How do insider trading schemes work? Put simply, insider trading occurs when someone executes a stock trade based on information that is unavailable to the general public. In many cases, corporate insiders have this kind of information—such as an upcoming merger or a pending announcement of a lucrative patent—and can use it to arrange a well-timed, illegal trade. Insider trading schemes also involve a corporate insider tipping, directly or indirectly, someone outside of the organization, such as a friend or relative, who then buys or sells securities. In that case both the “tipper” of the information and the “tipped” (the person receiving the information) are liable for illegal insider trading.
From Michael Milken and Martha Stewart to everyday people who can’t resist the temptation of an easy payout, cases of insider trading have made splashy headlines and led to serious SEC enforcement actions for decades. 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.
Examples of Insider Trading Schemes
Frauds are like snowflakes, no two the same. A scheme’s structure and its players come in all shapes, sizes and degrees of sophistication. Here we examine five infamous cases of insider trading from the last decade – some we include because of their record penalties, others because the facts are just plain interesting:
- In 2011, the SEC secured a then-record financial penalty of $92.8 million against Raj Rajaratnam, the billionaire manager of Galleon hedge fund, and alleged mastermind of one of the largest hedge-fund insider trading rings in US history. Rajaratnam engaged in a 7-year, wide-ranging conspiracy to trade on illegal tips from corporate executives, bankers, consultants, traders and directors of public companies. He was sentenced to 11 years in prison and faced monetary sanctions in civil and criminal cases of over $156.6 million. The SEC’s enforcement action against Rajaratnam and Galleon was part of a vast insider trading probe that resulted in civil charges against 29 individuals and entities. Most notably, in 2013, the Commission obtained a $13.9 million penalty against former Goldman Sachs board member Rajat K. Gupta who tipped corporate secrets to Rajaratnam about Goldman’s financial results and a key $5 billion investment from Warren Buffett’s Berkshire Hathaway. In a 2012 parallel criminal case, Gupta was sentenced to two years imprisonment and ordered to pay a $5 million criminal fine.
- In 2013, the SEC secured a record $600 million settlement from CR Intrinsic, a unit of hedge fund SAC Capital, for an insider trading scheme involving a clinical trial for an Alzheimer’s drug. Described as the most lucrative single insider-trading scheme ever, the Commission’s complaint alleged that Mathew Martoma, a CR Intrinsic portfolio manager, illegally obtained confidential details about the clinical trial of the drug from a doctor who was selected by the pharmaceutical companies to present the final drug trial results to the public. Martoma and CR Intrinsic then caused several hedge funds to sell more than $960 million in securities in a little more than a week. In 2014, in a criminal proceeding, Martoma was sentenced to 9 years in prison and forced to forfeit his nearly $10 million bonus. Seven additional SAC Capital employees were also found guilty of insider trading.
- In a particularly brazen case of insider trading, in 2013 the SEC charged Scott London, a former KPMG partner, for providing nonpublic information about KPMG clients to a friend, Bryan Shaw. Using this information, Shaw executed trades which netted him about $1.3 million in profits. The case baffled Wall Street insiders as London knowingly committed illegal acts and risked his long career and reputation for a small return: $25,000 in cash, Bruce Springsteen tickets, and a few dinners. London also spoke openly on the phone with Shaw about the best way to handle the trades and avoid suspicion from authorities. They conducted handoffs of cash in the parking lot of a Starbucks, where the FBI caught them on camera. The SEC barred London from auditing public companies and the DOJ filed a criminal complaint against him. London was sentenced to 14 months in prison and ordered to pay a criminal fine of $100,000. Shaw was sentenced to 5 months after helping the FBI build a case against London.
- In 2016, the SEC uncovered an insider trading scheme centered around a web of gambling debts. Thomas Davis, a Dean Foods Company board member, owed money to sports gambler William Walters of Las Vegas. For seven years, Walters used inside information about Dean Foods provided by Davis and made $40 million in profit and avoided losses. Additionally, he provided Davis with almost $1 million to help Davis settle his debts. The SEC also alleged that professional golfer Phil Mickelson traded Dean Foods’s securities at Walters’s urging and then used his almost $1 million of trading profits to help repay his own gambling debt to Walters. Walters and Davis were charged with insider trading, and Mickelson was named as a relief defendant. Relief defendants, while not accused of wrongdoing, are named in SEC complaints to recover alleged ill-gotten gains from schemes perpetrated by others. Mickelson agreed to pay over $1 million in profit plus interest on the money he made on the investment. In a parallel criminal proceeding, Walters was sentenced to five years in prison and ordered to pay a $25.4 million fine. Davis was sentenced to two years in prison and ordered to pay approximately $8 million in restitution.
- In late 2019, the SEC announced a settlement with former U.S. Representative Christopher Collins, his son Cameron Collins, and Stephen Zarsky. All three were charged with insider trading and pleaded guilty to related criminal charges. According to the Commission’s complaint, Christopher Collins tipped his son non-public negative trial results for a multiple sclerosis drug developed by biotech company Innate Immunotherapeutics. Christopher Collins learned of the results from his position as an independent director on Innate’s board. Cameron Collins tipped his then-girlfriend’s father, Stephen Zarsky. The two men then sold nearly 1.7 million Innate shares ahead of Innate’s announcement of the results, avoiding combined losses of more than $700,000. Christopher Collins was sentenced to 26 months in prison for the related criminal charges.
For more information on insider trading schemes, check out our first-of-its-kind SEC sanctions database.
For more details about common securities violations, see our Securities Law Primer.