We Defend Corporate Insiders and Others Facing Criminal Insider Trading Investigations Nationwide
Insider trading is a federal offense that can have civil or criminal implications depending on the specific allegations at issue. In criminal cases, corporate insiders and others can face fines and prison time, and a conviction can cause a lifetime of reputational harm.
As a result, a strategic defense is required. Corporate insiders and others facing insider trading allegations need to have a clear understanding of how Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10(b)5 apply, and they need to have an equally clear understanding of the defenses they have (and don’t have) available. This requires experienced legal representation, and they need to be able to rely on their defense counsel to communicate effectively with the U.S. Securities and Exchange Commission (SEC) as well.
Experienced Attorneys for Federal Insider Trading Defense
At Oberheiden P.C., we bring centuries of relevant experience to the table. Along with career federal defense attorneys, our team includes several former federal white-collar prosecutors who spent decades at the U.S. Department of Justice (DOJ) before entering private practice. As a result, not only do we understand insider trading cases from the defense perspective, but we also understand these cases from the government’s point of view. We are familiar with the SEC’s and DOJ’s investigative and prosecutorial tactics, and we have seen first-hand what works—and what doesn’t—when it comes to federal insider trading defense in criminal cases.
What Constitutes Criminal Insider Trading?
Insider trading involves buying or selling “a company’s stocks or other securities by individuals with access to confidential or non-public information about the company.” It is proscribed under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10(b)5, which establish general prohibitions against “employ[ing] any device, scheme, or artifice to defraud,” and “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”
While the SEC can pursue administrative or civil penalties against insiders (and “tippees”) suspected of insider trading, it can also refer insider trading cases to the DOJ for criminal prosecution. When prosecuted as a federal crime, insider trading carries up to a 20-year prison sentence and a $5 million fine—which increases to $25 million for corporate entities.
4 Key Elements of a Criminal Insider Trading Case
To establish culpability in a criminal insider trading case, federal prosecutors must prove four key elements. These elements are:
1. Breach of a Fiduciary Duty or Violation of a Relation of “Trust and Confidence” in Connection with a Securities Transaction
Corporate insiders owe fiduciary duties to their company’s shareholders. They also hold a relationship of “trust and confidence” not only with the company’s shareholders, but with the investing public as well. If corporate insiders breach their fiduciary duty or violate this relationship—whether by executing trades themselves or providing tips to colleagues or family members—this establishes the first element of a criminal case for insider trading under Section 10(b) and Rule 10(b)5.
2. Possession of Material Nonpublic Information in Connection with a Securities Transaction
When breaching their fiduciary duty or violating their relationship of “trust and confidence,” corporate insiders must have access to material nonpublic information (MNPI) regarding the company or its stock. “Nonpublic” means that the company has not yet released the information through a press release or EDGAR filing, while “material” means that the information is relevant to shareholders’ or prospective investors’ buying or selling decisions. If a corporate insider does not have access to MNPI, then the insider is not culpable for insider trading even if MNPI exists—as discussed in our overview of potential defenses to criminal insider trading allegations below.
3. Intentional, Knowing, or Reckless Use of MNPI When Buying or Selling a Corporate Security
In addition to possessing MNPI, a corporate insider (or “tippee”) must use this information when buying or selling the company’s securities. To justify criminal prosecution, this use must be intentional, knowing, or reckless. Prosecutors can establish this subjective element of a target’s mental state in a variety of ways—but there are several defense strategies focused specifically on this element as well.
4. Personal Benefit As a Result of the Prohibited Purchase or Sale of a Corporate Security
Finally, to be criminally culpable for federal insider trading, an insider (or “tippee”) must personally benefit from the prohibited purchase or sale of a corporate security. This personal benefit can come in the form of either: (i) profiting from an increase in the company’s share value following the release of the MNPI; (ii) avoiding stock losses by selling before the public release of negative MNPI; or, (iii) receiving compensation (whether monetary or nonmonetary) as a result of providing MNPI as a “tipper.” This is typically among the easier elements for the SEC and DOJ to prove (when evidence exists), as these authorities can obtain individual financial records, stock transaction records, and other relevant documents through a variety of investigative means.
