Insider Trading

Insider trading enforcement actions continue as SEC’s top priority

Illegal insider trading generally occurs when a security is bought or sold in breach of a fiduciary duty or other relationship of trust and confidence while in possession of material, nonpublic information. In recent years, the SEC has filed insider trading cases against hundreds of entities and individuals, including financial professionals, hedge fund managers, corporate insiders, attorneys, and others. In 2014, examples of noteworthy cases include enforcement actions against the following:

Two husbands on March 31, 2014 – In two unrelated cases, the SEC charged two men with insider trading on confidential information they learned from their wives about Silicon Valley-based tech companies. Each agreed to financial sanctions to settle the charges.

Stockbroker and law firm clerk on March 19, 2014 – SEC charged two individuals who were linked through a mutual friend, with insider trading for $5.6 million in illicit profits based on nonpublic information that the clerk obtained by accessing confidential documents in law firm’s computer system.

Wall Street investment banker on February 21, 2014 – SEC charged an investment banker with making nearly $1 million in illicit profits by insider trading in a former girlfriend’s brokerage account to pay child support.

Chicago-based accountant – SEC charged an accountant with insider trading ahead of the release of financial results by the company where he worked. The individual made more than $250k in illicit profits.

May 14th, 2014|Fraud|

Spotlight on insider trading

Many people associate the term “insider trading” with illegal conduct. But the term refers to both legal and illegal activities. The SEC’s legal version is that corporate insiders, i.e., officers, directors, employees, or anyone with at least a 10% stake in a company, can buy and sell stock in the company providing they abide by the SEC’s restrictions and transactional requirements.

In 2002, the SEC tightened its rules by adopting the Regulation Fair Disclosure to curb the practice of company executives giving securities analysts an inside track; the rules mandate that anything disclosed to an outsider must be revealed to the general public. The SEC also includes in its definition of insiders those who have “temporary” or “constructive” access to the material information, such as business associates, friends, family members, brokers, attorneys and “other tipees.” The U.S. Supreme Court ruled recently that any individual, with or without ties to the particular company, who is in possession of material information, even if the information was stolen, is an insider.

Illegal insider trading, according to the SEC, refers to the buying or selling of a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information. Insider trading violations include “tipping” such information, trading in securities by the person “tipped” and trading by those who misappropriate the information.

The SEC considers the prosecution of insider trading violations a top priority. The exhaustive publicity of illegal insider trading cases sends a strong message that no one is outside its radar. A spokesperson for the Division of Enforcement said that the SEC is aggressively rooting out and identifying hard-to-detect insider trading by connecting patterns of trading to sources of material nonpublic information, whether those sources are law firms, banks or others with a duty to keep the information confidential. Prosecutors add that illegal trading is now easier to prove as direct evidence of fraudulent intent can be obtained through wiretaps, e-mails, text messages, social media contacts, etc. And that evidence also is useful to convince co-conspirators to turn on each other and provide even more substantial proof of fraud. Going after the violators is critical because their actions hurt individual investors and undermine public confidence that allows firms to raise money in the capital markets.

Individuals who are convicted of criminal insider trading face prison terms (the Sarbanes-Oxley Act extended the maximum length of sentences) and fines in addition to civil penalties, which can be triple the realized profit or the loss avoided. Violators also may be charged with mail and wire frauds and possibly with tax evasion and obstruction of justice. Further consequences include being barred from serving as executives or directors of public companies and being named as defendants in multi-million dollar lawsuits. Corporations are subject to penalties for failure to establish compliance programs and for failure to ensure reasonable efforts to prevent violations under the theory of “controlling person” liability. Even if an insider trading investigation does not result in formal charges, the company’s reputation may suffer from the stigma and adverse publicity.

May 24th, 2011|Educational Series|

Common securities fraud schemes on the Internet

Pump and Dump: These types of schemes are quick manipulations of the stock price. The schemers buy thinly traded stocks and then transmit optimistic messages about the stocks, which cause  investors to buy, thus driving up the price. The ownership interest that the schemers have in the particular stock is not disclosed. The schemers then sell the stock for significant gains. Their messages are transmitted through official looking e-mails, bulletin board posts or Web sites.
Dump and Diss: This is the pump and dump scheme in reverse. The schemers short-sell a stock and then transmit negative messages to investors causing the investors to sell, which in turn drives down the price. No disclosure is made of the negative position that the schemers have in the stock. They then buy the lower valued stock to fill their earlier sell orders and make a profit on the difference.
Insider Trading: The recipients of non-public information use the insider information to trade ahead of the information’s release, and subsequently realize profits.
Unregistered Offerings: Purported issuers of securities offer and/or sell securities through the Web without being registered or exempt from federal and state securities laws.
Pre-IPO Offerings: Purported issuers offer and/or sell shares of their company to investors based on the premise that the company soon will be going public. Some of these companies do not exist or are marginally successful.
Private Placement Offerings: Purported issuers offer and/or sell shares of their company with the usual promise of high returns, with the help of slick promotional materials. The companies turn out to be nonexistent.
Prime Bank Offerings: Purported sellers offer and/or sell interests in some type of prime bank instrument. The investors are advised to put their money into the prime banks of Europe in a program that generally is available only to the very wealthy, but because there is a “shortage” for the particular program, it is being offered for a smaller minimum investment. Prime bank instruments do not exist.
July 30th, 2010|Educational Series, Fraud|
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