Corporate Executive Christopher Saridikis had a bright future ahead of him. That is, until he shared news with family members of an upcoming company sale to eBay. Now Saridikis is headed to jail for insider trading. Sentenced to 15 months in prison, he has agreed to pay out over $600,000, and will never again be an officer or director of any publicly traded company again. So just what is insider trading, and how can you avoid the same mistakes?
What is Insider Trading?
Illegal insider trading occurs when a company stock or security is bought or sold by a person with access to confidential or non-public information about the company. When an individual takes advantage of this insider information, it is considered a breach of their fiduciary duty. Insider trading can also include "tipping" of this privileged information to others.
Who is at Risk of Investigation for Insider Trading?
Employees and members of the company are in the primary position to gain access to non-public information, and buy or sell securities based on that information. However, it is not only the employees who can be prosecuted for insider trading.
Lawyers, stock brokers, and other professionals who do business with the company are also in a privileged position to learn insider information.
Family members and friends of corporate employees may also learn of this non-public information. While these disclosures may be made without the intent that the information be acted on, sometimes these tips are made so that friends or family make a financial gain, without the employee making a trade themselves.
Who Prosecutes Insider Trading Cases?
The initial investigations may come from the Security and Exchange Commission (SEC). The Federal Bureau of Investigation (FBI) and even the United States Postal Inspection Service may take part in the investigations. The SEC may impose civil penalties. However, criminal prosecution will come from the Justice Department and local United States attorney's office.
What are the Penalties for Insider Trading?
Under the Securities exchange Act of 1932, amended by Sarbanes-Oxley Act of 2002, an individual faces up to 20 years in prison for criminal securities fraud, and a possible fine of up to $5 million for each "willful" violation of the act. However, if the individual can demonstrate they did not have knowledge of the rule or violated regulation, only monetary fines will apply.
An individual may have to forfeit or disgorge any gains from the illegal trading. Other violations can also be asserted, including wire fraud, securities fraud, tax evasion, and obstruction of justice. These additional violations can add further penalties including additional jail time.
How to Avoid Charges for Insider Trading?
A company is required by law to report trading by company officers, directors, or other members with access to privileged information. These insiders have a fiduciary duty to the company, and have to report trades to the SEC.
Although family or friends are not "insiders", by passing along insider information, or "tipping," they are assigned the same duty as the insider. However, for prosecution the person receiving the tip has to have knowledge that the information was company property.
How do Investigators Draw a Link Between the Insider and the Trader?
While the insider and the trader can be the same person, insiders face greater scrutiny over their trades of company stocks. Sometimes individuals will create distance between the insider and the trader, to attempt to avoid detection.
However, investigators will attempt to establish a link between the insider and trader, often using a combination of evidence. Investigations can look to telephone records, emails, and chats for evidence of communication. They will also look to financial transactions, such as money transfers, taking place after communication of the material, nonpublic information. Investigators can also use cooperating witnesses to provide information. In many cases, the government will attempt to get either the trader or the insider to testify against the other.
What to do When You Learn of an SEC Investigation?
Whether as the target of an SEC investigation, a witness, or upon receiving a subpoena, you may not know where to turn. Once you become aware of an investigation, legal counsel can help to make the difficult decisions in what to do next. You must decide how to respond to the company's internal investigation, and the SEC's investigation. The question of cooperation with the government is a critical decision, which could lead to resolution or could expose the individual to criminal and civil liability.
Defending Charges of Insider Trading?
Some defenses against insider trading include: a pre-existing plan to trade securities; contractual obligations for trading; the information was already public; or in the case of "tipping", they did not know the information was confidential.
The law surrounding insider trading and securities fraud are complicated and specialized. An experienced attorney focused in this practice area will be able to clarify the issues facing a client investigated by the SEC or facing prosecution from the Justice Department. A dedicated lawyer can help identify the elements required for insider trading, and make the case in defending their client.