Defenses to Criminal Insider Trading Allegations
Just as the SEC and DOJ have a variety of options when it comes to proving criminal insider trading allegations, targeted corporate insiders and others may have a variety of defense options as well. For example, depending on the circumstances of any particular case, potential defenses to criminal insider trading allegations include:
No Access to MNPI
Access to MNPI is one of the four elements of a criminal insider trading case. If federal prosecutors cannot prove that you had access to MNPI, then they cannot secure a conviction.
No Reliance on MNPI
Federal prosecutors also need evidence of reliance on MNPI. If you had access to MNPI but prosecutors cannot prove that it was material to your investment decision, this can also serve as a complete defense.
The Information Used was No Longer Nonpublic
Timing is often a key factor in federal insider trading cases. If you relied on information but it had already been made public by the time you (or your tippee) executed a trade, then you did not engage in insider trading.
Piecing Together Non-MNPI
Making an informed and strategic investment decision does not constitute insider trading. If you pieced together multiple pieces of nonmaterial nonpublic information, your defense counsel should be able to use this to protect you as well.
Following a Pre-Arranged Plan
Under SEC Rule 10(b)5-1, insiders can buy or sell their company’s securities pursuant to a “pre-arranged plan” even if they have access to MNPI. If you were following a pre-arranged plan that complied with SEC Rule 10(b)5-1, you do not deserve to face SEC or DOJ scrutiny.
Advice of Counsel
Corporate insiders and tippees can also assert a defense to insider trading based on the advice of counsel. If you sought advice and your counsel incorrectly advised you that you could lawfully buy or sell the company’s securities, you are not guilty of a crime.
FAQs: Facing Criminal Insider Trading Allegations from the SEC or DOJ
Q: Who Can Be Found Guilty of Criminal Insider Trading?
The federal prohibition on insider trading applies not only to corporate executives and board members, but to a broad range of other individuals as well. Anyone who has access to MNPI—whether as a corporate insider, as a tippee, or as a result of misappropriation—can face criminal insider trading allegations. This includes (but is not limited to):
- Company founders, board members, and executives
- Lower-level company employees
- Corporate leaders’ business associates and colleagues
- Professional advisors and consultants
- Friends and family members who receive MNPI
- Individuals who misappropriate MNPI (or receive misappropriated MNPI)
- Government officials and employees
Q: How Do the SEC and DOJ Uncover Insider Trading?
The SEC and DOJ uncover insider trading through various means. These include examining trading patterns, reviewing companies’ public filings, investigating whistleblower and investor complaints, and conducting investigations in-house and with the assistance of the Federal Bureau of Investigation (FBI).
Q: What Should I Do if I Am Facing an Insider Trading Investigation?
If you are facing an insider trading investigation, you need to engage experienced defense counsel promptly. You will need to be very careful when responding to subpoena, search warrants, questioning, and other investigative tactics, and you will want to have experienced defense counsel communicating with the SEC, DOJ, and FBI on your behalf.
Q: Should I Plead Guilty if I Engaged in Insider Trading?
Pleading guilty unnecessarily can have life-altering consequences. Before you make any decisions about how to handle your federal insider trading case, you need to consult with a defense attorney. You may have defenses available; and, even if you cannot avoid penalties entirely, an experienced attorney may be able to mitigate the consequences of your mistake.
Speak with a Criminal Insider Trading Defense Attorney at Oberheiden P.C.
If you need defense counsel for a federal insider trading investigation, our team can help. To speak with a criminal insider trading defense attorney at Oberheiden P.C. in confidence, call 866-603-4540 or tell us how we can reach you online now.