Prominent Insider Trading Cases

January 2, 2019

Finance attracts a wide assortment of people. Given the stakes involved, it’s not too surprising that there are many highly talented, highly capable people in the financial world. Money has a unique way of attracting even the most prosaic people to its side. Not only is money attractive, it can also be something which causes people to bend their principles and do things they wouldn’t ordinarily do. The financial world has witnessed some of the most mind-blowing scandals one could imagine. The reason for this is not simply because finance draws in some very unreliable or morally backward personalities. Finance can also transform people and make them behave in very uncharacteristic ways.  

A White Collar Crime

White-collar financial crimes have always garnered considerable attention in the American news media. This is not surprising, as Americans have a dual fascination with professional status and money. Among such crimes, cases of insider trading have received some of the most press. In this post, we will give our readers a concise definition of “insider trading” and then document a few prominent examples. As we will see, the legal definition of insider trading is fairly simple, but the biggest stories of such trading can be quite complex. Talented attorneys have always played powerful roles in cases of insider trading, and for good reason. A qualified attorney can mean the difference between freedom and a hefty prison sentence.  

Quick Definition 

Insider trading means any trading of a company’s stocks or other securities using privileged or confidential information. Federal law defines an “insider” as someone in control of at least 10% of a company’s securities. Insiders may only trade a company’s securities using information which is publicly available.  

If an insider gives a “tip” which involves confidential, non-public information, then the recipient may be penalized. In order for a tip recipient to be penalized, the recipient must have a reason to believe that the information was confidential. If the information is not openly stated to be confidential, the recipient may still be liable if an inference of confidentiality can be drawn. In that case, the law imputes the same insider status to the recipient and so the the same legal standard applies to the recipient.

Misappropriation Theory

The so-called “misappropriation theory” allows prosecution for trading on non-company stock based on confidential information. This theory has been codified under 17 CFR 240.10b5-1. Previously, prosecution was only possible for insider trading of the insider’s company stock. Under the codification, if confidential information is used to trade on any stock, this may be prosecuted. The public policy rationale behind the criminality of insider trading is that such trading depresses economic growth. What’s more, such trading imposes higher costs on securities traders who play by the rules.  

Enron Executives 

Easily one of the biggest cases of insider trading took place in the Enron scandal in 2001. The Enron scandal involved all sorts of nefarious underhandedness, not just insider trading but complex accounting fraud, media deception, and so forth. The three most prominent Enron insiders – Jeff Skilling, Ken Lay and Andy Fastow – sold off millions of dollars of Enron stock prior to the company’s collapse. These three insiders, along with many others, were indicted and convicted on multiple criminal charges. Lay passed away before he could serve his sentence. Fastow and Skilling, however, both went to prison.  

Actively Misleading

The sheer level of depravity involved in the Enron case contributed to its publicity. It’s clear that the top Enron executives were aware of the company’s dire financial situation well before its collapse. It’s also clear that their actions were actively misleading. They lied to analysts, reporters and even large sections of the company’s workforce. When Enron collapsed, thousands of employees lost their jobs and their retirement pensions.  

Martha Stewart 

Once a homemaking icon, Martha Stewart’s reputation plummeted when she and her broker received convictions for insider trading in 2004. Stewart sold more than 4,000 shares of stock in ImClone, a pharmaceutical company. She did so just before the FDA rejected approval of an ImClone drug. The timing of the sale allowed Stewart to trade at a price in the high $50s. Shortly after FDA rejection of the new drug, the stock price dropped to barely over $10 per share. Initially, Stewart claimed that the timing could be explained without insider trading. Ultimately, however, Stewart’s story collapsed. The court found Stweart guilty of collusion with ImClone’s CEO, Samuel Waksal. Waksal gave similar information to many others aside from Stewart. As a result, Waksal received a sentence of 7 years in prison and fined $4.3 million.

More Than Financial Repercussions

Both Stewart and her broker were convicted of insider trading. Stewart was sentenced to five months in prison and fined $30,000. The harshest consequence for Stewart, though, was the damage to her reputation and business empire. After the scandal, she resigned as CEO of her own company, Martha Stewart Living Omnimedia. The scandal caused shock throughout the country as Stewart’s behavior ran directly counter to her hard-crafted public façade.  

Call A New York City Tax Attorney to Discuss

Insider trading is just one area among many with which the attorneys at Mackay, Caswell & Callahan, P.C., have familiarity. Though proving the occurrence of insider trading can be challenging, the SEC regularly monitors trading for suspicious activity. Insider trading can lead to very serious penalties. If you’re facing this crime, it’s imperative you procure competent counsel. If you need counsel on this matter, or another tax or business law issue, reach out and a top New York City tax attorney will assist you.

Image credit: CreditScoreGeek 

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