Federal prosecutors allege U. S. Representative Chris Collins got busy with insider trading. Collins will go to court for some type of resolution, but in the meantime his indictment peels back the curtain on what a lousy job Congress has done to guard against such crimes.
Collins, a New York Republican, allegedly shared insider information about a publicly traded stock’s value. But that isn’t all which concerns others. Collins is also a director of Innate Immunotherapeutic, a pharmaceutical company also subject to oversight by the Congressional committee on which Collins sets.
Collins isn’t the first person to be suspected of insider trading — just the latest. Four others who have been busted include Jeff Skilling, R. Foster Williams, Martha Stewart, and Ivan Boesky.
“Tiptoeing on a narrow ledge past insider trading rules may be deft and clever,” says Arkady Bukh, a New York criminal defense attorney who has successfully defended dozens of accused insider traders. “But it doesn’t make it right.”
What Is Insider Trading?
An ‘insider’ is any person who holds:
- Access to valuable non-public information about a corporation, or
- Ownership of a stock equaling over 10 percent of a firm’s equity.
A common myth is all insider trading is illegal. There are two ways insider trading can happen. One is illegal, the other isn’t.
Legal Insider Trading
Insiders are legally allowed to trade shares of the firm that employment. The transactions must be registered with the Securities and Exchange Commission (SEC) are done with advance filings.
Illegal Insider Trading
The more notorious form of insider trading is the unlawful use of non-public material information for profit. This sort of trading can be done by anyone including company executives and their relatives and friends — or just an ordinary person on the street.
The SEC monitors illegal insider trading by watching the trading volumes of any particular stock. Volumes typically increase following new for the public, but when no news is issued to the public, it can be a warning flag. When that happens, the SEC investigates to find who is responsible and whether it was legal.
Proof
Proving a person has been responsible for insider trading can be difficult as traders often hide behind nominees, offshore companies and similar proxies. The SEC prosecutes more than a case a week and many are settled out of court.
Although the SEC does not have criminal enforcement powers, the agency does refer serious cases to the U.S. Attorney’s Office for possible prosecution.
Punishment
Several factors determine the punishment for insider trading. There are three criteria and depending on the jurisdiction, there may be civil or criminal penalties — or both. The three main criteria are:
- Scope
- Gain, and
- Evidence
Scope
How many people were impacted by the inside trading?
Gain
How much did the inside trade make from the transaction?
Evidence
Anyone charged is innocent until proven guilty. The burden of proof falls on the prosecution and if the case lacks a ‘smoking gun,’ the prosecutor finds it harder to prove guilt.
Rules and Regulations
Insider trading statutes are founded on American common law restrictions against fraud. The U.S. Supreme Court decided in 1909, that a company director who purchased a company’s stock when he knew the stock’s price would increase perpetrated a fraud by buying the stock but not revealing his privileged information.
The Securities Exchange Act of 1934
Prohibitions of fraud when it comes to stock and securities sales were strengthened the Securities Exchange Act of 1934. Section 16(b) prohibits short-swing profits made by company directors or officers and stockholders who own over 10% of a firm’s shares. Most of the development of insider trading prohibitions has come from court decisions.
The Takeaway
Once begun, insider trading doesn’t stop. The greed which nourishes the crime keeps growing until the branches become too heavy and the tree falls over. That’s when the SEC steps in and scrapes up the pieces. Anyone accused of insider trading should contact an experienced attorney immediately.
