Federal Insider Trading – Federal Crime

Federal Insider Trading – Table of Contents

• 18 U.S.C. § 1348 Overview
• 18 U.S.C. § 1348 Prosecuting
• 18 U.S.C. § 1348 Sentencing
• 18 U.S.C. § 1348 Defending
• Hire Us

Federal Insider Trading – Overview

Insider trading can be prosecuted at both the state or federal level. Both carry severe and harsh penalties; however, the penalties at the federal level are often more serious and can have significant monetary fines and prison sentences. For example, insider trading is considered a white-collar crime and involves the buying, selling, or exchanging of securities and commodities in the stock market. The state and federal laws that regulate securities do so to reflect that the value of a company’s stock and the stock market in general considerably fluctuate in value on a day-to-day basis.

Federal agencies like the Securities and Exchange Commission (SEC) oversee that individuals and corporations who violate the regulations will be prosecuted.

Sometimes, even the FBI will get involved in investigating federal insider trading. The SEC was formed by the United States government in 1934 and conducts surveillance on the stock market to deter any type of illegal or unlawful practices from being committed by individuals, corporations, or their stockholders, shareholders, or employees.  

As discussed in more detail below, this can be a tricky and complicated area of law, with several related potential violations of the law charged in conjunction with insider trading, such as mail and bank fraud or computer fraud. Complicating matters further, some insider trading is indeed legal. All of this can add to the confusion and concerns when faced with these potential investigations or charges brought by the federal government. Thus, it is crucial to understand what exactly is illegal insider trading.

If you are suspected of committing insider trading or have already been charged, you will need a skilled and knowledgeable criminal defense attorney to defend your interests and ensure the best possible outcome for your case. 

What are Federal Insider Trading Crimes

As stated above, these crimes can be brought at both the state and federal levels. The stock market can be confusing, even to the savviest industry leaders. Thus, it is essential to differentiate between legal insider trading and illegal insider trading. To simplify matters, the federal government, through such agencies as the SEC, wants to prevent what it considers the “unethical market practices” related to securities. In this analysis, securities are negotiable financial instruments that typically hold no particular value. They fall into the three usual broad categories of (1) Debt, (2) Equity, and (3) a Debt-Equity hybrid. Generally, in this sense, securities often include stocks, bonds, options, and certificates of interest. Although other such categories can exist, these are the most common. 

Insider trading is legal when stocks are traded within a company by their insiders if such trading does not amount to taking advantage of certain information not accessible to the general public. When information is private, and then trading occurs, a breach of fiduciary duty or relationship of trust has occurred, and this is an illegal activity.

In short, the SEC created SEC Rule10(b)(5) to help with an affirmative defense against insider trading. The rule is “designed to cover the situation in which a person can demonstrate that the material non-public information was not a factor in the trading decision.” This allows a person to defend against a charge of insider trading if the trade was made through a contract, or instruction that was given to another, or through a written plan that “did not permit the person to exercise any subsequent influence over how, when or whether to effect purchases or sales.” 

Illegal insider trading occurs when the trading of securities occurs by insiders through material information that was not provided to the general public. Typically, people who have such insight and access to this type of material are companies’ personnel, stock analysts, board members, employees, brokers, lawyers, and bankers. In short, the SEC, and federal law, make it illegal for these individuals with “material” inside information to buy or sell securities (stocks/bonds/commodities/options) based on their own particular special and insider knowledge that is not known to the general public at large. 

The people mentioned above, such as board members, lawyers, and stock analysts, have a relationship of trust with the corporation. Thus, they have a fiduciary duty and legal obligation to act in the company’s best interests and for the company’s benefit. This also includes a fiduciary duty to act in the best interest of the company’s shareholders. Using material insider information to trade illegally violates that fiduciary duty.

Material and Non-public Information

The SEC often brings charges for these crimes under 18 U.S.C. Section 1348; however, it does not define what “material information” means precisely. This will be discussed further below; generally, if any information might be considered beneficial to a particular stockholder in their decision to buy or sell securities (and the information is secret and/or not public), it will likely be considered material. 

Based on 18 U.S.C., this type of fraud imposes harsh penalties for those who “knowingly executes, or attempts to execute a scheme or artifice” for the purpose to either “(1) defraud anyone in connection with any commodity for future delivery, or (2) obtain, by means of false or fraudulent pretenses, representations, or promises, any money, property connected with the purchase or sale of amy commodity for future delivery.” 

