David R. Chase, P.A.
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1. Who Investigates Insider Trading?
The Securities and Exchange Commission (SEC), which is a federal, civil law enforcement agency that is empowered to enforce the federal securities laws. Its statutory mission is to protect investors, to ensure financial market integrity, and to encourage the facilitation of capital formation. In particular, the SEC has jurisdiction over the stock exchanges, options markets, broker-dealers and investment advisors, among other market participants.
The Department of Justice (DOJ) also has the authority to investigate and criminally prosecute illegal insider trading. At times, the SEC and DOJ will conduct parallel investigations into the same insider trading that may result in both a civil and criminal prosecution of an individual.
2. What is insider trading?
Insider trading occurs when one buys or sells securities while in possession of material, nonpublic information (MNPI), in violation of a duty of trust or confidence. In many instances, insider trading investigations target corporate insiders (executives, directors, or employees), but can also include anyone who receives confidential information (known as a tippee) and uses it to gain an unfair market advantage in breach of a duty.
3. What are the legal theories of insider trading?
There are two recognized legal theories of insider trading: classical and misappropriation.
Classical insider trading takes place when a corporate insider trades in his company’s stock based upon MNPI or tips one, referred to as a tippee, who then trades on the information in violation of the insider’s fiduciary duty.
The misappropriation theory is where one who is lawfully entrusted with MNPI, such as a lawyer, accountant, or consultant, misuses it for personal trading purposes in breach of a confidentiality and/or fiduciary obligation. The misappropriation theory was originated in the Supreme Court case of United States v. O’Hagan, 521 U.S. 642 (1997), which involved an attorney who traded options in the target company that was being acquired by his client.
4. What causes the SEC to start an insider trading investigation?
An SEC investigation can be initiated based upon: news reports that discuss potential illegal insider trading, whistleblower tips, alerts prompted from sophisticated market surveillance tools that identify highly irregular and/suspicious trading, referrals from other securities regulators (including the Financial Industry Regulatory Authority), as well as filings made by officers of publicly traded companies that disclose their purchases and sales of company stock.
5. Does the SEC Division of Enforcement investigate insider trading?
Yes, the Division of Enforcement is responsible for the investigation and prosecution of violations of the federal securities laws, including insider trading. Other cases usually involve various forms of securities fraud, including Ponzi Schemes, offering frauds, spoofing and other forms of market manipulation, It also prosecutes securities registration violations.
6. What is the difference between an SEC informal inquiry and a formal investigation?
Most SEC insider trading investigations begin as an informal inquiry where the SEC does not have subpoena power (which allows the SEC staff to compel the production of documents and sworn testimony from individuals suspected of engaging in insider trading). In the informal inquiry stage, the SEC must seek the voluntary cooperation of non-licensed individuals to obtain information. However, the SEC can readily obtain trading information and other data from stock exchanges and broker-dealers without subpoena power.
7. Do I have to respond to an SEC Subpoena?
Yes. While the scope of documents requested by a SEC Subpoena can be negotiated or objected to, one cannot simply ignore or disregard a validly issued subpoena. One does so at his own peril. In the event an individual does not timely and/or sufficiently comply, the SEC has the legal authority to file a subpoena enforcement action in federal district court that will seek to force the individual and/or company to respond. In most all instances, the SEC will prevail in such a legal action as it has broad powers to enforce its subpoenas. Moreover, by the SEC filing such a lawsuit, it takes an otherwise non-public investigation and effectively makes it public by virtue of the court filing thus exposing the targeted individual to adverse publicity even before the insider trading investigation has been concluded. Not a wise strategic move.
8. Can I assert my Fifth Amendment Right in a SEC Investigation?
Yes, an individual, but not a corporate entity, can invoke his/her Fifth Amendment Right in an insider trading investigation. This includes asserting the privilege in response to document requests sought in the SEC Subpoena, as well as to questions asked during sworn testimony. In fact, the Fifth Amendment is not just for the guilty, but is also designed to protect the innocent. The United States Supreme Court in the case of Ohio v. Reiner, 532 U.S. 17, 21 (2001) held that “one of the Fifth Amendment’s basic functions is to protect innocent men [and women] who otherwise might by ensnared by ambiguous circumstances.”
