Why is insider trading a felony?
Under the classical theory of insider trading, corporate insiders violate federal anti-fraud regulations by trading in the securities of their own company on the basis of material, non-public information in breach of their duty owed to the company.
This is why there are laws and regulations to eliminate market trades that aren't conducted on a level playing field. Insider trading violates trust and fiduciary duty, leading to serious legal implications. The victims are often everyday investors — and the economy as a whole.
Key Takeaways
The main argument against insider trading is that it is unfair and discourages ordinary people from participating in markets, making it more difficult for companies to raise capital. Insider trading based on material nonpublic information is illegal.
What Is It and Why Is Insider Trading Harmful? Using nonpublic information for making a trade violates transparency, which is the basis of a capital market. 2 Information in a transparent market is disseminated in a manner by which all market participants receive it at more or less the same time.
Insider trading can be punished strictly by civil sanctions, or involve criminal prosecution, or both. Federal law authorizes what are known as “treble” damages if the SEC brings a civil action against you for violating insider trading rules.
Insider trading charges (usual charged Federally as Securities Fraud under Title 18, United States Code, Section 1348) involve the intentional trade (sale or purchase) of any security based upon material, non-public information.
Former Congressman Sentenced To 22 Months In Prison For Insider Trading. Damian Williams, the United States Attorney for the Southern District of New York, announced that STEPHEN BUYER, a former Indiana Congressman, was sentenced today to 22 months in prison by U.S. District Judge Richard M. Berman.
Most insider-trading cases involve civil suits and penalties. After the stock exchanges (e.g. the NYSE) detect unusual trading activity in a company's stock, they begin an initial review. When the activity warrants further attention, the stock exchange refers the case to the SEC, which starts an informal inquiry.
Trading of securities by company executives based on inside information has been illegal throughout much of the history of corporate America, but enforcement has evolved over time.
Insider trading is a type of market abuse when an advantageous trade is made based on material nonpublic information. The issue is there's not a specific law defining what insider trading is, which makes it difficult to prosecute cases as they arise.
How does insider trading get caught?
Whistleblowers. Regulators also work to prevent and detect insider trading through insiders with knowledge of trades on material nonpublic information. The SEC gets tips from whistleblowers who come forward with the knowledge that people are trading on such information.
According to the SEC in the US, a conviction for insider trading may lead to a maximum fine of $5 million and up to 20 years of imprisonment.
For example, the US Securities and Exchange Commission (SEC) prosecutes approximately 50 insider trading cases per year (SEC, 2015).
The SEC adopted a civil procedure in 1942, but the first time that insider trading was really identified as an offense was in the 1960s, and prosecutions didn't really take off until the advent of the hostile takeover in the 1980s, with investigators focusing on suspicious trading ahead of a merger or sale.
Every day, FINRA's Insider Trading Detection Program monitors the market for material news events that significantly impact the price of company securities. Stocks, options and bonds for 100% of the U.S. marketplace are surveilled for potential insider trading activity prior to these material news events.
In the United States, Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider trading.
Data drawn from all prosecuted insider trading cases
They estimate that insider trading occurs in one in five mergers and acquisition events and in one in 20 quarterly earnings announcements. These estimates imply that there is at least four times more actual insider trading than there are prosecution cases.
The Supreme Court proscribed 4 elements to prove insider trading under the misappropriation theory, 1) a lie or deception 2) a transgression of a fiduciary obligation 3) the use of secret information in relation to a securities transaction 4) willfulness by the defendant.
It's not a victimless crime. You don't have to be directly trading on the stock exchange to be affected by insider trading.
What are the penalties for insider trading? Penalties for insider trading can be severe. Individuals who engage in illegal insider trading can be fined and/or imprisoned. In addition, the SEC can bar individuals from serving as an officer or director of a public company.
How punishable is insider trading?
The criminal punishments are arguably even more serious: if convicted of insider trading, you could be sentenced to a maximum of twenty years in prison, and be assessed a fine of up to $5 million. You may also be barred from working in the financial sector for life.
If you're found guilty of insider trading, you could get up to 20 years in federal prison. This is why it's so important to hire a lawyer, so you can improve your chance at winning the case or keeping your insider trading jail time to a minimum.
If someone is caught in the act of insider trading, he can either be sent to prison, charged a fine, or both. According to the SEC in the US, a conviction for insider trading may lead to a maximum fine of $5 million and up to 20 years of imprisonment.
The US Securities and Exchange Commission prosecutes approximately 50 insider trading cases per year, and there are harsh penalties of up to 20 years in prison.
The detection rate for insider trading before earnings announcements is similar: = 14.26%, with 95% confidence interval of [11.10%, 16.63%].
