Defending Clients Under Investigation for Insider Trading
Insider trading is a term that the federal government uses to describe a variety of ways that people in the securities market gain an unfair advantage over other investors. However, the term is a controversial one because many of the things that fall within its scope are legal. The Securities and Exchange Commission (SEC) has claimed, and courts have agreed, that insider trading is illegal, but federal insider trading laws do not exist – the closest that they come are fraud statutes. Nevertheless, defending against allegations of illegal insider trading is essential, as they carry stiff penalties and can lead to substantial prison time.
Understanding Securities Fraud: Insider Trading
In essence, insider trading is using material and nonpublic information to buy or sell securities. If the information was material and nonpublic at the time it was used to make a trade, that trade may constitute illegal insider trading. However, numerous exceptions and caveats can make a trade that looks like it was an illegal one perfectly legal.
The underlying idea behind illegal insider trading is that people who have more information than the general public should not act on it for their own gain. At a practical level, though, most securities traders constantly strive to learn information about a company that is not widely known: They reach out to company insiders and experts in the field, all in an attempt to get a sense of how the company is doing and whether it is a good investment. Most of the time, this is perfectly legal. If it was not, then all traders would have to wait for press releases or company announcements before making their trades.
Examples of Insider Trading
There are numerous types of insider trading. Some of them are clearly illegal, while others are more ambiguous and are on the edge of legality. The starkest examples of illegal insider trading are when corporate insiders trade on information that the general public does not have. These insiders are typically:
- Executives or directors of the company, or sometimes their friends and relatives, or
- Employees of the company
These are the archetypical forms of insider trading – the ones that people normally think of when they imagine an insider trading case. However, there are also numerous other ways that someone can face insider trading charges, including:
- A company’s outside advisors or business partners trading on information they obtained while working with the company
- Investment bankers who are privy to confidential information about a company’s operations or plans
- Government employees or officials who have access to confidential information about a company’s regulatory or enforcement issues
Ambiguity Leads to Uncertainty – and the Possibility of a Criminal Conviction
Those last three examples of insider trading, though, are not as clear cut as the first two. This is because the federal government’s campaign to end insider trading in the securities market has not been a strong one. Insider trading is not a criminal offense – the closest that federal law comes to banning insider trading is to make it a form of securities fraud. However, fraud requires an act of deception, and it is not clear what is being deceived when someone trades on material and nonpublic information about a company. The result is an ambiguous law that insider trading lawyers have struggled to define.
Just how ambiguous the law is can be seen in one case that was handled by the Second Circuit Court of Appeals – the court that has heard far more insider trading claims than any other circuit in the country. In Dirks v. SEC, a case decided in 1983 by the Supreme Court of the United States, a company insider passed on confidential information about fraudulent accounting to an investor. The SEC prosecuted the investor to whom the information was given. The Supreme Court, however, overturned the conviction, using a three-pronged test to determine illegal insider trading:
- The defendant must have received material and nonpublic information
- That information must have been received in breach of a duty
- The defendant must have known that the information was obtained in breach of a duty
The third prong, in particular, has caused numerous problems for securities fraud cases. The SEC has often pushed for courts to adopt a “should have known” standard, which would have made it easier for prosecutors to obtain a conviction. However, the Second Circuit, knowing how much power their ruling would have on insider trading cases, has stayed true to the Supreme Court’s “must have known” standard, which is much more favorable for defendants. Different outcomes for similar cases have been reached in different federal courts of appeal, though.
It is these unsettled areas of the law that make insider trading allegations so difficult to defend against. A competent and experienced insider trading defense lawyer can make a huge difference in these cases.
Potential Penalties for Insider Trading
If a securities fraud case that is based on insider trading allegations ends in a conviction, there are numerous penalties that could be imposed. They include:
- A criminal fine of up to $5 million and up to 20 years in prison per offense
- SEC civil penalties for up to three times the amount made on the trade
- Crime victims can file a civil lawsuit for the damages they have sustained
Spodek Law Group: Insider Trading Defense Lawyers
Defending against insider trading allegations is difficult and often takes a lot of time and effort, often years. Hiring a strong defense team of insider trading defense lawyers is essential for success.
The securities litigation and securities fraud defense lawyers at the national law firm Spodek Law Group have extensive experience handling these cases. Our internal investigators come from top federal law enforcement agencies, like the SEC and Federal Bureau of Investigation (FBI), and can help people who have been accused of insider trading defend themselves against the allegations.
Reach out to us online or call our law office at 212-300-5196 to get started on your defense.
Contact Spodek Law Group Today
If you are under investigation or facing charges for insider trading, our legal team is ready to help. Call 212-300-5196 or contact us online to schedule a confidential consultation.
