According to the U.S. Securities and Exchange Commission (SEC), insider trading occurs when corporate officers, directors, or other insider employees use material, nonpublic corporate information to reap a profit (or avoid a loss) by trading in the Company’s stock. Insider trading also includes when an individual “tips” material, inside information to a third party, and that person trades securities after receiving the information. Both the tipper (person who provided the information) and the tippee (the person who received the information) would be liable if the tippee traded on the information.
What is the Definition of an Insider?
To be charged with insider trading in Texas, the SEC must consider you to be an “insider.” The SEC defines an insider as any officer or director of a publicly traded corporation, as well as beneficial owners of more than ten percent of any of the corporation’s stock. The definition also includes individuals who receive a “tip” from an officer or director.
Simply being an employee of a company does not qualify you as an insider. Employees of a publicly-traded company are allowed to trade the securities of their employer if they meet various SEC reporting requirements.
Members of the U.S. Congress are not considered insiders and subject to insider trading laws, even though they often have access to nonpublic information about publicly traded companies.
What is Material, Nonpublic Information?
Prosecutors must prove that the information was “material” and “nonpublic” to convict an individual of insider trading. “Material” is defined as any information that could reasonably have an impact on the company’s share price. “Nonpublic” is defined as any information that has not been disclosed to the public generally. “Public” does not mean that everyone knows the information, just that anyone has the ability to find out if they work hard enough.
Examples of material, nonpublic information include upcoming corporate actions that have not been announced, such as initial public offerings, acquisitions, stock buybacks, or splits. Material, nonpublic information can be either positive or negative.
The individual charged with insider trading must have been aware that the information was material and nonpublic. For example, if you overhear a conversation on a train but have no knowledge that it is insider information, you cannot be convicted if you act on this information.
How Does the SEC Monitor Insider Trading in Texas?
The SEC monitors insider trading in various ways. For example, it uses market surveillance systems to monitor trading volume. If no new public information has been issued, but trading volume rises substantially, it raises a red flag. Additionally, the SEC responds to tips and complaints about illegal activity.
If the SEC notices suspicious activity, they may decide to open an investigation. An insider trading investigation may include wiretaps, interviewing witnesses, examining trading records, and reviewing phone records, among other things. If you suspect you are under investigation for insider trading, you should immediately reach out to an experienced Frisco criminal defense attorney.
Famous Examples of Insider Trading
Two famous examples of insider trading cases include Martha Stewart and Michael Milken.
• Martha Stewart. In 2001, Martha Stewart sold her shares in the pharmaceutical company ImClone Systems. One day later, FDA announced that it was not approving the new cancer drug. The company’s shares dropped 18% on the first day of trading after the announcement.
Stewart was convicted of insider trading after a jury found that she sold her ImClone Systems shares after receiving a tip about the FDA decision. Along with paying a $30,000 fine, she served five months in prison, five months of home confinement, and two years of probation.
• Michael Milken (the Junk Bond King). Michael Milken is the pioneer of selling low-rated corporate debt (i.e., junk bonds or high-yield bonds). Over a four-year period in the 1980s, his compensation was over $1 billion. In 1989, he was accused of using insider knowledge of the debt used in corporate takeover deals to make trades. Milken pled guilty and was sentenced to ten years in prison and a $600 million fine.
Speak to an Experienced Frisco Criminal Defense Attorney
If you or someone you know is facing insider trading charges, you should immediately reach out to a local Frisco criminal defense attorney. Philip D. Ray is an experienced criminal attorney and former prosecutor who will provide you with a skilled and aggressive defense. He has years of experience defending individuals against insider trading charges in the Dallas-Fort Worth area. Call The Law Offices of Philip D. Ray today at (469) 588-6770 for a consultation.
