What Is Insider Trading?
“Insider trading is a type of white collar crime that can result in significant fines and even time in prison. In fact, some of the most notorious insider trading cases have involved high profile defendants who spent months and even years in prison for engaging in this type of securities fraud.” Mick Mickelsen Dallas Federal Criminal Defense Lawyer.
So what, exactly, is insider trading? In short, insider trading happens when someone in a company with private, non-public information about the company uses that information to their advantage to make an illegal sale or trade of securities. They can also run afoul of the law if they “tip off” an outsider by sharing their inside information to the outsider’s benefit.
Insider trading isn’t always illegal. Specifically, people with inside knowledge of a company’s financial status are permitted to buy and sell securities. However, they must register these purchases and sales with the Securities and Exchange Commission (SEC).
Insider Trading Can Involve Insiders and Outsiders
While most of the high profile insider trading cases that make the news involve corporate executives, just about anyone can get caught up in an insider trading case.
For example, if the president of a corporation learns that his company will soon be purchasing a different company and he chats with his doctor about the upcoming acquisition, the doctor may run out and purchase stocks in the company that’s about to be acquired. It’s possible for this to qualify as a case of insider trading.
There have been plenty of cases in which the friends and relatives of a corporate executive faced prosecution for acting on “tips” offered by a corporate insider.
Tough Penalties for Insider Trading
Insider trading is a type of white collar crime, which means it’s a financial crime involving fraud rather than violence. As a result, people sometimes assume that an insider trading conviction won’t result in prison time.
Such assumptions are mislead. Prosecutors take insider trading very seriously. Under federal law, someone convicted of insider trading can be sentenced to up to 20 years in prison, or pay a fine of up to $5 million per insider trading violation. Additionally, they may be forced to turn over any of the profits or illegal gains obtained by way of the insider trading.
Most Notorious Insider Trading Cases
There have been plenty of insider trading cases in the news, both in recent years and throughout history. A handful of cases top the list as the most high profile and notorious.
- Albert H. Wiggin and the 1929 Stock Market Crash – After the stock market crash of 1929, bank executive Albert H. Wiggin was found to have shorted 40,000 shares of his own bank’s stock. Investigators discovered that he hid his trades by using corporations owned by his family.
The interesting fact about Wiggin’s case is that his actions weren’t illegal at the time. In fact, other bank executives made similar moves, which led to the stock market crash and the Great Depression. When knowledge of Wiggin’s actions became public, federal lawmakers created specific legislation to criminalize these types of trades.
- Martha Stewart – Martha Stewart had built an empire of homemaking and craft expertise when she was charged with insider trading in the early 2000s. The case revolved around stock she owned in a company called ImClone. The company had developed a new drug that the FDA decided not to approve.
While most people who held stock in the company were hurt financially, other investors, including Stewart, were not. In fact, Stewart had traded 4,000 ImClone shares while they were still priced high. It later emerged that Stewart had received insider information about the FDA’s decision not to approve the drug. In 2004, Stewart was fined $30,000 and sentenced to five months in prison.
- Enron and Jeffrey Skilling – Enron is a name that has become synonymous with corporate fraud. In 2006, Enron president Jeffrey Skilling was convicted of 19 counts of white collar crime, which include charges for insider trading. He received a 24-year prison sentence and was required to pay $45 million in fines. Skilling was released from prison in 2019 after serving 12 years of his sentence.
- Raj Rajaratnam – Raj Rajaratnum’s case is notable because he received the longest prison sentence for insider trading in U.S. history. At the time charges were brought against him, Rajaratnam was the founder of the Galleon Group, one of the world’s largest hedge fund management companies.
Rajaratnam was convicted of all 14 securities fraud and conspiracy counts brought against him, resulting in a record 11 years in prison. He was also required to pay over $150 million in fines. He was released from prison two years early in 2019.
The above cases are just a few examples of how seriously federal prosecutors take illegal insider trading. Individuals convicted of insider trading can face years in prison, along with steep fines. If you’ve been charged with insider trading, it’s important to discuss your case with a federal criminal defense lawyer who has experience handling white collar crimes cases.