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Charges of Illegal Insider Trading

What is Insider Trading?

Illegal insider trading is defined as follows: “the illegal use of information available only to insiders in order to make a profit in financial trading” – Merriam Webster

‘Illegal Insider Trading’charges can result in a maximum fine of $5,000,000 for individuals ($25,000,000 for companies) and a federal prison sentence of up to 20 years! With all charges, if you have been accused of this, the first thing to do is to speak with a white collar crimes attorney.


Why is Insider Trading Illegal?

Insider trading is considered illegal for a few reasons. First, when an employee or a broker for someone is a fiduciary of said person, corporation, government, etc., he or she gives his or her trust and loyalty, acting in the best interest of the person, business or government he or she is representing. Giving clandestine information to someone for financial gain that conflicts with one’s fiduciary duties is not only illegal, but also unfair.

Second, the stock market is supposed to be an even playing field for everyone (hence the term, “gone public”). For someone to have secretive information that no one else has and use it for their own financial gain is very unethical. Stephen Cutler, who is the Director of Enforcement of the SEC eloquently made the following statement in reference to the Martha Stewart case:

“It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip. It’s worse still when the individual engaging in the insider trading is the Chairman and CEO of a public company.”

It is similar to being the only person to have the answers to a major test, and you win a scholarship to an Ivy League university because of it. It is cheating, unless it cannot be proven.

 

Below are some examples of insider trading violations:

  • An executive of a company learns of an announcement the CFO made regarding the company’s future of going into bankruptcy, due to serious financial issues. The executive’s friend owns shares in the company. The employee lets his friend know about the future bankruptcy, and to sell his shares as soon as possible.
  • A government employee knows that a new regulation will pass soon. The regulation will significantly benefit a utility company. The employee secretly buys shares of the utility company and eagerly pushes for the regulation to go through.
  • A board member of a company learns of a merger is going to happen very soon. The merger will be announced very soon, which will most likely make the company stock go up. He buys 1,000 shares of the company stock in a relative’s name so he can make a profit using his insider knowledge avoiding having to report the trade to the Securities and Exchange Commission and without news of the transaction going public.

The Infamous MARTHA STEWART and ImCLONE SYSTEMS Case

One of the most high-profile insider trading cases is that of the happy homemaker, Martha Stewart. To summarize, Mrs. Stewart owned shares of “ImClone”, a drug company whose cancer treatment was rejected by the FDA. Such news of its rejection would surely make the worth of the company plummet. Mrs. Stewart found out about the information and sold her shares before the news went public. Both she and her broker, Peter Bacanovic, were charged with illegal insider trading. They both served 5 months in federal prison.

Is Insider Trading Always Illegal? No, Here is How

There are times when insider trading is legal. A couple of the guidelines are:

  1. All trading transactions must be reported to the U.S. Securities and Exchange Commission within two business days.
  2. One must hold a significant position in a company that authorizes him or her to legally trade.

When conducted legally, insider trading can actually benefit a company and increase its value. In laymen’s terms, when someone sees a CEO purchasing shares of their own company, it shows that the executive believes in the financial growth of the entity. That gives investors confidence that purchasing shares of this company is a financially good idea, the more purchase shares, the more money into the company. The more money into the company, the larger the value.

 


Does Insider Trading Always Lead to a Conviction?

While insider trading is well defined and considered a white collar crime, there are some blurred lines that can work in a Defendant’s favor. The U.S. Securities and Exchange Commissionholds the burden of proof, meaning it has to prove to the Court that the Defendant(s) acted intentionally for financial gain by betraying the fiduciary duties of the person, company or government. The SEC must also prove that the recipient of the confidential information acted intentionally because of the information received. For instance, Martha Stewart was found guilty because as soon as Mr. Bacanovic tipped her off with the inside information, she immediately sold her shares.

However, not all cases are like that of Ms. Stewart’s. A conviction can get overturned and a case can get thrown out in a Court of Law. One example is a 1981 case with Barry Switzer. Mr. Switzer was a football coach in Oklahoma that bought shares of an oil company named Phoenix Resources. He bought shares of the company at $42 per share and then sold them at $59 per share after overhearing a conversation between executives at a track meet. They were talking about liquidation of the company, and Mr. Switzer made roughly $98,000 off of his share buying and selling transactions. However, the federal judge dismissed the case due to lack of evidence.


 

All is Not Lost with an Insider Trading Charge

An illegal trading charge can be difficult to prove and, once again, the SEC holds that burden of proof. If they cannot produce substantial evidence showing that you knowingly and intentionally committed an illegal trading act, it cannot be guaranteed that the case will have a guilty verdict.

DM Cantor: The Necessity for SEC Experience and Knowledge

DM Cantor has a proven track record and solid rapport with the FBI, federal judges and their attorney peers due to their amazing reputation. These qualifications are imperative to winning cases such as illegal insider trading cases. Of course, familiarity with the SEC and knowledge of Securities law is also key in handling your case with the best care.

Our attorneys at DM Cantor have vast experience with the SEC, with a proven track record of Securities cases that include no jail time and reduced charges. With a federal charge like illegal insider trading, you must have a strong, smart, and aggressive legal team that will go the extra mile to ensure you get nothing less than what you deserve. We will go above and beyond to see to it that you get the best deal you can possibly get for your case. No one wants to face the possibility of prison time and/or heavy fines, revocation of licenses with a tarnished reputation.

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