By David R. Chase, Former SEC Enforcement Attorney and Now SEC Insider Trading Defense Lawyer
For many executives, traders, investment advisers, and finance professionals, the first sign of trouble arrives unexpectedly: a subpoena, a call from compliance, a request for documents, or an out-of-the blue contact from SEC enforcement staff itself.
By that point, the government may already have spent months quietly investigating and building a case against you.
Having served as a former SEC enforcement attorney, I’ve seen firsthand how insider trading investigations develop behind the scenes — and how early mistakes by investigation targets can dramatically affect the outcome.
This article explains how SEC insider trading investigations typically begin, what the SEC looks for, and what individuals should understand if they become the target of an insider trading investigation.
Insider Trading Investigations Often Begin Long Before You Know About Them
One of the biggest misconceptions about SEC investigations is that they begin with subpoenas.
In reality, by the time the SEC contacts an individual, the SEC’s investigative staff may already possess:
- your securities trading records
- phone logs
- brokerage details
- emails and text messages
- banking records
- testimony from witnesses or statements from cooperating witnesses
- suspicious trading analyses, and
- communications obtained from employers or third parties that have quietly cooperated with the SEC
Modern SEC investigations are heavily large data driven. Enforcement staff routinely analyze unusual and/or suspicious trading activity shortly prior to earnings announcements, mergers, acquisitions, pharmaceutical approvals, government actions, and other market-moving events.
Many investigations begin after:
- FINRA referral
- whistleblower tip
- suspicious trading analyses
- brokerage firm surveillance alerts
- parallel criminal investigations
- media reports, and
- internal corporate investigations
In most situations, targeted individuals are completely unaware they are currently under scrutiny.
The SEC Frequently Uses Parallel Investigations
In significant insider trading matters, the SEC often works alongside federal criminal authorities, including the Department of Justice and the FBI.
This is known as a “parallel investigation.”
That distinction matters enormously.
An SEC investigation is civil in nature. However, the same underlying conduct may also expose individuals to criminal prosecution and, potentially, incarceration.
As a former SEC enforcement attorney, I saw many instances firsthand where witnesses seriously underestimated the seriousness of an early SEC inquiry because the initial contact appeared “informal” and low-key. As a result, they agreed to speak to the SEC without counsel and made irrevocable, incriminating statements that were later used against them. These same statements can be used, and often are, in parallel criminal prosecutions.
What the SEC Looks for in Insider Trading Cases
Most insider trading investigations focus on three core questions:
- Was the information material and nonpublic?
The SEC examines whether the information would likely influence an investor’s decision-making and whether it was confidential at the time of trading. It often measures materiality by looking at the price and volume movement of the stock price after the public release of a major news event.
Examples may include:
- pending mergers or acquisitions
- earnings results
- regulatory approvals
- major contracts
- drug trial results
- executive changes
- significant corporate events
- Did someone breach a duty of trust or confidentiality?
The SEC frequently investigates whether confidential information was improperly disclosed or misused to assess whether it was a classic tipper-tippee scenario, or a misappropriation theory.
Potential SEC insider trading subjects may involve:
- corporate insiders
- investment bankers
- lawyers
- consultants
- accountants
- family members
- friends, and
- expert network participants
- Was the trading suspicious?
Enforcement staff often analyze:
- the timing of trades relative to the public announcement, as well as to what was known internally at the company
- patterns of communications involving an individual(s) who possessed the material, non-public information
- relationships between parties
- trading history
- use of short-term, out-of-the money options
- investment that exceeds historical norms or that represents a large percentage of the trader’s net worth, and
- coordinated activity across related or commonly controlled accounts
Securities regulators’ market surveillance tools these days are far more sophisticated than many people understand, and the SEC increasingly relies on its advanced analytics to identify suspicious, “red flag” market activity across enormous datasets to create a target list of traders for investigation.
Early Mistakes Can Significantly Damage a Defense
One of the most important lessons I learned during my time in SEC enforcement is this:
Individuals often create unnecessary, self-inflicted problems during the earliest stages of an investigation.
Common mistakes include:
- speaking with investigators without the benefit of legal counsel and trying to “explain away” problematic trading activity
- deleting communications and other forms of evidence
- contacting potential witnesses in an effort to coordinate stories
- assuming the matter is minor and not worth retaining a lawyer
- failing to preserve documents
- discussing the investigation publicly and/or in writing
SEC Investigations Are Often More Nuanced Than Headlines Suggest
Media coverage frequently portrays insider trading cases in simplistic terms — they are not.
Many cases involve complex questions concerning:
- Intent
- knowledge
- access to sources of the material, nonpublic information
- timing of trades relative to alleged knowledge
- circumstantial evidence
- prior trading history generally, and in the particular stock at issue
- public rumors regarding the material, non-public information
- trading authority, particularly the case with husbands who use their wife’s account to trade
- sufficiency of evidence (or lack thereof), including digital communications
Not every suspicious trade constitutes unlawful insider trading, but once the SEC opens an investigation, individuals must take the matter extremely seriously from the outset, as the consequences flowing may include loss of job, damage to professional reputation, financial penalties and possibly jail time if the criminal authorities get involved.
The Importance of Experienced SEC Defense Counsel
Defending an SEC insider trading investigation requires much more than general litigation experience; rather, it requires highly specialized knowledge and experience.
A seasoned SEC investigation lawyer understands:
- how SEC enforcement staff evaluates the relative strength and weakness of evidence
- how testimony is used
- how Wells process negotiations unfold
- how parallel investigations develop
- how regulators assess witness credibility, and
- how early strategic decisions affect outcomes
My experience as a former SEC enforcement attorney provides highly valuable insight into how these insider trading investigations are conducted internally and how enforcement teams approach charging decisions, negotiations and charging decisions.
That perspective often proves to be the critical factor in achieving success for my client.
Final Thoughts
SEC insider trading investigations are highly sophisticated, fast-moving, and increasingly data-driven.
By the time regulators make contact with you, they typically already possess substantial evidence and have developed preliminary prosecution theories regarding trading activity and communications.
Understanding how these investigations actually work — and responding strategically from the beginning — can make the difference between a successful outcome or a prosecution.
If you have received an SEC subpoena, Wells Notice, document request, or inquiry relating to insider trading or securities fraud issues, an experienced SEC defense lawyer should be consulted immediately.
David R. Chase is a former SEC enforcement attorney, and an Adjunct Professor of Law at the University of Miami School of Law where he teaches a course on SEC investigations, who now represents clients nationwide in SEC inquiries, with a focus on insider trading matters.
