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March 21, 2024 Uncategorized

These days when you talk about Martha Stewart you probably also mention how she was convicted of insider trading at one point in her life. She even served some time in jail for her offense. That may be a bit of an outlier of a case, but it is still important in the grand saga of Martha Stewart. It points to the fact as well that the Securities and Exchange Commission (SEC) takes insider trading extremely seriously. They will pursue cases and crack down on those who think that they can pull one over on them.

To be completely clear, a good definition of insider trading is provided by Investopedia.com. They say essentially that insider trading is when a market participant in a security trades on knowledge that is not commonly known to the public. They are benefiting from having some kind of inside knowledge that others do not know about. This gives them an unfair leg up and ends up hurting some other investor at some point down the line.

The SEC has become increasingly intense when it comes to chasing down those who are committing the crime of insider trading. They do not want anyone to think even for a moment that they can get away with something like this. They are even going after those who have committed this crime on a small scale. They have to try to prove that no one is above this law. If you have done something that could be deemed as insider trading, you will be pursued by the Securities and Exchange Commission.

What Happens?

If you are under investigation by the SEC for insider trading you will first receive a phone call from the organization. They will call you to try to get you caught off balance and provide whatever information to them that they can possibly get out of you. You must be resistant to those calls. You have to make sure that you tell them to speak to your lawyer. Remain polite but firm in your assertion of your rights. You have those rights there to protect you against an ambush like this.

After the phone call that you get you will receive official paperwork from the SEC in the form of a subpoena. This will tell you that you have to appear in court at a certain point in time. You must react to those pieces of paper by turning them over to your lawyer and getting his or her advice as to how you should react.

SEC Fact Finding Mission

The SEC will go on a fact-finding mission as it were to figure out what you knew about the trades that you made, when you knew those bits of information, where you found that information from, and if the public also knows the things that you know. They are also interested to see if you specifically traded on the inside knowledge that you have obtained.

The organization will collect the information that they can on you and then provide the documents that they have on you to ask you to testify about the information that they have on your specifically. They want to have you answer to the facts that they have collected on you.

The Risks Associated

Keep in mind that you have a lot of risks associated with an insider trading investigation. You are facing a high-stakes situation in which you could end up having to pay big fines, have licenses taken away, or even go to prison. You have to think about these things if you are going to be worrying about how you will take on the SEC and defend yourself against whatever they may try to throw at you.

You have the right to defend yourself, but it is always advisable to hire an attorney who specializes in this particular area of the law. They are going to have a lot more knowledge about how to keep you safe from prison and the other penalties that you might have to pay. They know how to work through the court system and land you at the results that you have been hoping for this whole time.

An underlying, yet seldom stated, concept behind the vast sums invested by countless millions of investors in the U.S. stock market is the belief in the integrity of the market itself. That is, the government has established sufficient rules and regulations along with enforcement methods to ensure honest, fair and fraud free transactions. Insider trading lawyers maintain the balance between those market ideals and the individual rights of investors.

Insider Trading – Not Per Se Illegal
Say the term “insider trading” and most often people conjure up Martha Stewart or the Enron scandal or some other high publicity incident. Although both of those specific matters involved a form of it, all insider trading is not necessarily illegal. In fact, legal insider trading occurs every day throughout the country. Officers, directors, employees and large shareholders all trade their company’s stock on an ongoing basis. What creates an imbalance that pushes insider trading along the continuum to illegal activity is the nature of the information relied on by the insider.

Who is an Insider?
It can be said that an insider, due to his or her position in a company, has privy to some information that is likely to impact the company’s stock share price or be such that an investor would benefit from knowing. In regards to the stock price, this type of information is known as “material information.”

Clearly, based on this definition, many people can be considered insiders. Despite what a company may attempt to do to limit the numbers of actual insiders, executives, managers, accountants, sales personnel, attorneys and many others all may possess material information. However, the fact that information may be deemed material is not the end of the analysis.

Non-Public Information
If the same information that an insider, say a director, used to make a decision to sell or purchase a stock was available to a non-insider through publically accessible means, the trade, although technically an inside trade, would not be considered illegal. If, conversely, the information was available only because of the trader’s status and could not be discovered by a member of the general public, an illegal insider trade may be said to have occurred.

A “Temporary” Insider
Every stock market investor dreams about learning of a hot tip and acting on it before others find out. Who wouldn’t want to have bought Apple in 1980? What if you overhear your neighbor talking or perhaps some patrons at a nearby table at lunch? Can you use this information? If you do, have you omitted a crime? Maybe.

In the definition of what an “insider” is, the SEC code section includes those who have “temporary” or “constructive” information. Any information that is not public and used to make a trade is prohibited. It doesn’t matter how one comes by the information. It need not be acquired by illegal means. And, importantly, it doesn’t matter through how many levels the information passes. For example, a director may tell his CPA who tells his barber who tells his babysitter. The director fits the classic and obvious definition of an insider, but the CPA, barber and babysitter are all temporary insiders who cannot use the information to make a trade.

Penalties for Violation of Insider Trading Laws
The SEC is empowered to seek civil penalties against an accused inside trader to disgorge the profits made on the alleged insider trade. In addition, based on the facts and circumstances of the case, the court may impose a penalty of up to three times the profit realized on the trade. And perhaps, most significantly, as Marth Stewart found out, criminal sanctions are possible based on the accused’s response to the charges.

If you are accused of insider trading or have reason to suspect you are under investigation regarding a specific trade, you should seek the legal advice of experienced insider trading lawyers.

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