If you remember the 1987 movie Wall Street, with Michael Douglas and Charlie Sheen, you have an idea of what insider trading is and why it’s dangerous. You may also know that TV and lifestyle icon Martha Stewart served jail time in 2006 for her role in an insider trading scandal. Do you really know what insider trading is, though, and why being accused of that is something you will want to consult a Seattle white-collar crimes criminal defense attorney about?
Understanding the Concept of Insider Trading
Buying and selling securities such as stocks or commodities futures is a common method for individuals and institutions to invest and potentially earn significant returns. However, the legality of these transactions depends on the nature of the information used to make these trades.
Material Information: This refers to any information that a reasonable investor would consider important in making a decision to buy, hold, or sell securities. Examples of material information include undisclosed earnings, major management changes, or potential mergers and acquisitions.
Insider Definition: An insider is typically defined as any officer, director, or significant shareholder (holding 10% or more of the company’s shares) of a publicly traded company. Additionally, anyone who receives confidential information from such insiders could also be considered an insider if they trade based on that information.
Legal vs. Illegal Insider Trading:
Illegal Insider Trading occurs when insiders buy or sell securities based on material, non-public information, thereby exploiting information not available to the general public. This can also extend to individuals who are not formal insiders but have access to confidential information (sometimes referred to as “tippees”).
Legal Insider Trading happens when insiders buy or sell shares but report these trades to the appropriate regulatory bodies, such as the Securities and Exchange Commission (SEC), in a timely manner, following all regulatory requirements. The disclosure of these trades makes the information public, thus leveling the playing field for all investors.
SEC Rules: Compliance with SEC rules involves adhering to requirements like the timely filing of Form 4, which insiders must use to report trades. Insiders must also adhere to corporate blackout periods, where no trading is allowed around the release of significant corporate news.
In essence, while insider trading can be a pathway to substantial financial gain, it must be conducted transparently and within the bounds of the law to maintain fair and efficient markets.
Penalties and Consequences of Insider Trading
Insider trading laws have evolved significantly over the years, especially following the introduction of The Insider Trading Sanctions Act of 1984. Prior to this act, the Securities and Exchange Act of 1934 was the guiding statute, which primarily focused on compensating victims of insider trading rather than imposing harsh penalties on the perpetrators. The 1984 legislation marked a pivotal change by increasing the fines dramatically—from $10,000 to $100,000—to deter insider trading by focusing on punishing the wrongdoers.
Today, the penalties for insider trading are even more severe. If convicted, an individual may face up to twenty years in prison and fines up to $5 million. Additionally, offenders can be subjected to civil lawsuits initiated by the SEC or company shareholders. This stringent approach underscores the seriousness with which insider trading is regarded and the strong measures in place to combat it.
The Role of a White-Collar Crimes Defense Attorney in Insider Trading Cases
White-collar crime is still a crime. If the thought of being caught and convicted – meaning you face jail time, along with fines and possible sanctions on your ability to do business – scares you, call us. You need an experienced attorney to protect you from the worst punishment you may receive. Contact Jennifer today for a consultation.