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Insider Trading

Insider Trading

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) [1] 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.

What to Do If You Are Facing a Money Laundering Investigation

According to experts, around $5 trillion is money laundered around the world each year, and law enforcement authorities recover only a small fraction of that money. But, in spite of this gap – and quite possibly because of it – U.S. law enforcement authorities take an extremely hard line in pursuing the money laundering investigations that do end up on their radar, and it is often tertiary and unsuspecting individuals and entities that find themselves in the crosshairs of a money laundering investigation. While we might think of large banks and other financial institutions when we think of money laundering, it is common for business partners, service providers, art and antique dealers, auction houses, trustees, directors and board members, and all types of financial service providers to get caught up in a money laundering investigation. It is certainly frightening to get a visit, call, or other inquiry from a federal agent or agency – or even to hear rumors of those close to you being approached – but what you do next can have enormous implications for your future.

Understand That Criminal Liability Can Exist Even If You Were “Ignorant”

Again, federal law enforcement takes a very aggressive approach to policing money laundering, and they do this for a number of reasons. One is that it is often more feasible for law enforcement to collect evidence of financial crimes than the crimes that produced the money being laundered, such as international trafficking. Law enforcement can also approach those who may played a secondary and/or unwitting role in the money laundering and use methods to intimidate them and their businesses that might lead them to the persons committing the crimes from which the money profits flowed.

Unlike with many other criminal laws, prosecutors do not have to show that a person willfully (in other words, intentionally) violated federal laws on money laundering in order to secure a conviction. Using the concept of “willful blindness,” prosecutors can successfully argue that a person is guilty of money laundering when he makes efforts to conceal the profits of criminal activity even if he did not know the money was the product of illegal activity but had strong reason to suspect it was. For example, an art dealer facilitating transactions on behalf of a wealthy drug dealer to conceal profits might be charged with money laundering if it can be shown there was a reason to suspect the nature of the funds.

Furthermore, anyone who merely encourages or assists such a transaction (e.g. service providers) could potentially be liable even if he or she was not a primary party to the transaction.

Do Not Wait to Speak With a Criminal Defense Attorney

Does this mean every person connected with a transaction involving money derived from illegal activity is criminally liable? Absolutely not, but it does mean that prosecutors can find a way to pin criminal liability on persons in ways they may well not have imagined. Thus, it is a mistake to speak with law enforcement – or any other non-attorney for that matter (any conversation you have not protected by a privilege may be used against you) – without an attorney under the impression that you have nothing to worry about.

By speaking with a criminal defense attorney experienced in federal investigations at the first sign of a money laundering investigation, you can take steps to determine what your potential criminal liability might be (which may be none, but better to find that out in a confidential consultation with an attorney who represents only your interests), and work with that attorney in communicating with law enforcement to reach your best possible outcome, which can include a dropped investigation or favorable agreement.

Contact a New York Defense Attorney Today

The Henry Law Firm PLLC provides criminal defense to individuals and businesses throughout New York in all state and federal investigations and prosecutions. If you believe you may be under investigation for money laundering, do not hesitate to contact us today to schedule a confidential consultation regarding your matter.  

FAQ: Tax Fraud Penalties

Can I be charged with a crime if my taxes are done incorrectly?

Yes. Not only can the IRS can hand down civil penalties for improperly doing your taxes, federal prosecutors can charge you with a tax-related crime if you fail to file a tax return, provide false or fraudulent statements to the IRS, or willfully evade paying your full share of taxes.

What are the criminal penalties for failing to file a tax return?

You face up to one year in prison and up to $100,000 in fines (or up to $200,000 in the case of a corporation). These penalties also apply when a taxpayer fails to pay taxes on time or fails to supply information to the IRS.

What are the criminal penalties for making fraudulent or false statements to the IRS?

You face up to three years in prison and up to $250,000 in fines (or up to $500,000 in the case of a corporation). Making fraudulent or false statements can apply to statements made in your tax return or to government officials.

What are the criminal penalties for tax evasion?

