An Insider Trading Lawyer Explains Charges for Acting on Insider Information
Insider trading is the practice of using insider or proprietary information to benefit from the purchase or sale of securities. Someone who trades with nonpublic information could face civil or criminal actions alleging that insider trading occurred. The penalty for insider trading can be substantial, even if you do not face criminal charges. Civil actions can lead to huge fines. Future employment as a financial professional, board member, or company executive could be affected by insider trading allegations.
Bukh Law Firm, LLC knows the complex laws for insider trading charges and can provide assistance to anyone who is accused of breaking the laws. Taking swift action to defend your good name and resolve your criminal or civil case is important. We will work hard to protect your finances, help you avoid fines, and help you to stay out of jail.
Call as soon as possible if you have been accused of insider trading or are facing charges.
Types of Insider Trading
Insider trading may occur when a corporate officer, director, or company member has privileged information and acts on the knowledge that is not publicly disclosed. A CEO who knows the company will be merging and that the stock will get a big boost cannot decide to buy shares of the business to profit off of the transaction.
“Outsiders,” or those who do not work for a company can also sometimes obtain private and non-public information and act on it. This is also considered illegal and can result in civil and criminal penalties. This happens in many different ways. An insider could “tip” friends or family members about non-public information that is likely to have an impact on the stock price. People could also misappropriate information and act on the insider knowledge that they have gained. Dirks v. SEC also created a “constructive insider” rule in which someone who works for a company is treated as an insider if that individual comes into contact with information that is not publicly available.
In both civil and criminal actions, the defendant can be found responsible for insider trading only if there is sufficient proof both of the proprietary information and that the information was the basis of some action (like buying, selling, or shorting a stock).
Insider trading can involve not just the purchase or sale of stock shares, but also of stock options or commodities. Whenever the goal is to use private information to make a profit, this can result in legal problems. Bukh Law Firm, PLLC can provide assistance in undermining the case against you and can work to raise doubts about whether you acted based on insider info.
Why is Insider Trading Illegal?
Insider trading has been illegal in the United States since 1934; however regulators only began aggressively going after people for insider trading in the 1980s. There are many potential arguments made about why insider trading is a crime:
- Insider trading disadvantages typical investors. Non-professional investors who may just want to put their retirement funds or savings into the market are not going to have access to insider information. If average investors don’t believe the markets are fair or are concerned they will be cheated by those with insider information, these average investors are not going to put their money into securities markets. This can reduce liquidity and the cost of stock shares will decrease accordingly because there will be less people interested in buying. Companies, in turn, will have more expensive capital.
- Insider trading may make markets less efficient. Hedge fund managers, pension fund managers, and other financial professionals spend a lot of time obtaining non-proprietary information about companies in order to determine what to invest in. Even with all of this effort, they can never match the success of insiders when it comes to making trades. If insiders were allowed to act on their information, financial professionals may leave the market because they can’t compete with people who have the inside track. This would result in less publicly available information on companies and less efficient markets.
- Fewer people participating in the market will lead to wider market spreads. Market makers hold large inventories of securities, which they sell at slightly higher prices than they purchased the securities for. This price difference, or spread, will need to be wider for market makers if fewer people participate in the market because the market makers will need to make up for the decrease in volume. This also makes the market less efficient since less capital is going to the companies that can use it.
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All of these are legitimate arguments to make for why insider buying and selling is prohibited. Still, the penalty for insider trading can sometimes be harsh for those who may have participated in only small transactions with little impact on the market. You should not be forced to face jail time or harsh fines just because of abstract theories about what insider trading can mean for markets- you need to defend yourself vigorously with the help of an insider trading lawyer if you have been accused of breaking the law.
Insider Trading Rules
There are a variety of different insider trading rules that actually make insider trading illegal. The rules include:
- Section 15 of the Securities Act of 1933, which prohibits fraud in the sale of securities.
- Section 16B of the Securities Exchange Act of 1934, which prohibits corporate officers, directors, and stockholders with 10 percent or more of a firm’s shares from making short-swing profits. Short-swing profits are defined as profits from purchases and sales within a six month period.
- Section 10B-5 of the Securities and Exchange Act of 1934, which prohibits any type of fraud in securities trading
- Section 10B-5-1, which prohibits trading on the basis of misappropriated information.
- The Insider Trading Sanction Act of 1984, which allows the SEC to seek civil penalties of three times the amount of profits and losses made from insider trading.
- The Insider Trading and Securities Exchange Act of 1988, which increased the potential jail time for people who were found guilty of an insider trading crime.
Bukh Law Firm, PLLC has represented many clients accused of insider trading and we are well-versed in all of the different statutes and court decisions that could apply in your case. We will explain how the laws affect your case and what potential penalties and consequences you face. Our NY investment fraud lawyers will also help you to explore ways to undermine arguments against you and to approach the pending legal proceedings strategically to reduce the chances that you will be found guilty or face large penalties.
What are the Insider Trading Penalties?
Penalties for insider trading could include up to 20 years in prison, a fine up to $5,000,000 for individuals and a fine up to $25,000,000 for companies. The United States Sentencing Commission indicates that aggravating factors that can result in more stringent penalties for insider trading charges include:
- A high level of sophistication in the insider trading scheme. In determining if the scheme was a sophisticated one, the court should consider the dollar value of the transactions; the number of transactions; the duration of the offense; the number of securities that were involved in the insider trading; whether there were offshore financial accounts used to hide transactions; whether any corporate shells or fictitious entities were created; and whether auditing systems or internal monitoring was subverted to hide the insider trading.
- A defendant who was an officer in a publicly traded company at the time of the insider trading incident
- A defendant who was a stock broker, dealer or investment advisor at the time of the insider trading.
- A defendant who was an officer or a director of a futures commission merchant or an introducing broker.
- A defendant who was an officer or a director who was operating a commodity pool.
- An defendant who was a commodities trading advisor.
In addition to criminal penalties, there are substantial civil fines for insider trading. Return of the profits made from the insider trades is only the beginning. The SEC can and does routinely seek civil penalties equal to three times the amount of money made from the transaction.
The New York Times indicated that sentences for insider trading have been “on the rise” since 2009. With the crackdown on people suspected of insider trading, it has become more important than ever to be represented by an experienced attorney if you have been charged with involvement in any type of insider trading scheme.
Insider Trading Defense
Insiders are allowed to make trades, but must do so within the rules. Companies are required to report any trades made by those who could be considered insiders, including an officer, director, or someone with at least 10 percent of stock shares in the company.
Criminal and civil sanctions arise only when trades are not reported, are made in secret, or are made on the basis of proprietary information. Defenses to accusations of insider trading can include:
- Alleging insufficient proof that insider trading occurred. Unless there are emails or some paper trail showing that you clearly made trades after receiving proprietary details, it can be difficult to prove that you violated the law. The SEC actively monitors trades and looks for suspicious patterns, but a few judiciously-timed trades are not going to be sufficient to prove you broke the law. This is especially true in a criminal case where a prosecutor has the burden of proving insider trading beyond a reasonable doubt.
- Claiming a preplanned trade. If you made a trade at an advantageous time, you can claim that it was planned before you became aware of any possible insider information.
These are just a few of several possible defenses that you can raise. You need to decide what legal arguments to make in order to best reduce the chances of being convicted of a crime or facing civil penalties. An attorney can help.
Call an Insider Trading Lawyer for Help
Bukh Law Firm, PLLC can provide legal representation to clients accused of all types of insider trading. Call today to schedule a consultation and learn more about the legal assistance we offer to financial professionals, hedge fund managers, advisors, board members, company officers, and others accused of acting on insider information.