Insider trading is when someone buys or sells a company’s securities based on information that the public doesn’t know. It’s illegal because it usually involves a breach of duty and serves to give individuals a competitive edge.
Read the rest of this article to learn more about insider trading and what to do if you’re involved in it.
When is Insider Trading Legal?
Insider trading is defined as legal when it involves corporate insiders, such as company board members, buying or selling stock due to federal rules, provided they are disclosed.
It’s essential for companies to follow the Securities and Exchange Commission (SEC) guidelines to ensure their insider trading stays legal.
By comparison, illegal insider trading is when people don't comply with regulations and make use of information that isn’t disclosed to the public.
What are the Main Types of Insider Trading?
Some of the most common types of insider trading that occur include:
- Direct trading. An insider trades securities based on information they had access to within the company.
- Tipping. This could be described as a more indirect form of insider trading. It involves an insider disclosing private information with another party who trades with it.
- Misappropriation. A party trades because of information they know was illegally secured.
In order for behavior to be considered insider trading, it must contain the following elements.
- The person accused of insider trading must be an insider with access to the sensitive information.
- The information they used or stole is non-public and material. This includes financial information or details about mergers.
- The person used the information to give others tips or used the information for their own trades.
How is Insider Trading Investigated?
Insider trading is investigated by the SEC, which is responsible for enforcing securities laws. They have various units in place to investigate illegal activity, such as the Analysis and Detection Center (A&D) which uses advanced data analytics to spot suspicious trading behaviors.
The SEC, and similar organizations, will work with the Department of Justice (DOJ) to deal with prosecuting insider trader offenders.
A typical insider trading case will be investigated via the following processes.
Market Surveillance
When systems detect strange trading activity, data analysis is conducted. These serve to spot patterns in trading and links between traders and non-public information that they might be using.
Technological advancements are helping systems to become stronger and smarter at picking up any unusual or peculiar trading patterns.
Building Evidence
An in-depth investigation will build a case against the individual, such as by checking their trading records, phone statements, and internet search history, and by conducting witness interviews. There could be a subpoena for records to aid in the investigation.
Collaboration
When someone is caught for illegal insider trading, the SEC and DOJ will work together to enforce penalties and criminal sanctions, such as jail time.
There are both civil and criminal penalties involved when charging insider traders. Civil penalties include returning profits gained from the illegal behaviors, sometimes with hefty penalties added to the amount, and injunctions. This is when the court orders an individual to stop the fraud.
By comparison, criminal penalties involve imprisonment and fines, which can be as much as millions for individuals or corporations to pay.
What to Do If You’re Involved in Insider Trading?
If you’re involved in insider trading or you’re being accused of it, you should consult with a lawyer immediately. They will help you to navigate the complex laws and regulations involved in insider trading to provide clarity for your situation. They will also help you to explore your options and build a strong defense.
Being involved in this type of investigation can feel scary and stressful. It can cause emotional distress, while being extremely time-consuming, so you’ll want to have a reputable lawyer on your side.
Besides contacting a lawyer, here are some important things you should do.
Preserve Evidence
You can be prosecuted for not keeping information and evidence that helps the authorities to conduct their investigations. There have been cases of traders being prosecuted for not keeping information such as chat histories on their devices.
Build a Strong Defense
Your lawyer will help you to deal with the investigation and throughout the entire process.
After your information and evidence is reviewed, the investigators will present the findings to your SEC review board. They will decide on penalties or direct the case to federal court.
Your lawyer will help you to build a defense, which can include stating the following:
- The information wasn’t important or significant enough to influence investor choices.
- The defendant didn’t have insider information at the time of the trade.
- The information had already become public before it was used or known by the defendant.
- The defendant didn’t have an intention to defraud anyone.
Avoid Mistakes
Without a legal background, it’s easy to make missteps during the investigation. Your lawyer can help you to ensure you don’t make any mistakes, especially because how you respond to the authorities can affect your outcome.
They will help you to protect your rights, prevent errors, and address the allegations in a legally sound and convincing way.
Other things your lawyer will do for you include:
- Challenging the evidence collected by the authorities. They will question if the information is accurate.
- Proving that you didn’t engage in fraud on purpose.
- Showing your lawful behavior, such as legally-sound business practices you’re involved in to strengthen your reputation.
- Negotiating on your behalf. Depending on your specific case, your lawyer could be able to reduce damages owed by you by negotiating for a settlement.
Do you need a lawyer for insider trading?
If you’re involved in an insider trading accusation, you should contact a lawyer on ContractsCounsel, an online legal network connecting clients with professional, reputable lawyers on the platform.
All lawyers have been vetted on the platform, and they’ll be able to build a strong defense to help you navigate a stressful insider trading case.
