Is insider trading a serious crime?
It is considered a criminal offense in most cases under the theory that it is not fair to investors who do not have the benefit of “inside” information. Unlike many types of investment fraud, insider trading does not target individual investors as victims.
Insider trading violates trust and fiduciary duty, leading to serious legal implications. The victims are often everyday investors — and the economy as a whole. Insider trading has been a hot-button issue for many years.
Former Congressman Sentenced To 22 Months In Prison For Insider Trading. Damian Williams, the United States Attorney for the Southern District of New York, announced that STEPHEN BUYER, a former Indiana Congressman, was sentenced today to 22 months in prison by U.S. District Judge Richard M. Berman.
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.
Insider trading has been associated with unethical trading behavior by people who have information about a company that could affect the market prices of its issued securities.
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.
Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not available to the general public. Many jurisdictions require that such trading be reported so that the transactions can be monitored.
Insider Trading Sentencing Guidelines
In the 1990s, the median insider trading sentence was less than one year in jail. The median increased to 18 months in the early 2000s. Now it's closer to three years in jail, underscoring the need for legal guidance if you've been charged with insider trading.
As to the criminal penalties for insider trading, the maximum sentence for an insider trading violation is 20 years in federal prison.
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.
What is the most severe criminal penalty for insider trading?
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.
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
The issue is there's not a specific law defining what insider trading is, which makes it difficult to prosecute cases as they arise. Additionally, a major component of prosecuting a case is proving intent, which requires a lot of evidence to support the claim.
Key sources of evidence include trading records and communication records. Trading records are a cornerstone of insider trading cases. These documents establish a comprehensive trail of financial transactions, highlighting unusual patterns or timing that could indicate insider knowledge.
It is considered a criminal offense in most cases under the theory that it is not fair to investors who do not have the benefit of “inside” information. Unlike many types of investment fraud, insider trading does not target individual investors as victims.
A blackout period in financial markets is a period of time when certain people—either executives, employees, or both—are prohibited from buying or selling shares in their company or making changes to their pension plan investments. With company stock, a blackout period usually comes before earnings announcements.
The individual charged with insider trading must have been aware that the information was material and nonpublic. For example, if you overhear a conversation on a train but have no knowledge that it is insider information, you cannot be convicted if you act on this information.
The median insider in our sample earns annual abnormal profits of $464 per year. Focusing on round-trip transactions, which have an average holding period of 2.4 years, we find that insiders placing such trades realize average abnormal profits of $128,000 a year and median abnormal profits of $5,000 a year.
Research shows that insider trading is common and profitable yet notoriously hard to prove and prevent. A recent study estimated that overall only about 15% of insider trading in the U.S. is detected and prosecuted but suggested more of it is coming to light in recent years because of increased enforcement.
What is an example of insider trading?
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.
Stewart, who sold her ImClone stock in 2001—allegedly on a tip from ImClone founder Sam Waksal—got $58.43 a share, or a total of $229,513. She ended up being convicted in 2004 of lying to federal prosecutors about the circ*mstances surrounding the sale and spent five months in prison.
Since Martha Stewart apparently feared her trading in ImClone stock was illegal, she did not have to cooperate with federal investigators. Without her statements to investigators, there was no basis for her conviction.
| Samuel D. Waksal | |
|---|---|
| Board member of | Cadus Corporation, Antigenics Inc., Test University, Rockefeller University |
| Criminal charge(s) | fraud, conspiracy, perjury |
| Criminal penalty | 87 months imprisonment |
| Criminal status | released |
Understanding White-Collar Crime
High-profile individuals convicted of white-collar crimes include Ivan Boesky, Bernard Ebbers, Michael Milken, and Bernie Madoff. Their crimes have included insider trading, accounting scandals, securities fraud, and Ponzi schemes.
