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Is insider trading always illegal?

On Behalf of | Jan 16, 2024 | Federal Criminal Defense

The world of finance is complex, governed by rules and regulations intended to maintain fair play in the markets. Among these, insider trading is a critical issue with grave consequences. Insider trading occurs when someone trades a company’s stocks or other securities based on information that is not available to the public and is significant enough to affect the company’s share price.

Insider trading is illegal, but not always. Corporate insiders can legally buy and sell stock in their own companies, but only if they promptly report their trades to the U.S. Securities and Exchange Commission (SEC). They make the material information public by reporting it to the proper agency. They did not use it as an unfair advantage. Instead of insider trading, it is a perfectly legal insider transaction.

It becomes illegal when it violates the principle of fairness

Insider trading fundamentally entails the purchase or sale of a security by someone who has access to crucial, confidential information about it. They use privileged information entrusted to them by a principal for their own personal gain. The action violates a fiduciary duty, making it illegal.

It can happen when a high-ranking executive buys or sells stock based on privileged information before it becomes publicly available. They have engaged in insider trading and earned a sizable return, which makes the whole activity unfair to other potential traders.

Insider trading is not only something corporate insiders can be guilty of doing. It can also involve friends, family members or any individuals who trade securities based on tips received from insiders. In California, as in the rest of the United States, insider trading is a term that often goes hand in hand with concealed deals and profound betrayals of trust. You do not have to be an established CEO or Martha Stuart to be under investigation for insider trading. Some people do not even know they have engaged in the criminal act until after the fact.

The consequences of insider trading in California

At the federal level, violators may face both civil and criminal penalties, including hefty fines, disgorgement of profits and imprisonment. Under California law, additional state penalties can apply. Criminal penalties can include expensive fines and jail time, while civil penalties might involve compensatory damages paid to those harmed by the illicit trades. Convictions can lead to tarnished reputations, loss of professional licenses and significant financial burdens.

If you find yourself facing allegations of insider trading, it is imperative to consult with a knowledgeable criminal defense attorney who specializes in criminal law. You may not have known that the information you used was confidential or that it could affect the stock price.