A security is a general term referring to:
- Shares of stocks;
- Bonds and debentures; and
- A variety of interests involving an investment with the return primarily or exclusively dependent upon the efforts of a person other than the investor.
Securities law is made up of the multiple federal laws and regulations that govern the sale, purchase, and creation of security interests. These rules are all based on one straightforward concept: that all investors, whether large institutions or private individuals, should have access to specific basic facts about an investment before buying it. This is because it is only through the steady flow of timely, comprehensive, and accurate information that people can make sound investment decisions for themselves.
The agency that is empowered with the sole responsibility of enforcing securities law throughout the United States would be the Securities and Exchange Commission, or the SEC. The overall goal of the SEC is to protect investors and maintain the integrity of the securities markets. This is accomplished by requiring public companies to disclose meaningful financial and other associated information to the public, so that they can evaluate security investments.
Each year the SEC brings between 400 and 500 civil enforcement actions against individuals and companies that are in violation of securities law. The most common examples of infractions include:
- Insider trading, which is further discussed below;
- Accounting fraud; and
- Providing false or misleading information regarding securities, as well as the companies that issue them.
Securities law violations are considered to be serious criminal infractions that can result in both incarceration and substantial criminal fines.
What Is Insider Trading?
In legal terms, insider trading may refer to either illegal or legal conduct:
- Legal Insider Trading: Legal insider trading occurs when corporate insiders buy and sell stock within the corporation. Corporate insiders generally include the officers, directors, employees, and shareholders, although who constitutes an “insider” is also discussed later on. It is important to note that in order for these securities trades to be considered legal, they must be reported to the Securities Exchange Commission; or
- Illegal Insider Trading: Illegal insider trading occurs when a person, who has special access to or is aware of unpublished corporate information, uses that information in order to make a profit by selling or buying corporate securities. If they wrongfully obtain this nonpublic information, the trader has committed insider trading.
As such, a person can be considered guilty of insider trading for “tipping,” or publicizing such nonpublic corporate information; or, by trading securities on the “tip.” It is also possible to commit insider trading when you have no affiliation at all with the corporation.
Some examples of insider trading cases that the Securities Exchange Commission (“SEC”) has brought include:
- Corporate officers, directors, and/or employees who traded the corporation’s securities after becoming aware of major, nonpublic corporate developments;
- Friends, business associates, family members, and other such outsiders who traded securities on “tips” that they received from corporate officers, directors, and/or employees;
- Employees of other professional practices (such as law, banking, brokerage, and printing firms) who traded corporate securities on confidential information that was given to them in exchange for their services;
- Government employees who traded securities based on nonpublic corporate information that they had access to by virtue of their government employment status;
- Employees of financial printers who traded corporate securities based on confidential information that was learned during the course of their employment; and
- Other people who misappropriated, and took advantage of, confidential information from their employers.
Insiders can be any shareholders who hold more than five percent of a company’s voting stock. Additionally, insiders are any corporate employees who have access to confidential corporate information. Any information that has an effect on a company’s stock price, or that might influence investor decisions and that is not open to the general public, is considered to be important confidential corporate information.
To reiterate, insiders must file with the Securities Exchange Commission and report their trading activity in order for their activity to be considered legal insider trading.
What Are Some Of The Legal Penalties For Insider Trading Violations?
Insider trading can result in various legal penalties. Because insider trading transactions can often cause the company significant financial losses, the employee or corporate director responsible for the act may be sued by the company for the losses that were caused by the inside trade. In such cases, the worker may be required to return their profits to the company, as well as pay for additional expenses that are associated with the trade.
Under criminal statutes, insider trading is generally considered to be a white collar crime. White collar crime refers to a subset of criminal law addressing crimes that are committed by people in business and government. These crimes are generally non-violent in nature, and involve motives of financial gain.
Most white collar crimes are prosecuted by government lawyers, or prosecutors, who consider the nature of the crime and information provided by the arresting officers’ police report in order to determine if and what charges to file. For felonies, prosecutors may use grand juries to make the charging decisions.
In terms of legal penalties for white collar crimes, such as insider trading, this generally includes but may not be limited to:
- Compensation payment made to the victim;
- Mandatory community service;
- Incarceration in a county jail facility, generally not to exceed a sentence of one year;
- Incarceration in a federal prison facility for sentences which exceed on year; and/or
For sentences that are imposed by a judge, the sentencing judge will consider several different factors when determining the punishment for white collar crimes:
- The nature of the crime;
- Input from the prosecutor for especially serious felonies;
- The defendant’s criminal history, or lack thereof; and
- The defendant’s social, economic, and/or other personal circumstances.
Insider trading is generally considered to be a misdemeanor charge, which can result in criminal fines and/or a sentence in jail. Additionally, the defendant may suffer other consequences outside of the law, such as a loss of their job and difficulties in finding similar lines of work in the future.
Are There Any Defenses To Insider Trading Transactions?
One of the most commonly used defenses to insider trading charges would be that no fiduciary duties were broken. To reiterate, insider trades may be conducted legally, the main requirement generally being that the trade is reported to the SEC. As such, proper reporting of an inside trade can prevent legal claims and save both the employee and their company a considerable amount of time and resources.
If you are unsure regarding the status of a trade, it is best to either refrain from making the trade or to ensure that the trade will not be considered illegal. In order to do so, it may be necessary to consult with a lawyer in order to determine the legal status of a specific financial decision or corporate action. Additionally, it is important to remember that insider trading laws can be subject to frequent change over time.
Do I Need An Attorney If I Am Involved In An Insider Trading Transaction?
If you are involved in insider trading, or are being accused of committing illegal insider trading, you should consult with an experienced and local securities attorney. A local lawyer can inform you of your legal rights and options according to your state’s specific finance and securities laws. An attorney will also be able to represent you in court, as needed.