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As Gordon Gekko demonstrated in the 1987 blockbuster hit movie, Wall Street, insider trading refers generally to the buying or selling of securities based on material non-public information. Such conduct is illegal because the misuse of privileged information undermines investor confidence, threatens the fair functioning of the markets, and is considered a breach of fiduciary duty.
Is insider trading an important enforcement focus of the Commission? Absolutely. In Fiscal Year 2019, the SEC brought significant enforcement actions involving insider trading against 42 individuals who misappropriated or traded on material, nonpublic information.
In many cases, corporate insiders are ‘in the know’ based on their position inside the organization. The employee then buys or sells the securities based on that important and non-public information. Insider trading may also occur when a corporate insider tips, directly or indirectly, someone outside of the organization who then buys or sells securities. In that case both the “tipper” of the information and the “tippee” (the person receiving the information) are liable for illegal insider trading.
What might an insider trading scheme look like?
Read some examples of notorious insider trading cases from the last decade.
The SEC conducts market surveillance using sophisticated tools to detect suspicious trades and potential illegal insider trading. The Commission also receives numerous tips regarding potentially illegal insider trading from wronged investors, rival traders, and whistleblowers.
Keep in mind, the SEC deals with civil actions – it cannot send an individual to jail for a criminal conviction. Nevertheless, law enforcement agencies work closely with one another to hold wrongdoers accountable. In an insider trading case, for example, once the SEC has opened an investigation, if the matter is significant and the Department of Justice believes there is enough information for a criminal conviction, it may embark on a parallel criminal proceeding. (In fact, if an SEC whistleblower’s tip assists the DOJ in a parallel action, the whistleblower can receive an award based on monies recovered in the DOJ enforcement action as well!)
Want to learn more? In an article in Forbes, our partner Jordan Thomas explains the difference between a criminal violation of insider trading and a civil one.
For further details about other common securities violations, see our Securities Law Primer