There are many reasons to prevent insider trading. Some of these include the potential for lawsuits and penalties, the liability of short-swing profits, and procedures that can be put in place to ensure that insiders don’t engage in improper trading.
Legality of insider trading
Insider trading is the practice of trading on material, non-public information about a company or a security. It includes buying or selling securities before the news of a good or bad company announcement is announced. The Securities and Exchange Commission (SEC) investigates insider trading violations.
In some cases, the SEC has issued orders preventing an insider from taking certain positions at a publicly traded company. This is called a cease-and-desist order. An insider may also be prosecuted by the Department of Justice for money laundering. A maximum sentence for wire fraud is 20 years in prison.
Insider trading occurs when an employee acquires, discloses, or uses material, non-public information that is not known to the public. The law prohibits this type of trading, which can lead to a large profit for the insider.
Insider trading is illegal in many countries. However, there are a few gray areas. For example, insider trading may not be unlawful in some European nations.
Procedures to prevent improper trading by insiders
Insider trading is a growing concern in the capital markets today. It can affect the allocation of capital and the resulting investor confidence. In turn, it distorts the incentives of corporate insiders.
There are legal measures an issuer can take to protect itself. One example is Regulation Fair Disclosure (RFD), which was created by the SEC in 2000. These rules require companies to disclose information on major ownership changes.
Another measure is a written trading plan. Known as a 10b5-1 plan, these are intended to give insiders the chance to prepare for a trade ahead of time. The plan also prevents insiders from gaining access to material non-public information. However, the plan may not be effective if the insider has no material non-public information.
While not a foolproof solution, insider trading is a serious matter. The United States Department of Justice and the Securities and Exchange Commission actively investigate and prosecute cases of insider trading. This is because it can lead to stiff civil and criminal sanctions.
Penalties for insider trading violations
The Securities and Exchange Commission has the power to impose civil and criminal penalties on insider trading violations. Insider trading involves the purchase or sale of securities while a person is aware of material nonpublic information.
Generally, insider trading occurs when a person breaches the trust or fiduciary duty of a person who controls or is responsible for the company. It can also occur when a person obtains access to important confidential corporate information.
An employee can be found guilty of insider trading if he or she is a corporate officer or director or if he or she has a close connection to the company. If an employee is suspected of insider trading, the U.S. Department of Justice may investigate.
The federal government may seek a maximum penalty of twenty years in prison and fines of up to five million dollars. In addition, the SEC can impose a fine of up to three times the profit resulting from insider trading.
Liability for short-swing profits
In an effort to restrict insiders from profiting from short-term trading, the Securities and Exchange Commission (SEC) implemented a rule that prohibits insiders from profiting from profitable insider trading in company securities within six months. The rule is found in Section 16 of the Exchange Act, and it requires insiders to return any profits gained from insider trading to the issuer.
Insiders are subject to civil liability under the Securities Exchange Act of 1934, and they may be punished with fines or imprisonment. Short-swing profits are profits from matching purchases and sales of equity securities of an issuer in a six-month period. Generally, the SEC may seek a civil monetary penalty of up to three times the amount of the profit gained.
A family of hedge funds that is managed by the same investment adviser may be liable under Section 16. This analysis is based on the Second Circuit’s ruling in the case of International Value Advisers LLC v. Rofam, LLC.