How the SEC Proves Insider Trading
The Truth: Most People Who Commit Insider Trading Think They’re Being Clever
They use a friend’s brokerage account. They communicate through encrypted messaging apps. They wait a few days before trading so it does not look too obvious. They think these precautions will protect them.
They are wrong.
Every year, hundreds of glowing LinkedIn profiles are erased from the internet because their owners made the same mistake: They thought insider trading was hard to prove.
It is not.
The SEC has spent the last decade building surveillance infrastructure with:
- ARTEMIS: The 10 Billion Record Database
- MIDAS: One Billion Records Per Day
- The FINRA Alert Engine: 450 referrals annually
About one billion records per day flow into the SEC’s surveillance infrastructure, timestamped down to the microsecond, cross-referenced against every corporate announcement, every earnings report, every merger filing.
What’s Inside: The SEC Insider Trading Prosecution Playbook
In plain English, we’ll show you the actual methods the SEC uses to prove insider trading––even when there’s no admission, no confession, and the evidence is entirely circumstantial.
What You’ll Learn:
- The 4 legal elements of insider trading every prosecutor must prove
- The surveillance systems (ARTEMIS, MIDAS, FINRA) that flag insider trading before the first call is placed
- The specific electronic communications (emails, texts, chats) the SEC uses to prove knowledge, intent, and relationships
- The exact types of messages that have been used as smoking gun evidence in federal court
- How seemingly innocent delays, code words, and friend’s accounts actually increase the government’s proof
The Legal Elements: The SEC’s Roadmap to a Conviction
If you wonder how the SEC proves insider trading, you first need to know what they have to prove.
Federal insider trading is not a single law, but a patchwork of statutes, regulations, and court decisions stretching from 1934 to the present day. In the eyes of the law, insider trading is fraud—a deception used to obtain money or property.
Every insider trading prosecution must prove four elements beyond a reasonable doubt:
- Material Nonpublic Information: The defendant possessed information that was both material (a reasonable investor would consider it important) and nonpublic (not available to the general public).
- Duty of Trust or Confidence: The defendant owed a duty of trust or confidence to the source of the information (or knew that someone owed such a duty).
- Misuse of the Information: The defendant breached that duty by using the information for personal gain.
- Scienter (Intent): The defendant acted knowingly and willfully (not by accident or mistake).
The SEC proves nonpublic status by showing:
- The information was not in press releases, SEC filings, or public forums.
- It was discussed only in confidential meetings, internal emails, or restricted channels.
- The recipient had a special relationship or access (e.g., employee, lawyer, consultant).
Element 2: Duty of Trust or Confidence
Insider trading is not just about information; it’s about trust. The law punishes those who betray a duty of trust or confidence.
The SEC proves the duty by showing:
- Classical Theory: The insider is an officer, director, or employee who owes a duty to the shareholders.
- Misappropriation Theory: The insider stole the information from someone who trusted them.
- Tipper/Tippee Theory: The insider (tipper) breached a duty by tipping someone else (tippee), who knew or should have known about the breach.
Under the Newman test (and clarified by Salman v. United States), the SEC must show that the tipper received a personal benefit from the tip (e.g., money, reputation, or future favors) and that the tippee knew about it.
Element 4: Scienter (Intent)
Insider trading requires a knowing and willful act. The defendant must have known they were breaking the law.
The SEC proves intent by showing:
- Repeated patterns of trading after learning material nonpublic information.
- Attempts to conceal the trades (e.g., using a friend’s account).
- Communications indicating knowledge or intent.
How the SEC Detects Insider Trading: The Early Warning Systems
Before the first subpoena is issued or the first phone call is made, the SEC already knows when the insider trading happened. How? Through a network of high-tech surveillance systems and partner agencies.
ARTEMIS: The 10 Billion Record Database
ARTEMIS is the SEC’s Advanced Relational Trading Enforcement Metrics Investigation System. It’s a database that ingests over 10 billion records, including:
- Trade data from every U.S. exchange
- Public filings (10-Ks, 10-Qs, 8-Ks)
- News releases and social media
By cross-referencing trades against news and filings, ARTEMIS can spot suspicious patterns, such as:
- Abnormal Returns: Trading that leads to abnormally high profits.
- Event-Driven Trading: Trades clustered around specific corporate events.
- Serial Outsized Returns: Repeatedly successful trades by the same account.
