Insider trading is the unlawful stock trading in a publicly held company by a person with inside or advanced information based on their status as an insider. Such transactions are unlawful because they are unfair and damage public trust in the securities market. Insider trading refers to transactions in securities of publicly held corporations by persons with inside or advanced information on which the trading is based.
Usually, the trader is an “insider” with an employment or other relationship of trust with the corporation. For example, suppose an employee of a corporation learns that their company will enter a merger agreement with a rival competitor. With this knowledge, it buys shares of stock with the expectation that the value will increase after the merger agreement becomes public knowledge. In that case, the employee abuses their insider status and engages in insider trading.
What Is a Security?
Security is a general term that refers to shares of stocks, bonds and debentures, and various interests that involve an investment with the return primarily or exclusively dependent on a person’s efforts other than the investor.
What Is Securities Law?
Securities law represents the multiple federal laws and regulations that govern the sale, purchase, and creation of security interests. These rules derive from a simple concept: all investors, whether large institutions or private individuals, should access certain basic facts about an investment before buying it.
People can make sound investment decisions only through the steady flow of timely, comprehensive, and accurate information.
Securities Law Violations
The SEC brings between 400-500 civil enforcement actions against individuals and companies that violate the securities laws each year. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and companies. Securities law violations are also severe criminal infractions resulting in incarceration and significant fines.
Enforcement of Securities Law
The agency entrusted with the sole responsibility of enforcing securities law throughout the United States is the Securities and Exchange Commission (SEC). The primary mission of the SEC is to safeguard investors and maintain the integrity of the securities markets by requiring public companies to disclose meaningful financial and other data to the public so they can assess security investments.
What Law Criminalizes or Penalizes Insider Trading?
Insider trading is a federal crime and is therefore prosecuted in federal court. The Securities and Exchange Commission (SEC) executes federal laws banning insider trading.
Additionally, some states, California and Delaware, have their own regulations on insider trading. These laws often permit the company to recover from the person illegally trading to recover damages and profits from that individual.
What Is the Importance of the Securities Exchange Act?
The Securities Exchange Act (SEA) created the Securities and Exchange Commission (SEC). The primary goal of the SEC is to make sure a market is a fair place for investors to put their cash in the hope of profitable returns.
The SEC uses the power given to it by the SEA to regulate brokerage firms, transfer agents, clearing agencies, and the nation’s securities self-regulatory organizations, such as the various stock exchanges.
How Does the SEC Regulate These Different Groups?
The SEC regulates these groups by demanding companies with over $10 million in assets and more than 500 owners of securities to make periodic statements to the SEC. The information required for disclosure is generally described in the Securities Act of 1933 and involves company balance sheets, budgets, and a description of the business and its objectives.
When a public company has a stockholder vote for the election of a board of directors or any other corporate action, the company must disclose information about the matters to be voted upon to the SEC.
Also, any investor who wants to buy more than 5% of a company’s shares of stock, considered a controlling interest in the company, must submit data to the SEC.
The objective of all this disclosure of information to the SEC is to allow the Commission to make sure it is all truthful and then make the knowledge available to the general public so that investors can make educated conclusions about where they want to put their money.
Does the Act Prohibit Any Specific Kinds of Action?
Like other securities laws, this Act restricts various types of securities fraud. In particular, it disallows insider trading. This kind of trading transpires when an investor purchases or sells securities based on details about the company or securities not available to the general public.
What Are the Penalties for Insider Trading?
The SEC can obtain a court order forcing a person convicted of insider training to return all the profits they made from their criminal transaction. Furthermore, the SEC can also ask the court to impose a fine of up to three times the realized profits. Offenders may also face imprisonment and other criminal penalties since insider trading is considered a white-collar crime.
State law might also permit companies to maintain a cause of action against an officer, director, or controlling individual in the company. These laws usually authorize the recovery of profits and a penalty.
What Is White Collar Crime?
The term “white-collar crime” refers to nonviolent crimes typically committed for financial gain. According to the FBI, “these crimes are characterized by deceit, concealment, or violation of trust.” These crimes are typically motivated by either gaining money or avoiding losing money, property, or services. Yet, they may also be motivated by a need to secure a personal or business advantage.
The term itself is defined as a “crime committed by a person of respectability and high social status in his occupation.” Historically, white-collar workers have been defined by office jobs and management, while blue-collar workers traditionally wore blue shirts while working in more physically demanding jobs.
White-collar crimes have grown exponentially as new technology, and financial products have created new means of committing such crimes. Additionally, the internet facilitates multiple new white-collar crimes, such as fraudulent emails requesting help by sending a substantial amount of money.
Some definitions of white-collar crime only include offenses by an individual to benefit themselves. Nevertheless, the FBI defines these crimes as “large-scale fraud perpetrated by many throughout a corporate or government institution.” The agency names corporate crime among its highest enforcement priorities because these crimes cause significant financial losses to investors. Additionally, the FBI states that these crimes have the potential to cause considerable damage to the U.S. economy, as well as investor confidence.
What Are Some Examples Of White Collar Crime?
There are a wide variety of crimes that would constitute a white-collar crime. In general, some of the most common examples of white-collar crime include:
- Criminal Fraud: Criminal fraud involves a scheme intended to cheat or deceive another individual or entity. This is done to obtain a financial or similar type of gain. According to criminal fraud law, any action intended to deceive another through false representation of fact, resulting in legal detriment to the person who relied on the information, could be considered an act of criminal fraud. Just a few specific examples of criminal fraud include identity theft, forgery, and perjury;
- Embezzlement: Embezzlement occurs when a person entrusted to handle the finances of another person or business illegally takes that money for personal use. The crime is most commonly committed in situations involving employees with access to their employer’s checks, cash, or bank accounts.
- Racketeering: Racketeering is the operation of an illegal business, or racket, generally associated with organized crime. A few examples of criminal rackets include importing and selling illegal drugs, prostitution rings, and gambling. Additionally, protection rackets involve a criminal organization extorting money from businesses for “protection” against crimes, which the criminal organization itself would most likely commit;
- Securities Fraud: Securities fraud is any fraud used in connection with the sale of a security. Securities fraud law is generally intended to prevent anyone from using a scheme to defraud, make untrue statements, or fail to make a statement that deceives investors.
How Can a Lawyer Help?
If you have been accused of insider trading or another white-collar crime, a securities attorney can advise you of your legal rights and defenses. Additionally, if you face a civil action for insider trading or suspect that someone in your company traded illegally, a business litigation lawyer can assist with your case.