Insider Trading Penalties Explained
Federal insider trading investigations are high-stakes events that can lead to catastrophic financial penalties, lengthy prison sentences served at over 85%, and permanent career destruction. This federal crime carries both civil and criminal sanctions, often bundled with related offenses like wire fraud and money laundering, resulting in dramatically longer sentences than most defendants anticipate.
Criminal Penalties for Insider Trading
The Securities Exchange Act of 1934 gives federal prosecutors broad authority to charge individuals and entities with insider trading. The most severe criminal penalties are imposed when the government proves that the defendant willfully violated the law, often by trading on nonpublic, material information in breach of a duty to the source.
Maximum Prison Sentences
- Individuals: Up to 20 years in federal prison
- Entities: Criminal fines only (prison for individuals involved)
Maximum Criminal Fines
- Individuals: Up to $5 million
- Entities: Up to $25 million
Wire Fraud and Money Laundering Enhancement: In modern prosecutions, the DOJ routinely charges insider trading defendants with additional counts of wire fraud (18 U.S.C. §1343) and money laundering (18 U.S.C. §1956), each carrying up to 20 years in prison per count. As a result, the total exposure can quickly exceed 40 years in prison, with little opportunity for early release due to the 85% rule.
The 85% Rule (Real Sentencing)
Federal insider trading prison sentences, like all federal sentences, are governed by the 85% rule under the First Step Act and the U.S. Sentencing Guidelines. This means defendants must serve at least 85% of their imposed sentence. If a defendant is sentenced to 10 years, they are required to serve a minimum of 8.5 years in prison, with almost no opportunity for parole. Sentences are often influenced by the severity of the offense, the amount of loss, the defendant’s role in the scheme, and cooperation with prosecutors.
- Example: If sentenced to 8 years for insider trading, the defendant will serve at least 6.8 years in federal prison, even with good behavior and participation in recidivism-reducing programs.
Restitution and Disgorgement
In addition to prison time and fines, defendants are often ordered to pay restitution to victims and to disgorge any profits made from the illegal trades. Restitution amounts are calculated based on the actual losses suffered by the victims, while disgorgement is intended to strip the wrongdoer of any ill-gotten gains.
Collateral Consequences
Beyond prison and fines, individuals convicted of insider trading face severe collateral consequences:
- Bar from serving as an officer or director of a public company
- Permanent loss of professional licenses (FINRA, SEC, state bars, state CPA)
- Civil suits from harmed investors and shareholders
- Asset forfeiture laws allow the government to seize any property or accounts connected to the illegal trades, often before conviction.
- Media attention can permanently destroy personal and professional reputations.
Civil Penalties for Insider Trading
The Securities and Exchange Commission (SEC) can bring civil enforcement actions against individuals and companies for insider trading violations. Civil penalties are imposed in addition to any criminal sanctions and are designed to deter future violations.
- Injunctions: The SEC routinely seeks court orders to prevent future violations, freezing assets or restricting trading activities.
- Civil fines: The SEC can impose additional fines up to three times the profit gained or loss avoided (“treble damages”).
- Disgorgement: In nearly every case, the SEC will seek to recover all profits from the illegal trades.
- Bar orders: The SEC will seek to ban individuals from serving as officers or directors of public companies, either temporarily or permanently.
Civil Penalties Are Often Imposed Even When No Criminal Charges Are Brought
The SEC can pursue civil sanctions even if the Department of Justice (DOJ) declines to pursue criminal charges. This means that individuals and entities may face significant financial penalties and other consequences, even if they avoid prison time. Civil cases have a lower burden of proof (“preponderance of the evidence” rather than “beyond a reasonable doubt”) and do not require proof of willful misconduct, making it easier for the SEC to obtain sanctions.
Recent DOJ Prosecutions and Sentencing Trends
Recent DOJ insider trading cases carried sentences ranging from 36 to 120 months in federal prison, often due to the addition of wire fraud and money laundering charges. For example, an executive convicted of insider trading and money laundering may receive a 120-month sentence, serving at least 102 months due to the 85% rule.
Federal prosecutors are increasingly targeting not only corporate insiders but also their spouses and friends who receive and trade on material, nonpublic information. The DOJ often pursues those who attempt to obstruct investigations by deleting evidence or lying to investigators.
Forfeiture and Asset Seizure
Federal prosecutors have expanded their use of forfeiture laws to seize assets connected to insider trading. Title 18 U.S.C. §981 allows the government to seize property and accounts even prior to a conviction. This includes not only the direct proceeds of illegal trades but also assets purchased with those proceeds, such as homes, vehicles, and investment accounts, often through civil forfeiture actions.
Defending Against Insider Trading Charges
Insider trading investigations and prosecutions require a strategic, aggressive defense. Corporate executives, financial professionals, and attorneys facing potential insider trading violation must understand the severe consequences, including the possibility of simultaneous criminal and civil actions.
Defense strategies often focus on demonstrating that the information was not material or nonpublic, or that the defendant did not act with the required intent. In some cases, it may be possible to negotiate a settlement with the SEC or DOJ, often including cooperation agreements that can reduce sentencing exposure under the U.S. Sentencing Guidelines.
Conclusion: The Stakes Are Catastrophic
Federal insider trading investigations can end careers, destroy families, and result in lengthy prison sentences with no parole. The combination of criminal, civil, and collateral consequences makes these cases among the most severe white-collar crimes prosecuted by the federal government.
Any individual or entity facing potential insider trading allegations should retain experienced federal defense counsel immediately to navigate the complex interplay of criminal and civil enforcement and to mitigate the potentially devastating consequences.
