If you are involved in, or are interested in becoming involved in, the trading of securities, understanding what constitutes insider trading is critically important. It is also important for corporate “insiders” to understand how this white collar crime may be committed. What may seem like an innocent, helpful piece of information, whether given or received, may actually give rise to the possibility for civil or criminal penalties.
Legal and Illegal Insider Trading
Unlike many other white collar crimes, insider trading actually can be conducted in a legal way. It is perfectly acceptable for corporate insiders, like officers, directors, and employees, to buy and sell shares of stock in their own company. When this occurs, the transactions must be reported to the Securities and Exchange Commission (SEC).
However, insider trading is illegal when a person buys or sells securities in breach of a fiduciary duty or other relationship of trust and confidence, while in the possession of material, nonpublic information about the security. A fiduciary duty is a legal duty to act solely in another person’s interests. A director of a company has a fiduciary duty to the shareholders of that company. Because this crime undermines investor confidence, the SEC has made enforcement a priority.
It is important to note that, because insider trading can be both a legal and illegal activity, proving it can be very difficult. It must be shown that the person accused of illegal insider trading was trading in securities based on information that was wrongfully obtained. One example of why this can be challenging is due to the fact that it is difficult to demonstrate the exact reason why an individual was trading in a particular security.
Tipping
It is also a violation to “tip” material, nonpublic information about a security and, after being tipped, to trade in securities related to the information obtained through the tip. An example of this is when a person tips information to a friend or family member, known as the tippee, who then trades in those securities. While it may seem fairly harmless, this hypothetical may actually be a violation of the securities laws. But, as discussed above, proving there was illegal insider trading after tipping occurs is often difficult.
Penalties
Under the Securities Exchange Act of 1934, the SEC may bring an action to seek a civil penalty to be assessed against a person who committed insider trading. The amount of the penalty may be up to three times the profit gained or the loss avoided as a result of the unlawful purchase, sale, or communication. Additionally, it is possible that illegal insider trading will result in criminal charges. However, this is usually the case only when the amount of money involved or the number of people affected is extremely large.
White Collar Crime Defense
If you find yourself under investigation for a possible insider trading violation, you need to speak with experienced counsel as soon as possible. The securities laws are complex and the federal government has extensive resources to investigate these types of cases. The south Florida attorneys at Farkas & Crowley, P.A. can help you defend your rights. Contact us today and let us get to work for you.
