Insider Trading

Insider Trading


Many people get involved in the stock market and other securities activities to invest and make money.

Sophisticated investors study news and market trends to find better securities and other investments for their portfolios. As with any investment, finding out all you can before you invest is essential.

Sometimes investors want to get ahead of the game and find the next big return. Research and due diligence are essential to understanding a company and its stock or other type of investment. However, using information that has not yet been made public to get higher returns on buying and selling stocks may be illegal.

The Securities and Exchange Commission, or SEC, is the agency that investigates and prosecutes cases of insider trading and other securities-related frauds, based on a variety of federal statutes and regulations. Insider trading is a federal crime that includes harsh penalties such as prison time, high fines, and forfeit of all financial gains, called “disgorgement.”

What Is Insider Trading?

If you have “material” information about a company that hasn’t been made publicly available yet, and use that information in buying and/or selling that company’s stock, chances are it’s insider trading.

This is especially true if the information could be used to influence an investor’s decision to buy or sell a company’s stock.

The SEC defines insider trading as, “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non-public information about the security.” One of the SEC’s goals is to ensure that the marketplace is fair. Insider information and trading gives the “insider” an unfair advantage over other investors, who do not have the same information. Someone engaged in insider trading may potentially reap bigger profits that are unfair to other investors without access to that information.

When someone exploits critical information that is not public about a company and either profits from the information, passes it to others to profit, or uses information “tipped” to them by an insider, they have engaged in insider trading.

Who Is Considered An “Insider?”

The SEC considers directors, executives, and anyone else who holds more than 10% of any class of a company securities or has information about a company as insiders.

Within ten days of becoming an insider, that person must file SEC Form 3, Initial Statement of Beneficial Ownership of Securities.

However, there are other ways for someone to be considered an “insider.”

Some “insiders” in financial services engage in insider trading, such as a stockbroker, but not always. Someone engaging in insider trading can be nearly anyone who has access to “material, non-public information” that could impact the security either positively or negatively were it known publicly, such as:

• Financial problems such as loan defaults or possible bankruptcy

• Changes in upper management

• Upcoming buyouts, mergers, and other proposed actions

• Upcoming announcements of new products or services

Whether they use it themselves or pass the information to others, insider trading is a federal crime.

For instance, the SEC and the FBI prosecuted a man in Houston, Texas for insider trading who eavesdropped on his wife’s confidential business calls while she worked from home. He used that information to purchase and sell over 46,000 shares of his wife’s company stock. That transaction netted him $1.7 million in profits. He was tried and convicted, and sentenced to 24 months in prison and disgorgement of the $1.7 million gains from the activity.

When Is Insider Trading Legal?

There are instances where insider trading might be legal, if the person trading abides by the SEC rules. If an insider makes a trade, they are required to file a Form 4, Statement of Changes in Beneficial Ownership, within two days of the transaction. This is a notification to the public that an insider acted on a security.

The trade becomes illegal when the insider does not properly file the form, or if someone passes along material non-public information before the company makes it public, and using it for buying or selling stocks.

Famous Cases of Insider Trading

Many prominent names have been associated with insider trading. Lifestyle expert and entrepreneur Martha Stewart notably accepted a five-month prison sentence in 2003. In its complaint, the SEC alleged that Stewart received an illegal insider tip from her stockbroker and sold stocks to avoid financial losses. Stewart and her stockbroker were sanctioned by the SEC and charged separately for the false statements about the stock sale, which led to their incarceration. Following her incarceration, she continued running her companies, hosting her TV show, and publishing books and signature magazines.

Another case was the late Ivan Boesky, who engaged in insider trading during the 1980s. Boesky was a stock trader who famously paid a contact at a broker-dealer with suitcases of cash in exchange for non-public information on mergers and acquisitions. Boesky used this information to bet on stocks of companies that were rumored to be targets of corporate takeovers.

After his arrest, he cooperated with the government in the cases of others involved in insider trading and other securities fraud, including Michael Milken, nicknamed the “Junk Bond King.” He served 20 months in a minimum security prison and paid fines of $100M.

Penalties for Insider Trading and other Securities Fraud

If you are accused of insider trading, understand that these are federal charges with harsh penalties. You could face up to 20 years in a federal penitentiary and fines of as much as $5 million. A business can face fines of up to $25 million. Additionally, you could be barred from serving as an executive at any publicly traded company. In the case of Martha Stewart, she stepped down as chairman and chief executive, role but remained as “chief creative officer” and director. 

Defense Against Federal Charges of Insider Trading

The stock and securities market is highly regulated. Even an accusation of insider trading can be devastating, especially if you’re a business owner. At Farkas & Crowley, we have experience defending clients on many types of federal charges, including insider trading. Common defenses include:

• The trading was actually legal

• The material information was publicly available when it was being used

• Lack of willful intent or “scienter,” the knowledge that an action is wrong

• Challenging the admissibility of the presented evidence

• The trade had nothing to do with the nonpublic information

• You had no knowledge of illegal insider information, such as when someone else accesses or overhears confidential information and uses it for trading

• The “Mosaic Theory”—by gathering and assembling pieces of public and non-material information, a person could put them together in a “mosaic” to draw a conclusion about the non-public material information.

Do not attempt to handle charges of insider trading yourself—call Farkas & Crowley immediately to discuss your case and start your defense. Your future is at stake—you need a strong legal team on your side when facing insider trading and other federal charges.


If you have been arrested for a federal offense such as Insider Trading, contact the criminal defense attorneys at Farkas & Crowley today. We offer aggressive representation, and we will not rest until we get a favorable outcome for your federal case.

Our federal criminal attorneys in Florida have experience with federal court systems, and we are here to help you. Call us now for a free consultation at 561-444-9529. We’re available 24/7 when you need us.

insider trading - stock exchange monitoring by a stock broker

Looking for a criminal law firm? Farkas & Crowley, P.A. are the attorneys for you. They are extremely knowledgeable of the law and go the extra mile for their clients. Their expertise and impeccable work ethic are hard to beat. Available 24/7. Highly recommended.

-Marla Newman

Get In Touch


500 S. Australian Ave.
6th Floor
West Palm Beach, FL 33401


(561) - 444 - 9529


Mon - Fri: 9 am – 5 pm

Farkas & Crowley, PA

Criminal Defense & Family Law Lawyers