5 Federal Insider Trading Defenses That Work
What Is Insider Trading?
Insider trading is when a person buys or sells stocks or other securities based on material, non-public information. It can also be when a person provides non-public information to another person who then buys or sells stock based on the information. In an insider trading case, the government must show that the information was shared in breach of a fiduciary duty. It must also show that the person who buys or sells the stock knew or should have known that the information was shared in violation of a fiduciary duty.
Many insider trading cases involve information about a company’s performance or other business plans. But they can also involve information that may not be relevant to the company’s performance at all. For example, in a prosecution for insider trading, a person may be accused of destroying the company’s reputation or the company’s opportunity to expand by disclosing information in violation of a fiduciary duty.
Who Investigates and Prosecutes Insider Trading Crimes?
Insider trading is a serious federal offense. It is usually prosecuted by the Securities and Exchange Commission (SEC) or the U.S. Department of Justice (DOJ). Depending upon the circumstances, the Federal Bureau of Investigation (FBI), the Financial Industry Regulatory Authority (FINRA), and others may play a role in investigating the alleged crime. Insider trading can result in both criminal and civil penalties. The SEC may file civil charges against a person. The DOJ may prosecute the person criminally. The DOJ will become involved if the person is accused of violating a federal law. In addition to prison time, the person may be required to pay a fine and return any profits gained through illegal trades.
Examples of Insider Trading
Example 1
A chief financial officer (CFO) learns that their company is about to be acquired by a larger corporation. The CFO shares this information with a friend and the friend then buys and sells stock in the company based on that information. The friend could be prosecuted for trading on insider information.
Example 2
A government official who learns that the government has approved a new drug by a pharmaceutical company then tells their spouse who buys stock in the company. The official and their spouse could be prosecuted for insider trading.
Example 3
A fiduciary is someone who owes a duty of trust to another person. A doctor who learns that a patient is about to die from a terminal illness then shares this information with a friend. The friend buys stock in a company that the decedent owns. The doctor could be prosecuted for sharing insider information in violation of their fiduciary duty.
Defending Against an Insider Trading Crime
Federal prosecutors at the DOJ and others must show beyond a reasonable doubt that you traded on material non-public information in breach of a fiduciary duty. The person to whom you gave the information must also have traded based on that information in violation of a fiduciary duty. Defending against insider trading charges is difficult. It requires careful analysis and skilled representation.
