What Constitutes Illegal Insider Trading?

Insider trading is one of the more well-known white-collar crimes, thanks to many high-profile cases getting major media attention. The stock market is meant to give consumers a fair chance at investing in companies, and anything that dilutes trust in that system is a threat to the system itself. Insider trading doesn’t just artificially inflate or deflate the value of stocks, it threatens the entire American economy.

If you’ve been accused of insider trading or you are the target of an investigation, it’s time to talk to a white-collar defense attorney in Alabama. Call Kirk Drennan Law at 205-803-3500 to schedule a consultation now.

An Overview of This White-Collar Crime

Insider trading occurs when someone with secret, not publicly available, or “insider” knowledge uses that information to manipulate the market. When someone buys a company’s stock or security because of insider information, they are engaging in insider trading. It’s also considered insider trading if someone with this knowledge shares it with others, thereby allowing them to benefit financially from it.

The primary offenders of this crime include employees of a company that is public or about to go public, stockholders and executives, financial professionals contracted by a company, and others who have direct or indirect access to a company’s financial information. Friends and family members of these individuals could also be investigated for insider trading.

It’s important to note that white-collar crime is not usually the only charge brought against an offender. The SEC and FBI investigate these claims in extensive detail, and numerous other charges may be brought against you if you are accused.

Other charges that are often brought against someone accused of insider trading include bank fraud, wire fraud, mail fraud, racketeering, money laundering, securities fraud, and tax fraud. If wire or mail fraud are suspected, the USPS may also be involved in the investigation of your alleged crimes.

Who Investigates Insider Trading Claims?

The Security and Exchange Commission (SEC) is the agency that generally receives tips on insider trading and monitors the market. As a result, they conduct investigations of alleged insider trading. This information is then passed onto the FBI. The FBI conducts criminal investigations while the SEC may force offenders to pay civil penalties. If you are arrested for insider trading, charges generally come from the U.S. Attorney’s office or the Justice Department.

Since insider trading is a federal crime, the penalties are stiff. Fines could be as high as $5,000,000 for individuals and $25,000,000 for entities. Prison time is also likely, and offenders could be sentenced to up to 20 years in federal prison.

Beyond that, those who are convicted could also face civil penalties and sanctions. This may involve paying back everything gained from insider trading or repaying losses one would have suffered if they had not had insider knowledge. Civil penalties may include treble damages, which means penalties up to three times the amount gained.

That isn’t the end of the potential consequences. A party negatively impacted by insider trading can also bring a civil suit against the liable party or entity.

Examples of Insider Trading

• Following the market crash of 1929 that led to the Great Depression, Albert H. Wiggin was investigated for insider trading. As the head of Chase National Bank, he shorted 40,000 shares of the company. Shorting shares allows a company or individual to benefit when the price of a security is likely to drop in the future. By shorting his own company’s stocks, Wiggin made millions by intentionally destroying his own company. The Security and Exchange Act came about because of Wiggin’s actions and the actions of many other corrupt investors.
• Martha Stewart sold 4,000 shares of a pharmaceutical company just days before the FDA announced that the company’s cancer drug would not be approved. The stock crashed and Martha avoided major losses. She was sentenced to prison time and paid millions in fines.
• Jeffrey Skilling, CFO of Enron, was convicted of insider trading. He intentionally misled the public about his company’s financial woes, allowing him to keep stocks high while he dumped his stocks to avoid major losses.

Facing Criminal Charges? Call Kirk Drennan Law

If you are convicted of insider trading, you face massive financial penalties and prison time. This is why it is crucial to work with a white-collar crime lawyer to minimize the damage. Set up a consultation with our firm now by calling us at 205-803-3500 or contacting us online.