While all companies are different, as are the numerous types of industries that involve stocks and securities, the following are generally considered items that serious investors would consider materially crucial in terms of their buying or selling securities or stocks:

1. Business development;
2. Whether or not there will be stock splits or buybacks;
3. Gaining or losing a significant contract related to the business;
4. Gaining or losing an essential and invaluable customer;
5. Specific economic results which may differ from current trends/outlooks;
6. Acquisitions;
7. Mergers;
8. Divestitures;

If the items mentioned above are used in deciding to buy or sell stocks when this information is not available to the public, it would likely be considered material and non-public and thus punishable by SEC and government regulations.

Examples of People who Commit Federal Insider Trading

1. Directors
2. Corporate officers;
3. Employees;
4. Friends and family members, as well as business associates, who may have been “tipped off” by insiders and then used that information to trade or buy securities;
5. Service firms such as those involved in law, banking, and printing companies that became aware of insider information through illegal means.

Example of Other Charges Often Brought in Addition to Insider Trading Crimes

1. Mail fraud;
2. Computer fraud;
3. Wire fraud;
4. Bank fraud;
5. Fictitious name and/or fictitious address;
6. Failure of Corporate Officers to Certify Financials;

In addition to insider trading, these are all serious crimes, and each requires a serious defense.

Examples of Material/Non-Public Information

1. Positive earnings statements;
2. Negative earning statements;
3. Projections or prospects;
4. Major new contracts;
5. Replacement or removal of board members;
6. Removal or replacement of executive officers;
7. Potential or impending litigation against the corporation or company;
8. Securities splits/dividends or changes in dividends that will be paid;
9. Significant capital investments;
10. New product releases.

Federal Insider Trading – Prosecuting

The SEC will prosecute these charges at the federal level. It will often involve the Department of Justice (DOJ) and the FBI.

Each element must be proven for a conviction. 

1. You sold, or you purchased the security;
2. You did so because you used material and private information;
3. Said information was not generally known to the public;
4. The information indeed was material, as outlined above.

Suppose it can be reasonably be shown that a legitimate and serious investor would most likely consider the information material in deciding whether to buy, purchase, hold or sell a stock. In that case, it will generally be considered “material” for legal purposes.

Federal Insider Trading – Sentencing

As stated above, these crimes, both at the state and federal levels, carry harsh penalties. 

You can face hefty civil sanctions, criminal prosecution, or both. Both the state and federal courts take these crimes very seriously. The securities trade is highly regulated with strict annual reporting guidelines to ensure there is no abuse or misconduct involved in the stock market, which could even affect the United States economy.

You can face the following penalties:

1. Prison sentence of up to 20 years;
2. A fine of up to $ 5 million for an individual;
3. A fine of up to $ 25 million for an organization.

In addition, the penalties can be elevated when the charges are filed in conjunction with other white-collar crimes, as mentioned above, such as wire fraud, bribery, or bank fraud. Such additional charges would likely increase any fines or prison sentences.

Federal Insider Trading – Defending

You need an experienced federal defense attorney to assist you in defending against these serious crimes and potential convictions and penalties. The government has most likely spent weeks, months, or years in obtaining the evidence they will use against you. This can make it difficult to defend against such charges. For these reasons, you need an experienced federal criminal defense attorney. The government has the burden to prove each element of the charge beyond a reasonable doubt. You are also presumed innocent until proven guilty in a court of law. If the prosecution cannot meet the burden of proving each element of the crime, there cannot be a conviction. This is a high standard for the prosecution. An experienced defense attorney can help you prepare the best possible defense to challenge the prosecution’s case.  

Each case is different, but generally, your attorney will attempt to poke holes in the prosecution’s case by demonstrating the following:

1. The inside trade was legal;
2. You relied on information that was not material;
3. The information was publicly known, not secret;
4. You did not know of any illegal trade;
5. You were not culpable in your intent.

Federal Insider Trading – Hire an Attorney

If you’ve been charged with Federal Insider Trading Crimes in the Los Angeles area, contact us today for a free consultation. Your freedom depends on finding an experienced federal defense attorney immediately. The sooner you reach out, the sooner we can work on getting your case drastically reduced or dismissed entirely.

Need a Criminal Defense Attorney? CALL NOW: 310-274-6529

Seppi Esfandi is an Expert Criminal Defense Attorney who has over 20 years of practice defending a variety of criminal cases.