October is National Crime Prevention Month. Although “white collar” crime doesn’t get as much daily news coverage, the consequences of these crimes often ruin the financial security of thousands of vulnerable people while given a select few an edge. In the US, heavy focus by the Securities and Exchange Commission (SEC) is geared toward investigating illegal insider trading.
According to the SEC, “insider trading undermines investor confidence in the fairness and integrity of the securities markets”.
To help successfully prosecute cases involving insider trading, the SEC has two rules, 10b5-1 and 10b5-2, which help to establish clarity where courts have disagreed on the act of when insider trading becomes criminal. Every day, legal insider trading takes place – where employees buy and sell stock within their own companies. Although corporate insiders engaging in this type of trading are required to report the trades to the SEC, it is not illegal. Insider trading crosses the legal boundary when securities are bought or sold in breach of fiduciary duty or nonpublic information is misappropriated.
- Rule 10b5-1 from the SEC was established to make the allowance for insiders of publicly traded corporations to set up a trading plan for selling stocks they own. It is often used by corporate executives to sell a predetermined amount of shares at regular intervals, while avoiding the suspicion of illegal insider trading.
- Rule 10b5-2 addresses the issue of when a breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading. It helps to clarify how the misappropriation theory applies to specific non-business relationships.
The SEC believes that selective disclosure shakes investor confidence in the integrity of capital markets. There are many high-profile cases that highlight how prevalent and damaging illegal insider trading is. Looking back on some of the biggest recent cases:
SAC Capital (2013) – Fined 1.8 billion, the largest ruling in history for insider trading. The firm was using non-public information on publicly traded companies to boost its returns.
Galleon Group (2011) – The hedge fund firm run by Raj Rajartnam fell apart when Raj was arrested in 2009 for conspiracy to trade using insider information, after relying on a Rolodex of insiders for insider information. He paid a criminal penalty of $64 million and his civil penalty was $93 million.
ImClone (2001) – Prior to the announcement that the company failed to get FDA approval on a new cancer drug called Erbitux, a number of executives sold their stock in anticipation of the hit to the stock price. This was the case the embroiled Martha Stewart and her stock broker, after he received the insider information and passed it onto Stewart, who then dumped stock before the announcement. Later it was discovered that ImClone’s founder, Samuel Waksal, gave the information to sell the stock before the announcement to members of his family, other executives in the company, and even the general counsel.
Enron (2001) – Although this case is more focused on Enron’s use of mark-to-market accounting, the former president of Enron, Jeffrey Skilling, was convicted in 2006 on 19 counts, including insider trading. He was sentenced to prison and fined $45 million.
Insider trading has become such an issue that it is not just the big fish who get caught. From family and friends to the secretary, insider information being misappropriated is not worth the risk. It is important for all people associated with such information or companies to clearly understand what kind of information can be discussed with others. 360training.com provides a full suite of short and comprehensive courses on Insider Trading Awareness and Prevention that are meant for all kinds of audience to understand how to protect non-public information and keep themselves within the bounds of the law.