Insider Trading Defense
We Defend Founders, Executives, Family Members, and Others in Federal Insider Trading Cases Nationwide
Insider trading. Few other two-word phrases can strike as much fear in the hearts of company founders, executives, and other insiders. Facing allegations of insider trading is an extremely serious matter. The allegations alone can have significant ramifications (especially if made public); and, if the allegations can be substantiated, civil or criminal penalties could be on the table.
Most people are familiar with the concept of insider trading because of highly-publicized cases such as the Martha Stewart and Enron scandals. However, the U.S. Department of Justice (DOJ), Federal Bureau of Investigation (FBI), and Securities and Exchange Commission (SEC) investigate far more cases that don’t make national headlines. In fact, insider trading investigations are fairly common, and each year numerous “insiders” face prosecution with millions of dollars in fines and years of federal imprisonment on the table.
Former DOJ Prosecutors with Experience On Both Sides of Insider Trading Cases
Our federal defense lawyers bring centuries of combined experience to defending founders, executives, family members, and others in federal insider trading cases. This includes prior experience as white-collar prosecutors with the DOJ. Several of our insider trading defense lawyers served as high-ranking DOJ trial lawyers prior to entering private practice; and, as a result, they offer our clients deep insights into the federal government’s investigative and prosecutorial tactics and procedures.
What Constitutes Insider Trading?
Insider trading is defined as, “trading of a company’s stocks or other securities by individuals with access to confidential or non-public information about the company.” It is prohibited under federal law, as it affords corporate “insiders” the ability to unfairly profit from their access to confidential or non-public information at other investors’ expense.
In order to establish a case for insider trading, federal prosecutors must be able to prove four key elements:
- Breach of a fiduciary duty or violation of a relationship of “trust and confidence” in connection with the purchase or sale of a security. All corporate insiders either owe a fiduciary duty to shareholders or hold a relationship of trust and confidence with shareholders. Evidence of a breach of this duty or violation of shareholders’ trust and confidence is fundamental to a charge for insider trading.
- Use or possession of “material” and “nonpublic” information in connection with the purchase or sale of a security. Insider trading requires access to insider information. In order to trigger a statutory violation, insider information must be both (i) material (meaning that it would be important to investors’ investment decisions, and (ii) nonpublic (meaning that it is only available to individuals within the company or who receive the information from these insiders).
- Knowing or reckless use of the material and nonpublic information when trading in the security. In order to pursue charges for insider trading, federal prosecutors must be able to establish that the insider or “tippee” knowingly or recklessly acted on the material and nonpublic information in their possession. The ability to rely on reckless acts lowers the bar for prosecutors significantly, as it allows them to substantiate insider trading charges by demonstrating that insiders should have known that they were prohibited from trading based upon the information they had in their possession.
- Personal benefit as a result of the unlawful trade. This can either be through direct financial profit as a result of the sale, or through the receipt of compensation as a “tipper” when sharing material and nonpublic information with a corporate outsider. This is typically among the easier elements for prosecutors to prove, as prosecutors can use various investigative means to collect evidence of insiders’ securities trades and financial transactions.
Who Can Be Found Guilty of Insider Trading?
The definition of an “insider” for insider trading purposes is much broader than most people realize. While it covers corporate officers and directors, it also covers lower-level employees, friends and family members, and other outsiders who have access to material nonpublic information. Thus, the DOJ, FBI, and SEC can pursue insider trading cases against:
- Company founders
- Company officers and directors
- Company employees
- Business associates of company founders and personnel
- Friends and family members of company founders and personnel
- Employees of law firms, consulting firms, brokerage firms and other professional services firms
- Employees of printing companies and other vendors that have access to material, nonpublic information
- Government employees who have access to material, nonpublic information (through their employment or otherwise)
- Individuals who receive tips or misappropriate material, nonpublic information
Insider Trading Defenses
While federal prosecutors can pursue insider trading charges against a broad range of individuals under a broad range of circumstances, there are many possible defenses to insider trading charges as well. As defense counsel, we evaluate all possible defenses and build comprehensive strategies based on the specific circumstances presented. Examples of defenses to federal insider trading allegations include:
No Access to Inside Information
If an insider does not personally have access to material, nonpublic information (NPI), then the insider cannot be guilty of insider trading. This is a common defense in cases in which federal prosecutors target multiple insiders, all of whom are presumed to have had access to the same NPI.
