Insider Trading Defense

The government does not need to prove that you made money. It needs to prove that you traded while possessing information that the public did not have, and that someone, somewhere in the chain, violated a duty. The distance between those two propositions is where most defendants discover they need a lawyer.

Insider trading occupies a peculiar position in federal criminal law. There is no statute that uses the phrase “insider trading.” The prohibition is instead a judicial construction, assembled over four decades from Section 10(b) of the Securities Exchange Act, SEC Rule 10b-5, and the federal mail and wire fraud statutes. What Congress failed to codify, the courts and the Commission have built from inference, and the structure continues to expand.

In 2024, the SEC brought a record number of enforcement actions. In the first half of 2025 alone, the Commission filed seventeen insider trading cases. The targets ranged from chief executives to filing agents at companies that process EDGAR submissions. Two men in Brooklyn were arrested at John F. Kennedy International Airport in June 2025 while attempting to board a flight to Hong Kong. They had allegedly made one million dollars trading on information obtained through their positions at a firm that files corporate disclosures with the SEC. The flight was the confession the government did not need but was glad to receive.

The Elements Are Simple Until They Are Contested

To convict on an insider trading charge, the government must establish that the defendant traded securities on the basis of material nonpublic information, and that such trading involved a breach of duty. The “on the basis of” standard was codified in Rule 10b5-1, which presumes that a person who is aware of MNPI at the time of a trade has traded on the basis of it. That presumption is rebuttable in theory. In practice, rebuttal requires evidence that the trading decision was made before the information was acquired.

Materiality has a legal definition that is less precise than the word suggests. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Not dispositive. Important. The SEC has argued, and courts have agreed, that information about mergers, earnings revisions, clinical trial results, and the loss of a major customer all satisfy this standard. The question is never whether the information was interesting. The question is whether it would have altered the total mix of information available to the market.

What constitutes “nonpublic” is its own theater. Information is nonpublic until it has been disseminated broadly enough for the market to absorb it. A rumor published in a newsletter read by fourteen people is not public. A filing on EDGAR is. The boundary between those two conditions is litigated with a regularity that suggests the boundary is not where anyone claims it is.

The Duty Question Has Fractured

Classical insider trading theory requires that the trader owe a fiduciary duty to the shareholders of the company whose stock was traded. An officer trades on earnings information. A director sells before an acquisition collapses. The duty is self-evident, and so is the breach.

The misappropriation theory, endorsed by the Supreme Court in United States v. O’Hagan, extended liability to outsiders who trade on information obtained through a relationship of trust and confidence, even where no duty runs to the corporation’s shareholders. A lawyer who learns of a pending acquisition through client work and trades on that information has misappropriated it. The duty runs to the source, not to the market.

And then came shadow trading.

In SEC v. Panuwat, a jury found in April 2024 that a pharmaceutical executive had committed insider trading by using confidential information about his own company’s acquisition to purchase call options in a different company, a competitor whose stock was expected to rise on the same news. The information was about Medivation. The trades were in Incyte. The district court upheld the verdict in September 2024, and the implications have not finished arriving. If material nonpublic information about Company A can form the basis of a trading violation in Company B, the radius of liability has expanded beyond what most compliance departments had anticipated.

Is there a limiting principle? The court said yes. The employee’s confidentiality agreement covered trading in any securities on the basis of information learned through employment. The SEC will say that most confidentiality agreements contain similar language. Defense counsel will note that a theory of liability should not depend on the breadth of a boilerplate clause in an employment contract signed without negotiation.

Tipper and Tippee Liability Remains Unsettled

The person who trades is not always the person who possessed the duty. In Dirks v. SEC, the Supreme Court held that a tippee, one who receives inside information from a corporate insider, may be liable only if the tipper received a personal benefit from the disclosure and the tippee knew or should have known of that benefit. The personal benefit requirement was intended as a limiting principle. It has become a contested one.

In Salman v. United States, the Court held unanimously that a gift of confidential information to a trading relative is sufficient to establish a personal benefit. No pecuniary exchange is required. The tipper who tells his brother need not receive anything in return. The relationship itself is the benefit, or rather, the Court treats it as such. In United States v. Martoma, the Second Circuit extended the reasoning further: an insider personally benefits whenever information is disclosed with the expectation that the recipient will trade on it.

Can there be a guilty tippee without a guilty tipper? The government has advanced that position, and the question is not yet fully resolved. The structure of tippee liability was designed as derivative. Whether it can survive the removal of its foundation is a doctrinal problem that generates real consequences for real defendants.

A man tells his friend something over dinner. The friend trades. The man receives nothing, expects nothing, and did not intend to confer an advantage. Is the friend a criminal? Under Dirks, no. Under the government’s evolving interpretation, the answer depends on facts that the man at dinner did not know were relevant.

Rule 10b5-1 Plans Are No Longer a Safe Harbor

For two decades, the affirmative defense available under Rule 10b5-1 trading plans offered corporate insiders a mechanism for prearranged stock transactions. The concept was straightforward: establish a plan to buy or sell at specified prices or dates while unaware of MNPI, and subsequent trades executed under the plan would be protected even if MNPI existed at the time of execution.

In June 2024, a Los Angeles jury convicted Terren Peizer, the former chairman and CEO of Ontrak, Inc., of insider trading in the first federal prosecution based exclusively on the use of 10b5-1 plans. Peizer had adopted two trading plans while allegedly aware that Ontrak’s largest customer was about to terminate its contract. He sold approximately twenty million dollars in shares. When the customer termination was announced, the stock dropped forty-four percent. He was sentenced to forty-two months in federal prison, fined 5.25 million dollars, and ordered to forfeit more than 12.7 million.

