Corporate directors, officers and other “insiders” may trade securities in their own companies, provided that the trades are reported to the SEC and are fully disclosed. However, insider trading is prohibited by Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated thereunder, as well as other statutes. Illegal insider trading occurs whenever one buys or sells a security while in possession of material information not available to the public. The proscriptions against insider trading are designed to prevent corporate insiders from unfairly taking advantage of, and profiting from, their access to material non-public information.
The SEC may pursue civil remedies against persons that have engaged in insider trading. Insider trading can be broken down into two general categories: (1) buying securities prior to the announcement of good news, such as unexpectedly high quarterly earnings, or a promising merger; or (2) selling securities prior the announcement of bad news, such as a decline in quarterly revenue. In order to prove an insider trade has occurred, there must be an actual purchase or sale of a security, while “in possession of” information that is both material and non-public. The SEC has consistently taken the position that insider trading has occurred when these elements are present, even if there were other factors that may have been more important to the insider’s trading decision. The U.S. Supreme Court has held that information is “material” if there is a substantial likelihood that a reasonable investor would consider it important in making investment decisions. Federal law also authorizes what are known as “treble” damages, amounting to fines of up to three times the amount of profits gained or losses avoided, and criminal prosecutions may be brought by the Department of Justice.
The insider trading laws also cover “tipping” others off to impending company announcements. For example, both a corporate executive (the “tipper”) and his or her spouse (the “tippee”) may be guilty of violating U.S. securities laws if confidential information is shared between the two, resulting in lucrative trades by the spouse.
Finally, anyone who misappropriates information from their employer and trades stock on that information (either the employer’s stock or the employer’s competitor’s stocks) may be guilty of insider trading. Likewise, employees of banks, law firms, or other companies that gain inside information through providing services to the company, and then trade securities based on that knowledge, may too be guilty of insider trading.
The securities fraud attorneys at Glancy Prongay and Murray are experienced financial fraud lawyers. If you believe you suffered a loss due to insider trading, please contact Glancy Prongay & Murray.