How to Differentiate Legal and Illegal Insider Trading
Insider trading is considered to be illegal in the majority of situations and can carry many potential criminal and civil penalties. In 2007, more than $13 billion worth of insider trades occurred every month. In the event that you’ve been charged with a crime related to insider trading, it’s imperative that you understand how legal insider trading differs from illegal trading.
What Constitutes Insider Trading?
There is no exact legal definition of what insider trading is. However, it mainly refers to actions that involve buying or selling some kind of security while possessing information about the security that isn’t public. If it’s believed that the information you have about a security was obtained from someone close to you and was a breach of your fiduciary duty or otherwise a breach of trust, you could be charged with illegal insider trading. Even though it’s technically possible for insider trading to be legal, years of court rulings indicate that fiduciary duty was breached in almost all cases.
Let’s say that you’ve invested a large sum of money into a pharmaceutical company. If you receive nonpublic information that the company is about to receive negative publicity as a result of a poorly managed drug trial or a bad report about medicinal side effects, it would be illegal for you to use this information to get rid of all of your stock before the information is made public. If you do, you would likely be charged with insider trading.
While insider trading cases are typically straightforward, there are situations where the legality of the case is difficult to determine. In the event that you’ve recently been charged with insider trading, it’s important that you seek help from a Morristown criminal defense lawyer like ours. We can assist you in determining what your best defense is and what kinds of penalties you should expect.
When Insider Trading Is Legal
While acts of illegal insider trading are far more common than acts of legal insider trading, it’s possible for this type of trading to occur legally. Whenever employees, shareholders, or directors buy or sell stock in their own companies, this would in most cases be considered to be legal insider trading. However, there are still guidelines that dictate when legal insider trading can occur. If you work as a corporate insider, you must report trades of your company’s securities directly to the SEC.
It’s common for traders and investors to use the information filed with the SEC to make purchasing and selling decisions with their stocks. These individuals believe that a corporate insider selling or buying stock means that they have inside information that has prompted this decision. All transactions from corporate insiders need to be filed through SEC forms 3-5.
The majority of financial quote sites provide users with information pertaining to corporate insider transactions, which are commonly displayed on insider trading pages. While this information can be helpful for investors who are attempting to guess the market, it doesn’t always pan out and can be very risky for anyone who attempts to make their buying or selling decisions based primarily on this info.
When Insider Trading Is Illegal
Even though certain insider trading transactions can be legal, most of them are considered illegal. An act of illegal insider trading occurs when someone gains nonpublic information pertaining to a security and chooses to act on this information by buying or selling a stock. Using this information to gain an unfair advantage on the market would be a breach of your fiduciary duty.
Keep in mind that the illegality of insider trading has become more defined by the courts and SEC over the past decade. Even if the “relationship of trust” between yourself and the person who provided you with the information is practically nonexistent, you could still be charged with illegal insider trading. Some of the acts that are commonly considered illegal insider trading include:
- When a government employee learns of nonpublic information as a result of their role in the government
- When family members, business associates, employees, or company directors trade securities after obtaining nonpublic information
- When employees and corporate officers trade securities after they have learned of significant company developments
- When brokerage, banking, and law firm employees obtain information from a client and use it to trade in its securities
If you gain a tip about a stock or other security that is based on nonpublic information, there’s a good chance that you would be charged with illegal insider trading. Because of how severe the SEC and U.S. courts treat illegal insider trading, it can come with heavy penalties, which could include prison time and heavy fines.
Penalties Associated With Illegal Insider Trading
The penalties associated with illegal insider trading can vary significantly and depend on the exact details of the case. If the SEC believes that you committed securities fraud, they could seek monetary damages from you via a civil lawsuit. While civil lawsuits can result significant financial penalties, these lawsuits are typically considered to be preferable to criminal charges. Along with the SEC filing a civil lawsuit, the U.S. Department of Justice can file criminal charges in regards to violations of securities laws.
While people who commit illegal insider trading can face civil liability or criminal prosecution, it’s common for both of these to occur at the same time. The extent of the penalties you face depends on the severity of the insider trading. For any individual who engages in securities fraud, the maximum jail time that could occur from this violation is around 20 years. Because this is a federal crime, the sentence would be carried out in a federal prison.
Fines are often allotted as well for illegal insider trading cases. The maximum fine for an individual is currently set at $5 million. With these penalties in mind, it’s important that you have an experienced attorney by your side if you want to reduce your charges or get rid of them entirely.
Seeking a Legal Defense From Our Morristown Criminal Defense Lawyer
Because of the severity of an illegal insider trading case, it is essential that you have knowledgeable legal representation by your side to help you craft the ideal defense for your case. There is a range of legal defenses commonly used for individuals and entities facing illegal insider trading charges. The main legal defense involves arguing that the trade was, in fact, an act of legal insider trading. This defense is even detailed under SEC Rule 10(b)5-1. If the defendant can prove that the nonpublic information didn’t factor into the investment decision that was made, it is possible that the act would be an example of legal insider trading.
Another common legal defense is to argue that the information was not material in nature or that it was already public. If the information wasn’t relevant enough to affect the purchase or sale of a security, it wouldn’t be illegal. The same is true if the material information was made public before the trade occurred. It is possible that the information was already disseminated in some manner before it was used by the defendant to buy or sell securities. It is common for this defense to be used when the information was public but not widely known. Our lawyers have handled many insider trading cases and can help you determine how your case should progress.
If you believe that you might be facing insider trading charges and would like to have thee legal assistance of a Morristown criminal defense lawyer, contact Gregg Wisotsky today at (973) 898-0161 to set up a meeting so that we can learn more about your situation and determine the best way to proceed.