person who buys or sells the stock knew or should have known that the information was shared in violation of a fiduciary duty.
Many insider trading cases involve information about a company’s performance or other business plans. But they can also involve information that may not be relevant to the company’s performance at all. For example, in a prosecution for insider trading, a person may be accused of destroying the company’s reputation or the company’s opportunity to expand by disclosing information in violation of a fiduciary duty.
Who Investigates and Prosecutes Insider Trading Crimes?
Insider trading is a serious federal offense. It is usually prosecuted by the Securities and Exchange Commission (SEC) or the U.S. Department of Justice (DOJ). Depending upon the circumstances, the Federal Bureau of Investigation (FBI), the Financial Industry Regulatory Authority (FINRA), and others may play a role in investigating the alleged crime. Insider trading can result in both criminal and civil penalties. The SEC may file civil charges against a person. The DOJ may prosecute the person criminally. The DOJ will become involved if the person is accused of violating a federal law. In addition to prison time, the person may be required to pay a fine and return any profits gained through illegal trades.
Examples of Insider Trading
Example 1
A chief financial officer (CFO) learns that their company is about to be acquired by a larger corporation. The CFO shares this information with a friend and the friend then buys and sells stock in the company based on that information. The friend could be prosecuted for trading on insider information.
Example 2
A government official who learns that the government has approved a new drug by a pharmaceutical company then tells their spouse who buys stock in the company. The official and their spouse could be prosecuted for insider trading.
Example 3
A fiduciary is someone who owes a duty of trust to another person. A doctor who learns that a patient is about to die from a terminal illness then shares this information with a friend. The friend buys stock in a company that the decedent owns. The doctor could be prosecuted for sharing insider information in violation of their fiduciary duty.
Defending Against an Insider Trading Crime
Federal prosecutors at the DOJ and others must show beyond a reasonable doubt that you traded on material non-public information in breach of a fiduciary duty. The person to whom you gave the information must also have traded based on that information in violation of a fiduciary duty. Defending against insider trading charges is difficult. It requires careful analysis and skilled representation.
1. The Information Was Not Material, Non-Public Information
The government must show that the information was both material and non-public. Material information is information that a reasonable investor would consider important in making an investment decision. Non-public information is information that has not been publicly disclosed. Non-public information is also information that the public could not reasonably obtain.
Example: A CEO who knows their company is about to be acquired by another company in a merger. The CEO trades stocks in their current company based on this information. The CEO’s conduct may not be considered insider trading under federal law if the acquisition is publicly disclosed.
2. The Information Was Not Obtained in Breach of a Fiduciary Duty
A fiduciary duty is a duty of trust. It may be owed by a company officer to the company’s shareholders. Or it may be owed by a corporate director to the company’s shareholders. The government must show that you breached a fiduciary duty when you obtained the information.
Example: A CEO who knows their company is about to be acquired by another company in a merger. The CEO trades stocks in their current company based on this information. The CEO’s conduct may not be considered insider trading under federal law if the merger has been publicly disclosed.
3. The Information Was Not Obtained in Breach of a Confidentiality Agreement
A confidentiality agreement is a contract that requires a person to keep certain information confidential. The agreement may be between a company and an employee. Or it may be between a company and an outside consultant. The government must show that you breached a confidentiality agreement.
Example: A CEO who knows their company is about to be acquired by another company in a merger. The CEO trades stocks in their current company based on this information. The CEO’s conduct may not be considered insider trading under federal law if the CEO did not breach a confidentiality agreement.
4. The Information Was Not Used to Make an Investment Decision
The government must show that you used the information to make an investment decision.
Example: A CEO who knows their company is about to be acquired by another company in a merger. The CEO trades stocks in their current company based on this information. The CEO’s conduct may not be considered insider trading under federal law if the CEO did not make an investment decision.
5. You Did Not Share or Use the Information
You may also be able to defend against an insider trading charge if you did not share or use the information. The government must prove that you shared the information with another person who then traded on the information. If you did not share the information or the other person did not trade on the information, you may be able to defend against an insider trading charge.
Example: A CEO who knows their company is about to be acquired by another company in a merger. The CEO trades stocks in their current company based on this information. The CEO’s conduct may not be considered insider trading under federal law if the CEO did not share the information with another person.
Spodek Law Group Can Help Defend You Against Insider Trading Charges
The above are just a few examples of recent cases in which the government has successfully defended against insider trading charges. In addition to the defenses above, many other successful defenses are also available.
Insider trading is a serious criminal offense. If you are accused of this crime, it is important to have an experienced attorney who can build a strong defense on your behalf. An attorney can help you understand your rights and options. They can also help you develop a defense strategy.
If you are facing insider trading charges, our attorneys at Spodek Law Group may be able to help you. We are a federal defense law firm experienced in insider trading cases. We have successfully represented investment professionals, corporate officers, and others in insider trading actions.
We have a team that can help you understand all of the elements of insider trading. We can work with you to develop a defense strategy for your case. We can also help you get the best possible outcome in your case.
Contact Spodek Law Group today online or call 908-643-7005 for a free consultation and case assessment.
Written By
Todd Spodek
Todd Spodek is the Managing Partner of Spodek Law Group P.C. He is a second-generation trial attorney who has been recognized as one of the Top 100 Trial Lawyers in the country. He has represented clients in some of the highest-profile federal criminal cases in the Eastern District of Pennsylvania and beyond.