While the SEC may take a negative inference from an assertion of the Fifth Amendment, it still requires evidence to prove that illegal insider trading occurred – in other words, the SEC cannot rely exclusively on this negative inference. While the critical decision to invoke or not invoke the Fifth Amendment is a complex one, often involving the weighing of several evidentiary considerations, I have often utilized the Fifth Amendment as an effective strategic tool in successfully defending my clients in SEC insider trading investigations.
9. How long does an SEC investigation take?
There is no definitive time period for an SEC insider trading investigation. Depending upon the complexity, number of suspected instances of insider trading, and others who may be involved, such investigations can take several months or sometimes years.
10. What are the legal defenses to insider trading charges?
Legal defenses to insider trading include, but are not limited to, arguing that the information was either not material and/or non-public, or that the trade was not made based upon MNPI but rather for a legitimate trading reason.
11. What are the possible outcomes of an SEC investigation?
At the conclusion of the SEC’s investigation, and based upon the evidence it has developed, the SEC can either: (1) drop the case and decline to bring an enforcement action, or (2) issue a Wells Notification, which is a formal notice that it intends to recommend civil prosecution.
Counsel has the opportunity to respond to a Wells Notification and attempt to persuade the SEC to not prosecute. If not successful, one can seek to settle the case, or litigate it in federal court. However, losing an insider trading case can lead to penalties up to three times the profit gain or loss avoided through the illegal insider trading. See 15 U.S.C. § 78u-1.M.
12. What are the standard terms of a SEC insider trading settlement?
The SEC will typically settle an insider trading case on a neither admit nor deny basis as to the allegations of wrongdoing, and for payment of the profit made or loss avoided (called disgorgement), plus prejudgment interest, in addition to a one-time civil penalty of the amount of profit (or loss avoided). So, if you made $100,000 in profit from an illegal insider trade, the disgorgement would be $100,000 (with prejudgment interest calculated on this amount), in addition to a civil penalty of $100,000. Also part of the standard terms is an injunction, which is a court order prohibiting one from violating the anti-fraud provisions of the securities laws in the future.
13. Can I go to jail for insider trading?
Yes, although the SEC does not have criminal authority and can only bring civil charges. The SEC can, and at times does, refer its insider trading investigations to the Department of Justice, which criminally prosecutes these cases. The DOJ can also independently launch, investigate and prosecute an insider trading investigation.
14. When does the SEC refer an insider trading investigation to the criminal authorities?
There are no hard and fast rules for when the SEC refers insider trading cases to the DOJ for criminal prosecution; however, those that are referred typically involve repeated instances of illegal insider trading, multiple parties (like an insider trading ring), sophisticated means and/or large dollar profits.
15. What should I do if I’m contacted by the SEC?
If you are contacted by the SEC, whether directly by phone without warning (known as an “ambush call”) or if you have received a subpoena, it is critical to immediately retain an experienced and knowledgeable insider trading lawyer. Anything you say to the SEC, however seemingly innocent or even under the intention of being helpful under the belief (whether mistaken or not) that you did nothing wrong, can and will be used against you. Don’t go at it alone, the stakes are simply too high.
16. Why Hire David Chase to defend you in an insider trading investigation?
David is a former SEC Prosecutor who investigated and prosecuted insider trading cases. He thus knows how the SEC identifies, investigates and prosecutes insider trading. Using this deep understanding, he effectively defends his clients with the objective of avoiding charges. David is also an Adjunct Professor of Law at the University of Miami School of Law where he teaches a course on SEC investigations, including insider trading. He has been recognized as an outstanding securities lawyer in his field by Chambers & Partners and Super Lawyers, has been widely quoted in the media, including the Wall Street Journal, interviewed on Bloomberg Television on SEC matters and has extensively written on insider trading.
Contact David for a confidential consultation at: 800-760-0912 or e-mail him at: david@davidchaselaw.com. To read about David’s SEC defense experience, and the firm’s recent successful insider trading results, please visit the firm’s website at: www.securitiesfrauddefense.net.