Introduction
There are few legal situations that create more stress and uncertainty for investors, corporate insiders, pharma employees, investment bankers, or securities professionals than learning that securities regulators are investigating you for insider trading. Federal regulators, including the SEC and DOJ, aggressively pursue insider trading cases, and that historical trend appears to be continuing without pause.
If you receive a SEC subpoena, informal inquiry, or are contacted by the SEC or FBI, understanding the process, and your legal rights, is absolutely critical. This guide explains how insider trading investigations begin, what happens during an investigation, and why contacting an experienced insider trading lawyer immediately is critical.
What Is Insider Trading?
Insider trading generally occurs when someone buys or sells securities while in possession of material non-public information in violation of a duty of trust or confidence.
The law does not prohibit all trading by insiders; in fact, corporate executives, directors, and employees often buy or sell shares in their companies legally. The key legal question is whether the person traded based on information that had not yet been made available to the public and is material (i.e., market moving).
Examples of insider trading include:
- Corporate executives buying or selling stock before earnings announcements
- Employees sharing confidential merger information with family and/or friends
- Investment bankers, consultants or lawyers trading based on confidential client information
- Investors receiving illegal “tips” about upcoming corporate events, such as mergers, acquisitions or significant corporate events
Even individuals who are not corporate insiders can face liability if they trade on material, nonpublic information if they know it was improperly disclosed in breach of a legal duty.
How Insider Trading Investigations Usually Begin
Most insider trading investigations start when regulators identify and detect suspicious trading patterns.
The primary agencies involved include:
- Securities regulators, like the SEC
- Financial market surveillance systems, including NASDAQ
- Brokerage compliance departments
- Federal prosecutors
When investigators notice highly unusual securities trading activity shortly before a major announcement, often referred to as red flags, it can trigger further inquiry.
Regulators may examine:
- Trading records
- Phone calls and text messages
- Emails and internal communications
- Bank and brokerage accounts
- Relationships between traders and those who were in possession of the inside information
The Securities and Exchange Commission (SEC) monitors trading activity and may refer serious cases to federal prosecutors for criminal charges.
What Happens If the SEC Contacts You?
If regulators suspect insider trading, they may initiate contact in several ways.
- Informal Inquiry
Investigators, including FBI Agents or SEC Attorneys, may first contact you out of the blue and question you as to why you traded. The FBI will typically do so in person, while the SEC will typically call you.
- SEC Subpoena
A formal subpoena will typically require you to provide:
- Financial records
- Brokerage records
- emails or communications, including social media messages
- testimony under oath
- Parallel Criminal Investigation
In more serious cases, the investigation may involve federal prosecutors, criminal investigators and potential jail time.
This stage is critical because statements made early in an investigation may significantly and irreparably affect the case’s result.
What are the Potential Penalties for Insider Trading?
Insider trading charges can result in both civil and criminal penalties.
Possible consequences include:
- Civil penalties up to three times the profits gained
- Criminal fines up to $5 million for individuals
- Corporate fines up to $25 million
- Prison sentences of up to 20 years in serious cases
- Industry bans and reputational harm
Because of these severe consequences, defending insider trading allegations requires experienced, knowledgeable legal representation.
Common Defenses in Insider Trading Cases
A strong and well-thought-out defense strategy depends on the specific unique facts of the case. Some common defenses include:
Lack of Material Non-Public Information
If the information was already public and/or not material to investors.
No Duty of Trust or Confidence
Liability typically requires a breach of a duty to the company or source of the information. Absent such a duty, there may be no case.
Independent Research
Traders may compile publicly available information and discern from it that which is non-public and are lawfully permitted to trade on it. It’s called the Mosaic Theory of insider trading.
Pre-Planned Trading Programs
Certain pre-arranged trading plans allow insiders to trade legally under specific regulatory rules.
Why You Should Contact an Insider Trading Lawyer Immediately
Many people make the mistake (a big one) of speaking to investigators before seeking legal advice.
An experienced insider trading lawyer can:
- Communicate with regulators on your behalf
- Review trading records and evidence
- Identify potential defenses early
- Prevent you from making damaging statements during interviews
- Negotiate with prosecutors and regulators in those cases that so require
Hiring legal representation early on can sometimes prevent charges from being filed.
Frequently Asked Questions About Insider Trading
Can you go to prison for insider trading?
Yes. Criminal insider trading convictions can result in significant prison sentences and large fines.
How long do insider trading investigations last?
Investigations can last months or even years depending on the complexity of the trades, the number of people involved and the Government’s access to critical evidence.
What triggers an insider trading investigation?
Suspicious and unusual profitable trades shortly before major corporate announcements often trigger regulatory scrutiny.
Is insider trading always criminal?
Not necessarily. Some cases result only in civil SEC enforcement actions instead of criminal prosecution.
Should you talk to the SEC without a lawyer?
No. It is highly risky to speak with investigators without legal counsel.
When to Contact an Insider Trading Defense Attorney
If you receive any of the following, you should contact a white-collar defense lawyer immediately:
- SEC subpoena
- FINRA 8210 inquiry
- FBI contact
- Notification that you are a target of a criminal investigation (called a target letter)
Conclusion
Insider trading investigations are complex, high-stakes and potentially life-changing. Regulators use sophisticated analytics, big data and extensive investigative tools to detect, identify and pursue suspicious trading patterns.
If you believe you are under investigation—or more so if you have already been contacted — hiring experienced legal securities counsel as early as possible can help protect your rights, your assets, your reputation and potentially be the difference between facing charges or not.
