Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j, Rule 10b-5, 17 C.F.R. §240.10b-5
The Securities and Exchange Commission, or SEC, has cracked down in recent years on ‘insider trading,’ which is the purchase and sale of securities based on private information gotten from employees or other insiders of the company. For example, a pharmaceutical company employee could release information about FDA approval of a drug before that information is released, which can result in huge gains for shrewd traders. The New York District is one of the most serious prosecutors of insider trading crimes, in large part to its geographic proximity to the New York Stock Exchange, and the headquarters of most major banking and financial institutions.
Red flags come up by computer monitoring of the market which track the stock exchanges, include volume and price movements of publicly traded stocks. An unusual transfer can result in an investigation or inquiry by the SEC into the trading practices of an individual or company, depending on the circumstances. The SEC usually does not have a lot of power at the beginning of the investigation, meaning they usually can’t subpoena suspects (or documents). So, the SEC will typically use information from those who voluntarily cooperate.
If someone is the subject of an SEC investigation concerning insider trading, the first indication of such involvement is usually a phone call from an attorney from the SEC. The participation in this phone call is completely voluntary, but it is always a good idea to speak with an attorney before speaking to anyone else if you become aware that you are the subject of a potentially criminal investigation. The SEC will speak to you again if you indicate that you would like to converse in the presence of an attorney.
The elements of insider trading are first: the actual trade – purchase or sale – of securities. Suspicious circumstances are buying securities before a major, positive announcement (like FDA approval of a drug) or selling securities before a major, negative announcement (like FDA rejection of a drug). So, there must be some kind of positive action – simply refraining from engaging in trades is not enough to prosecute someone for insider trading.
The second element is, crucially, being in possession of insider trading. Some courts have held that even if there were other, more motivating factors for someone to make a trade, if he or she was in possession of non-public information, that could be enough for an insider trading conviction. Other courts have held that the person must have used this information in order to be guilty of insider trading.
Next, the information must be ‘material,’ or that there is a strong likelihood that a reasonable investor would consider the information at least important in making investment decisions.
Finally, the last element is the existence of ‘non-public information.’ An argument that the information is not public is if there were rumors or leaks from the company – but usually, this argument is not successful and the information is typically considered to be non-public.
If the government cannot prove these elements, their prosecution will likely be unsuccessful. Other reasons the investigation and prosecution are unsuccessful is if the trader has a valid reason for the trade – like an understanding of the history of the company or market research. A good attorney will help the client establish a timeline and relationship with the company. Once you become aware that the SEC has begun an investigation for insider trading, seek legal counsel as soon as possible.
An attorney should determine what caused the individual or company to make the trade – such as an independent news article – and obtain copies to preserve this information. The attorney also needs to determine the relationship between the trader and the company in question and find out if there are any other accounts that might contain questionable funds, including those belonging to family members. The attorney needs to know at what point in the investigation the SEC is – whether it is still informal, or if there has been a formal investigation started through the issuance of Formal Order of Investigation. The Order will assist the attorney in determining what statutes are in question, and any allegations of the violations of the law that their client faces.
