The SEC Investigates Company Executives, Securities Professionals, and Other Individuals for Insider Trading
Allegations of insider trading carry significant risks. Federal investigations targeting allegations of insider trading can lead to substantial penalties—including criminal penalties in many cases. As a result, if you are facing an insider trading investigation in Los Angeles, you need to assert a strategic and effective defense, and you need to move forward carefully relying on the advice of experienced SEC defense counsel.
At Oberheiden P.C., we have significant experience representing clients in U.S. Securities and Exchange Commission (SEC) insider trading investigations. We handle these cases in Los Angeles and nationwide. Not only do our SEC defense lawyers have centuries of combined experience representing company executives, securities professionals, and other individuals, but many of our attorneys previously prosecuted insider trading cases on behalf of the U.S. Department of Justice (DOJ).
Understanding the Federal Definition of Insider Trading
The federal definition of insider trading is much broader than most people realize. While most people are familiar with the prototypical type of insider trading case—a company executive buying the company’s shares based on knowledge of nonpublic information—this is just one of numerous examples of practices that are prohibited under federal law.
This is because federal securities laws do not directly prohibit “insider trading.” Instead, the prohibition on insider trading is derived from Section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. Section 10(b) and SEC Rule 10b-5 prohibit conduct that amounts to “fraud or deceit” affecting the public securities markets—and this includes all forms of insider trading.
Broadly, SEC insider trading investigations typically focus on three categories of offenses. These are: (i) “classic” insider trading, (ii) tipper/tippee liability, and (iii) misappropriation of inside information.
1. “Classic” Insider Trading
The “classic” form of insider trading involves a corporate insider trading in the corporation’s stock while privy to material nonpublic information (NPI). While there are exceptions to the prohibition on corporate insiders trading in this scenario (i.e., when executing trades according to a prearranged plan), these exceptions are fairly limited, and they require advance planning.
Corporate insiders include executives, officers, directors, and other employees. They can also include accountants, lawyers, and other service professionals who have access to NPI as a result of their relationship with the corporation. Classic insider trading can be prosecuted as either a civil or criminal offense, with criminal charges being warranted in cases involving intentional efforts to profit off of exclusive access to NPI.
2. Tipper/Tippee Liability
SEC insider trading investigations in Los Angeles also frequently focus on tipper/tippee scenarios. A “tipper” is a corporate insider who has access to NPI, while a “tippee” is a non-insider who receives NPI from a tipper.
In tipper/tippee insider trading cases, both individuals can face prosecution under Section 10(b) and Rule 10b-5. The tipper can face prosecution for breaching his or her fiduciary duty and wrongfully disclosing NPI ahead of a public announcement or filing, while the tippee can face prosecution for taking advantage of this wrongful disclosure.
Tippees are frequently friends, colleagues, and family members. In many cases, neither the tipper nor the tippee realizes that the sharing of the information at issue is prohibited and that trading in the company’s shares based on this information is unlawful. Crucially, however, while lack of knowledge can serve as a defense to criminal culpability in many cases, it generally is not a defense to civil allegations of insider trading under federal law.
3. Misappropriation of Inside Information
The third common form of insider trading involves executing trades based on NPI obtained through improper means. This is commonly known as the “misappropriation theory” of insider trading. As the Legal Information Institute nicely summarizes, “the misappropriation theory of insider trading does not require that the seller owes a fiduciary duty to the company in whose stock they trade. The seller’s knowledge of insider information alone is sufficient to create liability under Rule 10b-5.”
Misappropriation of NPI can occur through various means, and this misappropriation alone will be enough to trigger federal prosecution in many cases. Examples include theft through cyber intrusions as well as obtaining information from insiders through fraud or deceit. In any case, executing trades based on NPI is grounds for prosecution—and misappropriation investigations will frequently lead to federal criminal charges.
