The Latin phrase in vino veritas means “in wine, truth.” Whether one is at a bar or chatting online with colleagues, people enjoy talking about work. When one has a fiduciary duty to another party, an errant comment can expose both parties to liability. Securities law in the United States is intended to avoid any unjust enrichment and keep all parties on a level playing field. Insider trading increases the cost of capital and ensures that some parties have an unfair advantage over others.
Insider Trading
Insider trading occurs when an insider uses nonpublic information in order to profit from some type of stock trade or exchange of securities. Insider trading laws consist of several federal statutes, Securities and Exchange Commission regulations, and common law. An insider is any corporate officer, corporate director, any person who holds over 10 percent of a company’s holdings, anyone working with the corporation who comes into contact with nonpublic information, or anyone who comes into contact with insider information who knew or reasonably should have known that that information was not public.
Bystander Rules
The last part is the important part for bystanders at a chat room or a coffee shop. Anyone who knows or should have known that the information was kept private as part of the disclosing party’s fiduciary duty will be required to adhere to the same rules as any other insider. In other words, they are barred from executing trades of a shorter duration than six months. If an insider tells a friend that their company’s quarterly earnings report will divulge a loss greater than analysts’ expectations and if the friend shorts the stock and closes out the short the day after the statement is released, the friend will be guilty of insider trading.
The power to enforce this has expanded in recent years. Businesses often exchange information with each other. If a deal is expected to fall through, if one party expects a disruption in supply, or if one party will change suppliers, both parties would have knowledge in advance. This knowledge could affect company earnings. As a result, if the friend acts upon the information to trade stock or other securities from the third-party company, the friend will still be guilty of insider trading.
Penalties for Insider Trading
Legal professionals trained in federal criminal charges, such as the defense team at www.orlandocriminalteam.com, offer that the penalties for insider trading vary. The Securities and Exchange Commission is not always willing to impose criminal penalties; civil penalties require proof beyond a preponderance of the evidence while criminal penalties require proof beyond a reasonable doubt. Meeting these burdens of proof can be difficult. Defendants who are criminally prosecuted face up to 20 years imprisonment per violation as well as a fine of $5,000,000.
Financial penalties for insider trading will include disgorgement of profits from the illegal trade as well as severe civil penalties. Under 15 USC § 78u-1, the Securities and Exchange Commission may file an action in court demanding triple the amount of the defendant’s profit or the loss avoided. There is a statutory cap on civil penalties for a controlling party in the amount of $1,000,000. The Securities and Exchange Commission often pursues both civil and criminal actions as a weapon against perpetrators of insider trading.
A hot stock tip may sound like a wise investment, but confidentiality requirements and fiduciary duties do not cease simply because one party has had too much to drink. Trading on nonpublic information can result in serious criminal and civil penalties. The Securities and Exchange Commission aggressively investigates insider trading activities, and if the Commission believes that the trader knew or should have known that the tip involved nonpublic information, an innocent party can easily become a target. Anyone who is contacted by the Securities and Exchange Commission regarding any trading activity should say nothing and seek legal counsel immediately.
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Ann Bailey is a former news writer, and offers these tips for avoiding insider trading. The lawyers at Katz and Phillips provide defense advice and strategies to anyone charged with this federal crime, and, at www.orlandocriminalteam.com, provide valuable insights for using a federally experienced legal team.
Social Media Chat: Will You Be Guilty Of Insider Trading?
