Reporting Insider Trading to the SEC
In a recent analysis, a law school professor concluded that the Securities and Exchange (SEC) whistleblowing program is having a real impact on the stock market: The real likelihood that an SEC whistleblower will report on someone’s illegal trading is making it less likely that someone will commit insider trading. And if they do make a trade based on some inside information, they’re making less money on their illegal trade.
Why is it that SEC whistleblowing is having such a strong effect?
First, it’s because insider trading cases typically relate to a single trade. It’s a very different scenario than, say, the large pattern of prolonged illegal behavior (with many involved and injured parties) that might alert prosecutors to a boiler room scam. Therefore, most insider trades go unnoticed by federal authorities (particularly trades made by someone outside of the relevant company) until a whistleblower calls it to the authorities’ attention.
SEC whistleblowers are also invaluable for the prosecution of insider trading cases. They may be able to identify the information that provided the reason for the trade. Perhaps they know the source of that information and how the information was transmitted—all facts that could be crucial for a successful conviction.
Without that information, a prosecutor may have to rely on circumstantial evidence for their case. For example, the prosecutor may argue that someone bought a large amount of stock just before its value rose. But they have little proof of wrongdoing other than the suspicious timing and an argument that the purchase must have been motivated by some insider information. It’s hard to convince a jury of someone’s guilt without more concrete evidence.
The phone rings, and someone’s telling you they’ve got a hot tip on a stock. Their friend-of-a-friend works at a company that’s about to make a big announcement that will send the company’s stock price soaring. He’s going to buy a bunch of stock now, and he wants to know if you want in, too. Should you say yes?
It seems innocent enough, but—the answer is no, because that could be “insider trading,” a violation of securities law.
Illegal insider trading occurs when someone buys or sells a stock because they have material nonpublic information about the company. And those who have the information only received it because of someone’s fiduciary duty or other relationship of trust to a company.
There’s no requirement that the person trading on the information is the insider—simply that they are relying on an insider’s information.
(It is possible to have legal insider trading. For example, corporate executives can buy and sell stock of the companies they work for. However, these sales are regulated and must be publicly disclosed.)
Examples of those who have been prosecuted for insider trading include:
- Corporate executives who traded based on their knowledge of company developments
- Friends, family, and others connected to corporate executives
- Employees of law, banking, brokerage, and printing firms who received advance notice of company action, based on the services they provided to the companies
If you are aware of someone involved in insider trading, and you’re considering becoming an SEC whistleblower, contact the experienced attorneys at Silver Law Group and the Law Firm of David R. Chase.