Non-Reliance on Inside Information
Even if an insider has access to inside information, this does not necessarily preclude the insider from trading in the company’s securities. Non-reliance (or non-use) is a defense that will prove effective in many cases, as asserting this defense puts the onus on federal prosecutors to prove why an insider chose to exercise an option or make a purchase or sale.
Information was No Longer “Inside”
Oftentimes, NPI only remains “inside” for a limited period of time. Generally speaking, once information becomes public, then trading based on that information is no longer grounds for allegations of insider trading.
The Advice of Legal Counsel
One of the most-effective defenses to knowing or reckless use of NPI is reliance on the advice of legal counsel. If an insider seeks legal advice and makes a trade based on his or her lawyer’s determination that a proposed transaction is permissible, then the insider is not guilty of insider trading.
“Pieced Together” Usable Information
In some cases, insiders can defend against insider trading allegations by demonstrating that they “pieced together” usable information. If no individual piece of information qualifies as NPI, then using the information in the aggregate is permissible.
Under SEC Rule 10(b)5-1, insiders can conduct trades according to “pre-arranged plans”. With a pre-arranged plan in place, an insider can conduct a trade at a pre-selected time (prior to gaining access to NPI) even if the insider has access to relevant NPI at the time the trade is executed according to the plan.
Insider Trading Penalties
The penalties in insider trading cases depend on whether prosecutors ultimately decide to pursue civil or criminal charges. In civil insider trading cases, potential penalties include treble damages (three times the profit earned from the trade), fines, and other forms of monetary liability. In criminal insider trading cases, defendants can face fines of up to $5 million and up to 20 years of federal imprisonment. If charged with other related offenses (i.e. conspiracy, wire fraud, money laundering, or making false statements to federal agents), insiders can face additional fines and terms of incarceration.
FAQs: Federal Insider Trading Defense
How Do the DOJ, FBI, and SEC Uncover Cases of Insider Trading?
Federal authorities are able to uncover cases of insider trading through various means. Oftentimes, the information contained in companies’ public disclosures will suggest possible trading violations. Investor complaints and whistleblower allegations are also common triggers for DOJ, FBI, and SEC insider trading investigations.
What is SEC Rule 10(b)-5?
SEC Rule 10(b)-5 is a federal rule that establishes insider trading as a form of securities fraud under the Securities Exchange Act of 1934. This means that individuals accused of insider trading can face both civil and criminal prosecution—with penalties on par with those for other federal securities law violations.
What Information Do I Have to Provide if I Am Facing an Insider Trading Investigation?
If you are facing an insider trading investigation, you should consult with a federal defense lawyer prior to disclosing any information to federal authorities. If you have been served with a civil investigative demand (CID), subpoena, or search warrant—or if federal agents have shown up at your door—you need to speak with an insider trading defense attorney right away.
When Is It Time to Hire a Federal Insider Trading Defense Lawyer?
If you have concerns about a possible investigation, if you are currently under investigation, or if you are facing charges for insider trading, you need to discuss your situation with a highly-experienced federal insider trading defense lawyer. Our lawyers are available 24/7, and we are able to provide emergency representation when necessary.
Speak with a Federal Insider Trading Defense Attorney at Oberheiden P.c.
To speak with a federal insider trading defense lawyer at Oberheiden P.C., call 888-680-1745 or contact us online. With a national network of senior trial lawyers, we are able to represent clients in insider trading cases pending in federal jurisdictions throughout the country.