Insider Trading: Why is it So Hard to Spot and Punish?

Confidence in Wall Street and the stock market has been considerably low in the last five years. After the 2008 market crash and the underlying illegal activities and misconduct seen as a result of the crash, it is no wonder that people distrust the market. Although in the last five years, more legislation has been put into place to further limit the illegalities and misconduct seen with individuals attempting to “game” the system to make a pretty penny, there has also been an increase in the number of more innocent individuals getting caught up in the struggle and falling under the radar of the Securities and Exchange Commission (SEC), the U.S. Department of Justice (DOJ), and the Financial Industry Regulatory Authority (FINRA) for acts that are considered insider trading.

Lessons Learned from the 2008 Market Crash

With the welcoming of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has been campaigning against cheaters of the system who are looking to take advantage of less knowledgeable investors through misrepresentations and fraud. The most common example is through insider trading, which can be civilly or criminally punishable. The difference between a slap on the wrist and long-term jail sentences can make all the difference in the world and becoming familiar with them is important so as to protect oneself from the differences.

What is Insider Trading?

Insider trading is defined by the SEC as the illegal buying and selling of a security based on material, nonpublic information that was “tipped” or provided to the buyer/seller while he or she was in a relationship of trust and confidence such as having a fiduciary duty. It is also illegal to “tip” anyone with material nonpublic information when the tipper received the original information as a result of his/her position of power.

Why is Insider Trading Hard for Many To Avoid?

The law is not easily interpreted and understood and that makes it extremely difficult for many to follow the rules. The reason is because the definition of “material” is not understood, as mere rumor or speculation does not necessarily equate to “material” nonpublic information. Also, it must be proven that the defendant was “aware” that the information was “material” and nonpublic information for the charge to be brought against the defendant. Finally, it must be proven that the defendant bought or sold a security “on the basis of” the material nonpublic information, thereby meaning that it must be shown that without that information, the defendant never would have taken the actions that he/she did.

With regards to the “tipper,” it might not be obvious whether he or she is in control of “material” nonpublic information as a result of some sort of relationship or fiduciary duty. It is more obvious when the tipper is in the senior authority like the CEO of the company, but it could still apply to the janitor of the company who overheard the meeting, knew that the information was “material” and nonpublic, and still reported what he/she heard or benefited in some way from this dispersion of knowledge.

The Difference between Criminal and Civil Prosecution of Insider Trading

With regards to prosecution, there are factors that are considered when deciding whether or not a defendant should be criminally or civilly prosecuted for the breaking the law. What generally triggers criminal insider trading charges includes the following:

• The extent of the wrongdoing; in other words, the amount of money involved, the extent to which the activity affects others and the company itself;
• Whether there are witnesses or the extent to which there is evidence demonstrating criminal intent or wrongdoing; and
• The extent to which the government is targeting Wall Street as a result of its past misconduct to deter future harm.

Experienced Criminal Defense Attorney in Fort Lauderdale

White collar crimes, and more specifically, acts of insider trading, have serious consequences attached to their commission. There are, however, many defenses available to defendants, which is why it is important to speak with an experienced Fort Lauderdale criminal defense attorney like Kevin J. Kulik. Contact the Law Offices of Kevin J. Kulik today for a free and confidential consultation.