Understanding the Penalties for Insider Trading
Similar to other types of securities fraud investigations, SEC investigations involving allegations of insider trading can lead to administrative, civil, or criminal penalties. The SEC has the authority to impose administrative and civil penalties directly (following administrative enforcement proceedings or civil litigation proceedings, as relevant), and it can refer cases to the U.S. Department of Justice (DOJ) for criminal prosecution as warranted.
Administrative penalties are typically the least severe, although they can still have significant (and potentially career-threatening) implications for corporate insiders and securities professionals. These penalties can include debarment from the securities industry, a prohibition on serving as an executive or board member of a publicly-traded company, cease-and-desist orders, and other injunctive remedies. Typically, administrative enforcement actions are reserved for cases in which the SEC has uncovered evidence of minor and unintentional insider trading violations.
Civil penalties in insider trading cases can include fines and injunctive relief. The severity of the fines imposed in civil insider trading cases depend on multiple factors, including principally the value and volume of the securities unlawfully traded. Compliance failures, gross negligence, and other factors can come into play as well; and, in civil cases, mitigating the penalties for insider trading is often a matter of convincing the SEC that any inadvertent mistakes that were made do not warrant significant punishment.
Criminal penalties for insider trading are the most severe. When convicted of criminal insider trading violations, individuals can face up to 20 years in federal prison and $5 million in fines. At the corporate level, criminal prosecutions can result in fines of up to $25 million per violation.
FAQs: Defending Against Insider Trading Allegations in Los Angeles
Q: Is the SEC Focusing on Insider Trading in Los Angeles?
Yes, combating insider trading is a top enforcement priority for the SEC, and it is focusing its enforcement efforts in major cities such as Los Angeles. In fact, Los Angeles has been a geographic focus area for the SEC for several years—not only with regard to insider trading, but with regard to other forms of securities fraud as well.
Q: How Does the SEC Uncover Insider Trading?
The SEC uncovers insider trading through various means. For example, while the SEC relies on investors and whistleblowers to report anomalies and suspected insider trading violations, it also conducts its own market surveillance and analyses. The SEC works closely with the DOJ, Financial Industry Regulatory Authority (FINRA), Internal Revenue Service (IRS), state securities regulators, and other enforcement authorities as well, and it regularly acts on tips from these entities.
Q: Do I Need to Engage a Law Firm Headquartered in California for Insider Trading Defense in Los Angeles?
If you are facing an SEC investigation for insider trading in Los Angeles, you do not need to engage a law firm headquartered in California. When dealing with the SEC, the firm’s practice focus and experience are far more important than the physical location of its offices. Oberheiden P.C. has a nationwide network of federal defense attorneys who have decades of experience handling high-stakes federal investigations, and we are able to provide representation for insider trading investigations in Los Angeles as well as other major cities across the country.
Q: What Are Some Examples of Defenses to Insider Trading Allegations?
There are several possible defenses to federal insider trading allegations under Section 10(b) and Rule 10b-5. When facing an SEC investigation, determining what defenses you (or your company) has available requires a critical assessment of the facts involved. Depending on the circumstances, possible defenses range from demonstrating that the alleged NPI was public at the time of the trades at issue to arguing that you were unaware that you received NPI as a tippee.
Q: Can You Go To Prison for Insider Trading in Los Angeles?
Insider trading is a federal offense, and it is a criminal federal offense in many cases. This means that federal prison time is a very real risk for many individuals charged with insider trading in Los Angeles. To avoid prison time, targets of insider trading investigations must assert comprehensive defense strategies, and they must work closely with their defense counsel to steer the SEC’s investigation toward a favorable outcome in light of the facts at hand.
Discuss Your Insider Trading Case in Los Angeles with a Senior SEC Defense Lawyer
If you need defense counsel for an SEC insider trading investigation in Los Angeles, we encourage you to contact us promptly. Our lawyers can begin working with you to execute a strategic defense immediately. To speak with a senior SEC defense lawyer at Oberheiden P.C. in confidence, please call 866-603-4540 or request a complimentary consultation online now.