The government’s evidence centered on timing. Peizer began trading the day after establishing his May 2021 plan and three days after establishing the August plan, disregarding warnings from two brokerage firms to observe a cooling-off period. The DOJ described the prosecution as part of a data-driven initiative to identify 10b5-1 plan abuse. Their principal deputy stated after the verdict that this was their first prosecution of this kind, but would not be their last.

That statement was not rhetoric. The SEC amended Rule 10b5-1 in 2023 to impose mandatory cooling-off periods, require certifications that the plan was not adopted during awareness of MNPI, and limit the use of single-trade plans. These amendments are now evidence. A plan that fails to comply with the new requirements is a plan that the government will characterize as a fraud.

The Penalties Have Compounded

Criminal insider trading under Section 10(b) carries a statutory maximum of twenty years per count. Under the wire fraud statute, which prosecutors frequently charge in parallel, the maximum is also twenty. Under 18 U.S.C. Section 1348, the securities fraud provision enacted after Enron, the ceiling is twenty-five. Fines for individuals reach five million dollars per count. For entities, twenty-five million.

The Sentencing Guidelines calculate the offense level based on the gain resulting from the offense. Median sentences have tripled over the past three decades. In the 1990s, the median insider trading sentence was less than one year. By the early 2000s, eighteen months. Today, the median approaches three years. That figure obscures the range. Probation exists. So do sentences measured in decades.

Civil penalties run in parallel. The SEC may seek disgorgement of profits and a civil penalty of up to three times the gain or loss avoided. A defendant who made one million dollars in illegal profits faces potential civil exposure of four million, in addition to criminal fines, forfeiture, and the collateral consequences that follow a federal conviction: debarment, industry bars, loss of professional licenses, and a reputation that no amount of time will fully restore.

The Defenses That Remain

Absence of awareness. The defendant did not possess MNPI at the time of the trade. This defense is elemental and frequently more available than defendants assume. Information that appears material in retrospect may not have been material at the time it was received. A rumor is not information. A suspicion is not knowledge.

Non-reliance. The defendant possessed MNPI but did not trade on the basis of it. The trade was motivated by independent factors: portfolio rebalancing, tax-loss harvesting, a preexisting plan to liquidate. This defense requires documentation, and the documentation must predate the trade. Post hoc explanations are treated as what they are.

Reliance on counsel. An insider who consulted a securities attorney before executing a trade, disclosed all material facts, and followed the attorney’s advice possesses a defense that the government must overcome. The advice must have been sought in good faith, and the reliance must have been reasonable. This is not a blanket protection. It is an evidentiary shield that requires the defendant to have done something most defendants do not think to do until after the trade has attracted attention.

Lack of duty. Not every person who trades on information owes a duty to anyone. A stranger who overhears a conversation on the train has no fiduciary relationship with the corporation, no confidentiality agreement, no duty of trust and confidence. Under the classical theory, that stranger is free to trade. Under the misappropriation theory, the analysis is different, but the absence of any relationship remains a defense.

Challenging materiality. The information was not material. This requires demonstrating that a reasonable investor would not have considered the information significant, a factual question that is often more contested than the government’s confident assertions suggest.

Parallel Proceedings Create Compounded Risk

The SEC investigation is civil. The DOJ prosecution is criminal. They frequently proceed on the same facts, against the same defendants, at the same time. The SEC and DOJ routinely share information, coordinate timing, and reference each other’s proceedings in public statements. A statement made in a civil deposition may become an exhibit in a criminal trial. A document produced in response to an SEC subpoena may appear in a grand jury presentation.

The Fifth Amendment protects against compelled self-incrimination. Invoking it in a civil proceeding is permitted, but the SEC may draw adverse inferences from silence. In the criminal case, the government may not. The defendant is therefore asked to choose between exposure and inference, and the choice must be made before the shape of either proceeding is clear.

This is not a problem that resolves itself through patience. It is a problem that requires counsel who has managed the intersection before.

Timing Determines Outcome

Insider trading investigations begin with data. The SEC’s Division of Enforcement and FINRA operate surveillance systems that detect aberrant trading patterns around material events. A purchase of call options in a company that announces a merger the following week will be flagged. The question is not whether the pattern will be detected. The question is what happens after detection.

The interval between detection and indictment may span years. During that interval, the government issues subpoenas, conducts interviews, obtains phone records, and constructs a narrative. The defendant who engages counsel during this phase possesses options that evaporate upon indictment: the ability to make a presentation to the government, to correct factual errors before they become allegations, to structure a cooperation agreement before the balance of power has shifted entirely to the prosecution.

We have represented executives, traders, analysts, and their family members in SEC investigations and criminal insider trading prosecutions. The patterns are consistent. The cases that produce the most favorable outcomes are the cases in which counsel was retained before the first interview, before the first document request, before the first ill-considered phone call to a co-defendant who was already cooperating.

Insider trading prosecution has entered a period of expansion. The theories are broader. The surveillance is more effective. The penalties are heavier than they were a decade ago. The defense of these cases requires an understanding of securities law, criminal procedure, and the particular dynamics of parallel proceedings that characterize every significant insider trading matter. The consultation with this firm is where that understanding begins.