How serious of a crime is insider trading?
Insider trading is the selling or purchase of stocks and other securities based on non-public, material insider information. People found guilty of Illegal insider trading can receive up to 20 years of jail time and a $5 million fine.
Allegations of insider trading can have severe criminal and civil repercussions. Federal courts impose strict penalties, including steep fines and prison terms. A criminal conviction may also lead to civil litigation.
Burden of Proof in Insider Trading Cases
The government must prove that a defendant bought or sold one or more securities “on the basis of material nonpublic information about that security or issuer,” according to the SEC's Rule 10b5-1, 17 C.F.R. § 240.10b5-1.
If someone is caught in the act of insider trading, he can either be sent to prison, charged a fine, or both. According to the SEC in the US, a conviction for insider trading may lead to a maximum fine of $5 million and up to 20 years of imprisonment.
On June 17, 2004, a judge sentenced Martha Stewart to five months in prison and two years of supervised release, along with fining her $30,000. Stewart went to prison proclaiming her innocence, which she still maintains to this day.
Insider trading happens when a person or company uses information that is not available to the public to make a profit or avoid losses in financial markets. The US Securities and Exchange Commission prosecutes approximately 50 insider trading cases per year, and there are harsh penalties of up to 20 years in prison.
Penalties for insider trading can be severe.
According to the SEC, a conviction for insider trading can result in: Fines of up to $5 million. Imprisonment of up to 20 years. Being banned from serving as an officer or director of a public company.
Understanding Insider Trading: The Federal Criminal Statute
Insider trading charges (usual charged Federally as Securities Fraud under Title 18, United States Code, Section 1348) involve the intentional trade (sale or purchase) of any security based upon material, non-public information.
Insider trading cases typically involve the use of circ*mstantial evidence to prove the possession of material, non-public information (MNPI). On the other hand, proof of fraudulent intent is often direct.
The SEC uses sophisticated tools to detect illegal insider trading, especially around the time of important events such as earnings reports and key corporate developments.
What is the maximum sentence for insider trading?
As to the criminal penalties for insider trading, the maximum sentence for an insider trading violation is 20 years in federal prison. The maximum criminal fine for individuals is $5 million, and the maximum fine for a company is $25 million.
A lawyer who represents the CEO of a company learns in confidence that the company will experience a substantial revenue decline. The lawyer reacts by selling off his stock the next day, because he knows the stock price will go down when the company releases its quarterly earnings.
It's not a victimless crime. You don't have to be directly trading on the stock exchange to be affected by insider trading.
Whistleblowers serve as an invaluable layer of detection in identifying and combating insider trading. These individuals, who often work within the organization where illegal activities are taking place, come forward to report misconduct to regulatory bodies like the SEC.
Prosecutors had alleged that Stewart committed securities fraud when she lied about why she sold her ImClone stock. They claimed that her false statements were made in an effort to maintain her innocence and bolster the stock price of her own company, Martha Stewart Living Omnimedia, The New York Times reported.
Insider trading is a type of market abuse when an advantageous trade is made based on material nonpublic information. The issue is there's not a specific law defining what insider trading is, which makes it difficult to prosecute cases as they arise.
The 43 insider trading cases, against 93 individuals, represented 9% of the enforcement cases brought in 2022, which is in-line with the historic average of insider trading cases comprising between 8% and 10% of the SEC's cases.
Complaints From Traders
Such trades before big events can signal to regulators that someone is trading on inside information; the big losses taken by investors without material nonpublic information on the other end of these trades also cause such investors to come forward and report the unusual returns.
Securities violations can include insider trading, accounting fraud, and securities fraud. Penalties and disgorgements from SEC actions go to the U.S. Treasury, the SEC, and victims' and whistleblowers' funds. In 2021, the SEC collected $1.4 billion in penalties and $2.4 billion in disgorgements.
Insider trading is a type of white collar crime wherein individuals use non-public information to make stock trades for their own financial gain. This could involve company executives using confidential information about their organization's financial performance to buy or sell stocks, resulting in personal profits.
Who is not allowed to do insider trading?
Essentially, insider trading involves trading in a public company's stock by someone with non-public, material information about that stock. Insider trading is illegal, but if an insider trades their holdings and reports it properly, it is an insider transaction, which is legal.
The Dirks test stems from the 1983 Supreme Court case, Dirks v. SEC, which established a blueprint for evaluating insider trading. The Supreme Court ruled that a tipee assumes an insider's fiduciary duty to not trade on material nonpublic information if they knew or should have known of the insider's breach.
The SEC claimed Cuban used insider information he received from Mamma.com CEO Guy Fauré to avoid a $750,000 loss by selling all of his shares in the company one day before it announced a private stock offering, which diluted the value of the shares.
1. Martha Stewart: Martha Stewart is perhaps one of the most famous cases of insider trading. Stewart, who was a well-known businesswoman and television personality, was convicted of insider trading in 2004.
1. Jeffrey Skilling. Of the many crimes Jeffrey Skilling was convicted of during his time as the chief financial officer of Enron, insider trading was the most egregious. That came when he duped the investing public by hiding the company's serious financial troubles.
