Insider trading in securities occurs when a person or persons in possession of material nonpublic information about a company trades in the company’s securities and makes a profit or avoids a loss. Insider trading is a term used to describe an offense that may fall under a number of federal statutes that regulate the trade of securities. The authority to bring a civil insider trading case lies with the Securities and Exchange Commission (“SEC”). Criminal prosecutions are brought by the Department of Justice (“DOJ”) through the United States Attorney’s Office. In many instances, the SEC will announce a civil case at the same time an indictment is released.
The white collar criminal defense attorneys at The Henry Law Firm PLLC stay at the cutting edge of insider trading defense. We maintain a highly skilled group of professionals that understand state and federal securities regulations and regularly defend people charged with criminal and enforcement actions by the DOJ and the SEC. Insider trading cases are typically prosecuted by veteran Assistant United States Attorneys and carry severe jail sentences and significant monetary penalties. Insider trading prosecutions continue to evolve and the U.S. Attorney’s office for the Southern District of New York continues to make the prosecution of these cases a priority.
Insider Trading Statutes
Insider trading is regulated by multiple federal statutes. They include the Securities Exchange Act of 1934, the Insider Trading Sanctions Act of 1984, the Insider Trading and Securities Fraud Enforcement Act of 1988, and the Stop Trading on Congressional Knowledge (STOCK) Act of 2012. These statutes provide for a wide range of insider activity and may be enforced through criminal or civil actions.
Securities Exchange Act of 1934
The 1934 Act, 15 U.S.C. 78a et seq., covers many areas of securities regulation. Section 16 of the 1934 Act, 15 U.S.C. 78p, specifically provides for sanctions against corporate insiders who take advantage of their inside information to trade the corporation’s securities to make short-swing profits. An insider under this Act is defined as any “person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security … which is registered … or who is a director or an officer of the issuer….” There are myriad rules and regulations under the Act requiring registration and reporting.
Section 10(b) of the 1934 Act, 15 U.S.C. §78j(b), and SEC Rule 10b-5, 17 C.F.R.§240.10b-5, cover securities fraud generally, but is frequently applied to insider trading. Section 10(b) is the 1934 Act’s general antifraud provision and does not refer to specific types of fraud or to specific types of insiders. These definitions are left to the Court’s to interpret leaving significant areas for litigation over specific conduct. The statute says:
It shall be unlawful for any person, directly or indirectly by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange:
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
However, Insider trading liability is not limited to corporate insiders. Prosecutors can also bring claims under “misappropriation” theory, which means “outsiders”—persons that have no duty to the corporation or its shareholders—may be liable for insider trading if they obtain material, non-public information about a company and someone uses that information to trade and breaches a duty to the owner. Liability attaches when an “outsider” misappropriates or steals confidential information, and then uses that information to trade securities. Liability also extends to others who trade on such information through “tipper liability” and “tippee liability.” When a person in possession of material, nonpublic information (the “tipper”) shares the information with someone else (the “tippee”) for the purpose of trading for personal benefit, insider trading liability extends to both parties. The contours of tipper/tippee liability have been heavily litigated.
Recently, the Second Circuit in United States v. Newman, 773 F.3d 438, 442 (2d Cir. 2014), redefined “remote tippee” liability. The fallout from that case created numerous issues in prosecutions for insider trading. However, more recently in United States v. Stewart, the Southern District of New York revamped its’ insider trading strategy. The battle over what constitutes insider trading is ongoing and will continue to evolve.
The penalties for each willful violation of a securities statute by an individual include fines up to $5 million and/or imprisonment up to 20 years; a business may be fined up to $25 million.
Trading Sanctions Act of 1984
The Insider Trading Sanctions Act of 1984 amended the Securities Exchange Act of 1934 by adding or amending multiple statutory provisions. Generally, the 1984 Act allows the Securities and Exchange Commission (“SEC”) to seek civil penalties for insider trading in the United States District Court for up to three times the profit gained or loss avoided. The increased monetary sanction was intended to deter insider trading violations.
Trading and Securities Fraud Enforcement Act of 1988
Much like the 1984 Act, the Insider Trading and Securities Fraud Enforcement Act of 1988 amends the Securities Act of 1934. This Act expands the scope of potential civil penalties to include persons who fail to take adequate steps to prevent insider trading under 15 U.S.C. 78u-1(a)(3). There are limits to the liability of a controlling person found at 15 U.S.C. 78u-1(b). That provision provides:
No controlling person shall be subject to a penalty under subsection (a)(1)(B) of this section unless the Commission establishes that: (A) such controlling person knew or recklessly disregarded the fact that such controlled person was likely to engage in the act or acts constituting the violation and failed to take appropriate steps to prevent such act or acts before they occurred; or (B) such controlling person knowingly or recklessly failed to establish, maintain, or enforce any policy or procedure required under section 78o (f)  of this title or section 80b–4a of this title and such failure substantially contributed to or permitted the occurrence of the act or acts constituting the violation.
The Act also provides a private right of action for buyers or sellers of securities against the inside trader if they traded contemporaneously with the insider.
Trading on Congressional Knowledge (STOCK) Act of 2012
The Stop Trading on Congressional Knowledge Act of 2012, as its name suggests, applies insider trading prohibitions to Members of Congress, congressional staff, and other federal officials. Section 3 of the Act provides:
[A] Member of Congress and an employee of Congress may not use nonpublic information derived from such person’s position as a Member of Congress or employee of Congress or gained from the performance of such person’s official responsibilities as a means for making a private profit.
In Addition to Congress, the Act prohibits insider trading by members of the executive and judicial branches of government. The Act says:
Executive branch employees, judicial officers, and judicial employees are not exempt from the insider trading prohibitions arising under the securities laws, including section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
How Can We Help
Insider trading cases are extremely complex. The United States Attorney’s Office for the Souther District of New York and around the country have focused their efforts on prosecuting insider trading cases. As a result, the number of prosecutions continue to rise. If you have been contacted about or charged with an insider trading violation, call immediately at 646-820-0224. Early intervention is extremely important. Let the innovative federal criminal defense attorneys at The Henry Law Firm PLLC provide you with the defense you deserve.
Other Practice Areas
White Collar Defense and Regulatory Enforcement
We defend public officials, executives, board members, securities brokers, traders, law enforcement personnel, and employees facing criminal charges, internal investigations and regulatory enforcement actions.
Our attorneys have successfully appealed to The United States Supreme Court and other federal appellate courts throughout the country.
Federal Criminal Defense
We represent individuals who have been charged with or are being investigated for a full range of federal crimes nationwide.