NATIONALLY RECOGNIZED FEDERAL LAWYERS
Last Updated on: 7th August 2023, 08:45 am
Understanding Insider Trading
Insider trading can be defined as the process of trading securities or stocks by people who have private information regarding the company or market trends, which isn’t supposed to be accessible to the general public. When such individuals take advantage of their ability to access this information to make huge profits from the stocks or securities, it is considered a breach of their fiduciary duty.
What Constitutes Insider Trading?
An individual may also be convicted of insider trading if they give the non-public information to any of their close contacts. If you receive such information from a family member or friend, you are expected not to use that information to make trades. However, if you can prove that you did not know that the information was non-public before making the trade, you are unlikely to face prosecution.
In most cases, insider trading is treated as a serious federal offense. The reason why it is treated as such is that it disadvantages the other investors in the markets who have no access to such information. However, it has many differences with the other forms of investment fraud. Unlike the other types of investment fraud, insider trading doesn’t target an individual investor. Instead, the person holding the confidential information is able to act upon it, reaping huge profits.
Insider Trading Laws
The SEC utilizes the different federal regulations and statutes to investigate and prosecute insider trading along with other forms of stocks and securities fraud. According to the law, an insider is defined as an officer or director of a publicly traded company. Individuals with an upward of 10% of any of the company’s stocks are also regarded as insiders.
Such individuals have the duty of ensuring trust with the other stakeholders of the company and ensuring that their investments are protected. Using inside information to benefit themselves or their close contacts is therefore considered a breach of this duty. Any other individual who can access such information, including those who get a tip from the officers, directors, or significant shareholders, is considered as insiders as well. They, too, could face prosecution for insider trading.
For the prosecution to be valid, the US government needs to prove that the defendant either bought or sold stocks or securities using non-public information to predict the trends. The prosecutor must also show that the defendant received this information and that it was material and the non-public at the time of use. They must also be able to prove that the data influenced the trade.
The accused individual may be able to make defense by proving that he or she was part of a contract which they entered to buy or sell the securities or stocks in good faith. They must also show that they entered the agreement before acquiring the insider trading information.
In recent years, federal courts and SEC expanded the scope of insider trading to include trades made by regular people who acquired non-public information from a person who was not authorized to possess or share it. They, therefore, warn all investors from making trades based on tips from insider information.
Insider Trading Charges and Sentencing
According to the Securities Exchange Act, individuals who are prosecuted for insider trading or any other wilful act of securities fraud can face up to 20 years in prison. They can also incur a fine of up to 5 million dollars or both. If the individual can prove that they had no knowledge of the violated laws at the time of trading, they may fail to face imprisonment, but the fines still apply. Corporations found participating in insider trading can incur penalties of up to $25 million.
Although the insider trading charge may not fetch a long sentence in itself, it is essential to note that the perpetrators may face accompanying charges like mail and wire fraud, which can bring the sentence to a total of 20 years. Other possible charges include obstruction of justice, racketeering, and tax evasion.
The Statute of Limitations
The Statute of limitations for an insider trading charge is five years. The matter must, therefore, be presented before the court with adequate evidence not later than five years after the individual uses the insider information to make profits from a trade.