MIDAS: One Billion Records Per Day
The Market Information Data Analytics System (MIDAS) collects one billion trading records every day from national exchanges. It provides microsecond-level timestamps, allowing the SEC to see:
- Who traded
- When they traded
- How much they traded
MIDAS identifies:
- Data Quality Checks: Ensuring accuracy of trade data.
- Bloomberg Terminal Logs: Tracking who accessed specific news or filings.
FINRA: 450 Referrals Annually
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that monitors broker-dealers. It routinely provides the SEC with:
- Referral Reports: About 450 referrals per year for potential insider trading.
- Brokerage Account Monitoring: Watching for suspicious activity.
How It Works:
- FINRA’s surveillance engine flags a suspicious trade.
- FINRA sends a detailed referral to the SEC.
- The SEC uses ARTEMIS and MIDAS to pull all related trade data.
- The SEC matches the trade to a potential material event (e.g., earnings report, merger, FDA approval).
Turning Data Into Proof: The SEC’s Case-Building Process
Once the suspicious trade is identified, the SEC begins a systematic investigation to collect evidence for each element. This process often takes months or even years.
Step 1: Subpoenas and Document Requests
The SEC sends subpoenas to:
- Brokerage Firms: To obtain trade confirmations, account statements, and trading instructions.
- Employers: To obtain emails, calendars, access logs, and internal communications.
- Phone Companies: To obtain call logs and text message histories.
Step 2: Search Warrants for Electronic Communications
If the SEC believes there is probable cause of criminal activity, it will work with the FBI to obtain search warrants for:
- Emails: From corporate and personal accounts.
- Text Messages: From cell phones.
- Social Media Chats: From platforms like WhatsApp, Telegram, Slack, and Signal.
The Smoking Guns: The Electronic Communications That Prove Insider Trading
In modern insider trading cases, the smoking gun is almost always an electronic communication. Here are the types of messages the SEC uses to prove knowledge, intent, and relationships:
1. Suspiciously Timed Messages
- Example: A text sent minutes after a major corporate event: “Trust me, it’s going to be good. Loading up.”
- Proof: Shows the sender had advance knowledge of the event and intended to trade on it.
2. Code Words and Euphemisms
- Example: Using “the item” to refer to confidential information.
- Proof: Shows an attempt to conceal the true nature of the information.
3. Explicit Trading Instructions
- Example: “Buy as much as you can before the announcement.”
- Proof: Direct evidence of intent to trade on inside information.
4. Attempts to Conceal
- Example: “Don’t tell anyone I told you this.”
- Proof: Shows the sender knew the information was confidential and was trying to hide the disclosure.
5. Admission of Relationship
- Example: “I got this from my friend at the company.”
- Proof: Establishes the tipper/tippee relationship and the flow of information.
6. Personal Benefit
- Example: “If this works out, I’ll take you out to dinner.”
- Proof: Shows the sender received or expected a personal benefit from sharing the information.
7. Follow-Up Confirmation
- Example: “Told you it would pop!”
- Proof: Confirms the sender’s knowledge and the accuracy of the tip.
Don’t Take the Bait: Why “Clever” Tactics Backfire
Many insider traders believe they can outsmart the system with clever tactics:
- Using a Friend’s Account: The SEC simply subpoenas the friend’s account and matches the trades to the insider’s phone records.
- Delayed Trading: The SEC’s surveillance systems can still connect the dots, especially if the trade occurs shortly after learning the information.
- Encrypted Messaging Apps: Apps like WhatsApp and Signal can be decrypted with proper warrants.
The reality: These tactics often strengthen the SEC’s case by showing consciousness of guilt (an awareness that the conduct was wrong).
The Bottom Line: How Insider Trading Gets Proven
Insider trading is not proven by a single email or a solitary trade. It’s proven by a pattern—a constellation of evidence that, when viewed together, tells a story the government is ready to prove in federal court.
The SEC does not need a confession. It does not need a smoking gun. What it needs—and what it often gets—is a mountain of circumstantial evidence that, when cross-referenced by ARTEMIS, MIDAS, and FINRA, leaves no reasonable doubt.
In short: Anyone thinking about insider trading should know this: The odds are not in your favor.
About Spodek Law Group
Spodek Law Group is a team of former prosecutors, former FBI agents, former DOJ trial attorneys, and top civil litigators. We defend clients who are under SEC investigation or have received a Wells notice from the SEC.
If you are facing a federal insider trading investigation or have been charged with insider trading or securities fraud, contact our legal team at Spodek Law Group for a free consultation.