You face up to five years in prison and up to $250,000 in fines (or up to $500,000 in the case of a corporation).

What is the difference between tax evasion and tax avoidance?

Tax avoidance is the legal process of taking advantage of strategies allowable by the tax code to reduce your taxes. Tax avoidance is therefore legal. Tax evasion is using strategies not allowed by the tax code to reduce or eliminate the taxes you pay. Tax evasion is illegal.

What are common methods of tax evasion that can result in criminal penalties?

  • Failing to report income from a side job
  • Failing to report income from rentals
  • Failing to report income paid in cash
  • Overstating deductions that do not exist, such as charitable donations not actually made

What if a person makes a mistake on their tax returns?

If you negligently make a mistake, then you still may owe civil penalties, but the government cannot convict you of a crime unless it was willful on your part. The standard of proof in showing willfulness is guilt beyond a reasonable doubt.

Can I be charged with a crime for assisting another person or entity in tax fraud?

Yes, as with most crimes, you can be charged with a tax-related crime as an accomplice if you assisted and/or encouraged another person to commit tax fraud.

Contact a New York Criminal Defense Attorney Today

The Henry Law Firm PLLC provides criminal defense to individuals and businesses throughout New York. Contact us today to schedule a confidential consultation regarding your matter.  

Do I Need My Own Lawyer in an SEC Investigation?

If your employer is being investigated by the SEC, then you likely have some questions about the SEC investigation process but may not feel comfortable asking them of your supervisor or co-workers. This is understandable, as an SEC investigation can mean significant civil penalties such as fines, permanent career and reputational damage, or loss of a job. One of the most common questions employees of a company under SEC investigation ask is whether they need their own lawyer, and they often trip themselves up by asking the wrong people to answer that question.

Your Company’s Attorneys Cannot Tell Whether You Need a Lawyer

When an employee learns that an SEC investigation is occurring, it is common for the employee to ask the HR director, the General Counsel, or even an outside law firm representing the company whether the employee needs his or her own lawyer. First, it is critical to understand that all of those people are there to serve the interests of the company, not you the employee.  Thus, it is not their job to be concerned with whether you would be better off from a legal perspective by having your own attorney.

In addition, they might not have any idea what your role in potential SEC violations were and thus whether it would serve your interests to have your own attorney or not. If company attorneys are speaking with you about events related to a potential SEC investigation (also note that the company attorneys are likely not under any obligation to tell you whether an investigation is indeed occurring or not), there is a good chance they know less than you do about potential violations at that point and are indeed speaking with you to gather that information, thus making them even less likely to be able to answer that question accurately.

The Company Attorneys Represent the Company, Not You

Beyond the issue of presenting the question of whether you need your own attorney to company lawyers, regardless of what they might say to you, the fact of the matter is that those attorneys represent the company and not you. Simply put, their allegiance and duties are directed towards representing the company’s interests, and that will always be their overriding mission.

Does this mean they are out to get you and will ultimately throw you under the proverbial bus in an SEC investigation? Not necessarily, and the company (and by extension, its attorneys) may have a strong interest in defending, so long as your interests are aligned with those of the company.

But, when push comes to shove, it is the case that they are not there to defend your interests and formulate legal strategies to protect your reputation, career, and future. In many cases, companies under SEC or other federal investigation can curry favor with law enforcement by showing that they are taking a hard line against employees in the company who have violated laws, and so penalizing and/or terminating an employee can be an action a company takes on the advice of its attorneys to reach a favorable outcome with the SEC. And this outcome may be reached on the basis of information you as the soon-to-be terminated employee provide to the company and its attorneys under the mistaken impression that doing so would help your interests.

Contact a New York White Collar Defense Attorney Today

Thus, if you have reason to suspect you face negative consequences in an SEC investigation of your employer, it is wise to reach out to your own white collar investigations attorney to discuss your options in a confidential setting. The Henry Law Firm PLLC provides white collar defense in SEC investigations to individuals and businesses throughout New York. Contact us today to schedule a confidential consultation regarding your matter.  

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