When it comes to SEC insider trading investigations, I have a unique perspective. I have both investigated and prosecuted insider trading cases when I worked for the SEC as an attorney in its enforcement division, and have successfully defended them for over the last twenty-five years as a SEC defense attorney after having left the SEC.
From my years as a SEC prosecutor, I learned how the SEC analyzes insider trading cases: what it views as compelling, incriminating facts and, on the other side of the coin, what facts it considers as potentially fatal to its ability to successfully prosecute. It is with this hard-earned knowledge that I craft defense strategies for my client designed to beat the insider trading investigation so that it never sees the light of day.
Key Factors the SEC Considers in Assessing Insider Trading Cases
In determining whether it has sufficient evidence to bring a meritorious insider trading enforcement action, the SEC will consider the following factors:
First, the strength of the evidence establishing a connection between the trader (the target of the SEC investigation) and a potential source of the material, non-public information, commonly referred to as “inside information”. In other words, can the SEC identify who provided the inside information at the company to the target trader. This is perhaps the single most important consideration made by the SEC in its calculus of the case, and often poses the greatest challenge. While the SEC does not typically have clear and direct evidence of the “tip”, it often relies upon circumstantial evidence as proof, including the timing of communications between the individual in possession of the inside information and the target, coupled with when the suspected illegal insider trading occurred.
Second, how close in time was the trading in the stock relative to the publicly released news? Obviously, the closer in time creates a stronger evidentiary inference that the target was tipped with precise, inside information. However, the inverse is usually true, the longer a gap between the two events typically makes it more difficult for the SEC to bring a compelling case.
Third, did the target ever trade in the stock or was this his first time? A documented trading history in the stock can provide an alternative, exculpatory explanation for the subject trades. By way of example, if the target routinely traded in advance of quarterly earnings (with some successes and some losses), this may provide a credible, innocent explanation for the subject trading. If, though, this was the first and only trade in the stock, it will certainly invite heightened scrutiny by the SEC.
Fourth, how much money was invested by the target relative to metrics such as his total net worth and/or liquid net worth. If the purchase amount was a significant percentage of the trader’s financial means, the stronger the evidentiary inference will be by the SEC that the trade was based upon inside information. This is particularly true if the target borrowed money to make the trade. On the other hand, it is a much more difficult case, at least optically, for the SEC to pursue an individual with a net worth of $10 million who only invested $10,000, which of course invites the compelling defense argument of: if he really had inside information, he would have purchased much, much more.
Fifth, which securities account(s) did the target use to make the subject trades? If accounts were used not titled in the name of the target, or if in his name but offshore, this is sure to invite a high-level of SEC examination. Quite often the target’s spouse’s account(s) will be used, which may, in turn, unwittingly potentially create liability for her.
Sixth, what type of security was purchased? If options (calls or puts) were bought, the SEC will closely look at such factors as: their strike price, their expiration(s), whether they were purchased in the money or substantially out, and if so, how far out. The more speculative the options purchased, the more suspiciously the SEC will view it.
Seventh, can the target offer a credible reason for the trade? Meaning, can the target identify specific research he did in advance of the trade, point to an industry publication he read supporting the reason for the purchase, or cite a blog that explicitly speculated on, for example, the acquisition that took place? If so, this can be fatal to the SEC’s insider trading investigation.
SEC Insider Trading Investigation Attorney David Chase
While there are no hard and fast rules in determining whether the SEC can successfully prosecute an insider trading case, I assess the factors explained above to craft a defense strategy for my clients to maximize the likelihood that the insider trading investigation they face dies on the vine and thus never reaches the federal courthouse steps.
David Chase has successfully represented individuals in SEC insider trading investigations around the nation for more than two decades after having served as a Senior Counsel in the SEC’s Division of Enforcement.
