Insider trading is a significant federal offense, encompassing the buying or selling of securities based on non-public, material information. This practice violates securities laws and is primarily regulated under the Securities Exchange Act of 1934. The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are the primary federal entities responsible for investigating and prosecuting insider trading cases.
Insider trading occurs when individuals with privileged access to material, non-public information about a company use that information to gain a financial advantage in the securities markets. “Material” information is anything that would impact an investor’s decision to buy or sell securities, such as undisclosed earnings reports, mergers, or product developments.
Individuals directly associated with a company, such as executives, employees, and board members, are often prosecuted for insider trading. However, others like consultants, lawyers, accountants, and even family members or friends who receive non-public information and trade based on it are also liable. This extends to “tippees,” individuals who receive insider information indirectly and act on it.
Insider trading is regulated through various provisions within the Securities Exchange Act. Additionally, Rule 10b-5 prohibits fraud or deceit in connection with the purchase or sale of any security. The DOJ may pursue criminal penalties in cases of clear and intentional fraud, relying on statutes like the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988.
Penalties for insider trading both federally and in states can be severe. Civil penalties, enforced by the SEC, may include financial fines up to three times the profit gained or loss avoided through illegal trades. Criminal penalties, pursued by the DOJ, can lead to significant prison sentences (up to 20 years) and additional fines of up to $5 million for individuals and $25 million for organizations.
Defending against insider trading charges can be challenging. Prosecutors often need to prove the accused knowingly used non-public, material information. Criminal legal defense lawyer Nate Crowley can. demonstrate that the defendant had a legitimate, non-insider reason for the trade or that the information was not material or was already public.
California’s approach to insider trading primarily aligns with federal law, but the state enforces additional consumer protection and securities regulations that supplement federal oversight. Although insider trading cases are typically prosecuted at the federal level, California law also prohibits securities fraud and provides enforcement mechanisms under the California Corporate Securities Law of 1968 and the California Penal Code.
California’s Corporate Securities Law of 1968 prohibits fraudulent practices in connection with the sale or purchase of securities, covering similar ground to federal laws under the Securities Exchange Act. Violations under this law can involve using non-public, material information to gain unfair advantage in stock transactions, which is broadly consistent with federal insider trading definitions. Section 25401 of the law prohibits misleading statements or omissions of material facts in the sale of securities, laying the groundwork for insider trading prosecutions.
The California Department of Financial Protection and Innovation (DFPI) oversees securities regulation and enforces state securities laws. While the Securities and Exchange Commission (SEC) handles most insider trading cases, DFPI plays an essential role in monitoring and referring potential cases to federal authorities. DFPI can also levy civil penalties, revoke licenses, and issue cease-and-desist orders against individuals or entities suspected of violating state securities laws.
Penalties for securities violations in California can be significant. Violators may face civil penalties, restitution, and disgorgement of profits obtained through illegal trading. Additionally, California’s Penal Code allows criminal prosecution of securities fraud, which may lead to imprisonment, fines, and community service.
While insider trading enforcement in California often defers to federal authorities, the state’s securities laws provide a comprehensive framework for addressing fraudulent trading practices. Nate Crowley is a skilled lawyer with legal defense experience at both the federal level and state levels, when it comes to addressing insider trading and other white collar crimes.
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