Yes, the Securities and Exchange Commission often relies on electronic communications, like emails, text messages and social media chats to prove insider trading. In fact, such communications can prove to be critical evidence in establishing some or all of the key elements of an insider trading prosecution: knowledge, intent, relationships and, in some cases, efforts to conceal or cover-up after-the-fact.
Let’s take a look at how the SEC uses this electronic paper trail to bolster its insider trading enforcement cases.
What Do Emails, Text Messages, and Chats Prove in an Insider Trading Investigation?
Knowledge
They can be evidence that the targeted trader knew of the material, non-public information (MNPI) before he traded. How? The trader may explicitly say so in an email or text, but often times it is subtle or said in code. In a recent criminal insider trading prosecution, U.S. v. Chen et al., case number 1:25-cr-00303, filed in the U.S. District Court for the Eastern District of New York, the source of the MNPI (tipper) and the trader (tippee) communicated via an encrypted messaging app. Texts like: “Trust me … it’s going to be good … loading up” and, in response: “Gonna load up the hk acc too then” were used against the pair to demonstrate that they knew of the inside information prior to making the trades.
Relationships connecting the source of the MNPI and the trader(s).
They can establish who knew who, who communicated with whom, and when. This is critical information for the SEC as it can lay the framework for the source of the MNPI and to whom it was transmitted, as well as the timing of the transmission. By way of example, if the SEC learns that a company insider knew and communicated with a trader who purchased the company’s shares shortly prior to a merger announcement, that alone is valuable evidence, even if the SEC does not have the content of the communications. It constitutes circumstantial evidence that may be used to civilly prosecute a SEC case. This same analysis also applies to those who have been tipped (the tippee) who may then, in turn, pass the inside information to another (who then becomes a “remote tippee) and so on down the proverbial trading daisy chain.
Fraudulent Intent.
Illegal insider trading requires that an individual consciously and knowingly traded on MNPI. Not by mistake or inadvertence, but rather intentionally. Electronic messages may reveal the trader’s state of mind by what is said and its timing relative to the trade and public release of news. In the Chen prosecution, one of the traders texted: “I think u should milk till they fire u”. Clearly, this demonstrated that he knew that his conduct was wrong and illegal.
Cover-Ups (additional evidence of knowledge and intent).
It is often said that the cover-up is worse than the crime. Recall that Martha Stewart was jailed not for engaging in illegal insider trading, but rather for lying about it to federal law enforcement agents when questioned. Cover ups can include such actions as: deleting emails, text messages, and chats after receiving either a SEC Subpoena or Grand Jury Subpoena, lying to SEC or other federal law enforcement representatives in interviews or sworn testimony, coordinating stories with others who were involved, and/or threatening others to withhold information or to take false factual positions.
Does the Sec Use Emails and Text Messages to Prove Insider Trading?
Yes. Effectively defending an insider trading investigation necessitates much more than basic legal knowledge of let’s say a commercial litigator. Such investigations involve complex securities regulations, federal enforcement strategies, legal theories and granular financial investigations. David R. Chase offers clients the benefit of his insider knowledge and deep experience in securities laws, both as a former SEC Prosecutor who investigated and prosecuted these cases for the SEC, as well as a SEC defense attorney for over 25 years.
Insider Trading Lawyer David R. Chase
If you have just received a subpoena or have been cold called by the SEC regarding possible insider trading, the time to act in retaining counsel is now. David Chase, a seasoned SEC defense attorney, will guide you through the investigation and protect your vital financial, personal and professional interests with the ultimate goal of avoiding you being charged.
Call David R. Chase, Esq. at 800-760-0912 today for a confidential consultation. You can also visit www.securitiesfrauddefense.net to learn more about his background, insider trading, and his prior successful results.
