If you received a target letter from the Department of Justice, or you have another reason to believe you are a suspect in an insider trading investigation, you need to take the allegations and the situation seriously. You may think of insider trading as a relatively harmless crime. You may even wonder if insider trading is a felony because you think of it as a minor offense. You need to understand that not only is insider trading a felony, but it carries a lengthy term of imprisonment if you are convicted.

WHAT IS INSIDER TRADING

The term “insider trading” is usually used to refer to buying or selling a security while in possession of important non-public information about the security. Not only does insider trading result in a breach of fiduciary duty, but it can also lead to prosecution by the U.S. federal government for securities fraud.

WHAT IS SECURITIES FRAUD?

Because there is not a specific federal statute prohibiting “insider trading,” activities believed to fall under the definition of insider trading are typically charged as securities fraud. The Securities Exchange Act of 1934 Section 10(b) makes it unlawful to:

• Employ any device, scheme, or artifice to defraud.
• Make any untrue statement of a material fact or omit to state a material fact.
• Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Securities fraud, according to the United States Code (18 U.S.C. § 1348), occurs when someone “knowingly executes, or attempts to execute, a scheme or artifice…

• To defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities…OR
• To obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery…

IS INSIDER TRADING A FELONY?

Insider trading is one of many non-violent, financially motivated, crimes referred to as “white collar” crimes. Although the public often thinks of these crimes as less serious criminal offenses, the U.S. government aggressively prosecutes these crimes. One reason for this is the staggering amount of money lost to white-collar crimes each year. In 2022 alone, consumers reported losing almost $9 billion because of white-collar crimes, according to the Federal Trade Commission (FTC).

Like other white-collar crimes, insider trading (securities fraud) is prosecuted as a felony when the federal government decides to pursue such allegations. In fact, you face up to 25 years in federal prison along with a fine of up to $5 million per offense if you are convicted of securities fraud.

The United States operates under a federalist form of government, meaning we have a strong central government along with semi-autonomous state governments. This also means we have both a federal judicial system and individual state judicial systems. If you are prosecuted and convicted of a crime by the U.S. federal government, you will be sentenced using the Federal Sentencing Guidelines. As such, every defendant in a federal prosecution should understand how the Federal Sentencing Guidelines work and how they might be applied to your situation.

WHY DO WE HAVE THE FEDERAL SENTENCING GUIDELINES?

Within the federal court system, there are 94 District Courts at the bottom of the judicial system pyramid. These courts act as trial-level courts when a defendant is prosecuted by the U.S. Attorney’s Office (federal prosecutors). Prior to the enactment of the Federal Sentencing Guidelines, each District Court had considerable discretion when sentencing defendants, leading to wide disparity in the sentences handed down for seemingly similar crimes. In 1984, the United States Sentencing Commission (USSC) was established as part of the Sentencing Reform Act. 

The USSC, in turn, created the Federal Sentencing Guidelines in 1987. Initially, application of the Guidelines was viewed as mandatory; however, they are now considered to be advisory only. Nevertheless, most federal judges stick close to the Guidelines when imposing a sentence unless a compelling reason is provided for a departure from the recommended sentence.

HOW DO THE FEDERAL SENTENCING GUIDELINES WORK?

All federal criminal offenses are assigned an offense level from one to 43 with level 43 offenses being reserved for the most serious crimes under the federal criminal code. In addition, each defendant is assigned a criminal history category from I to VI. A defendant’s placement in a category is determined by “points” that represent prior convictions with placement in Category I, meaning you have virtually no criminal history, and Category VI indicates a lengthy and usually violent criminal history.

The Federal Sentencing Guidelines provide a suggested sentencing range in months determined by where the offense level intersects with the defendant’s criminal history category. For example, a defendant convicted of a crime with an offense level of 20 and whose lack of criminal history puts him in Category I will have an advisory sentence of 33–41 months. That same defendant would be facing a sentence of 70–87 months with a Category VI criminal history.

WHAT DOES AN “UPWARD/DOWNWARD DEPARTURE” FROM THE GUIDELINES MEAN? 

Not only are the Guidelines officially intended to be “advisory” only, but there are well-accepted reasons to increase or decrease a defendant’s advisory sentence. Common reasons for increasing a defendant’s sentence, referred to as an “upward departure”, include:

• Death or physical injury occurred as a result of the defendant’s criminal conduct.
• Extreme psychological injury occurred because of the defendant’s criminal conduct.
• Possession and/or use of a weapon during the commission of the crime.
• Abduction or unlawful restraint of a victim.
• The criminal conduct resulted in the disruption of a governmental function.
• The defendant was/is a member of a gang.
• The criminal conduct caused property loss not already accounted for in the sentence.

Just as there are commonly accepted reasons to increase a sentence, there are also reasons to decrease a defendant’s advisory sentence. This is referred to as a “downward departure” and may be justified if:

• The defendant provided “substantial assistance” to authorities in solving this or another crime.
• The victim contributed to or provoked the defendant’s conduct.
• It is shown that the defendant was coerced, was under duress, or suffered from diminished capacity at the time of the commission of the crime.
• The defendant voluntarily disclosed or admitted to the commission of the crime.

When the federal government is involved in the investigation and prosecution of a drug crime, you can rest assured that significant resources and manpower will be dedicated to the case and that the defendant faces harsh penalties if convicted. If you are under investigation for federal drug crimes or are facing federal drug charges, you need an experienced federal criminal defense attorney on your side as soon as possible to protect your rights and your future.

WHAT IS THE DIFFERENCE BETWEEN STATE AND FEDERAL DRUG CRIMES?

In the United States, both the federal government and each state government may enact and enforce criminal laws. As such, a criminal offense may be prosecuted at the state level, the federal level, or both. In the case of federal drug charges, the federal government typically has jurisdiction because the “criminal conduct crosses state lines.”

WHAT ARE FEDERAL DRUG CHARGES?

Title 21 of the United States Code (USC), commonly referred to as the “Controlled Substance Act (CSA), governs most federal drug crimes, making it illegal to:

• Manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense a controlled substance OR
• Create, distribute, or dispense, or possess with intent to distribute or dispense, a counterfeit substance.

Under the CSA, controlled substances are categorized into five schedules based on medical use, potential for abuse, and the likelihood of abuse and/or dependence. Schedule I drugs are those with no currently accepted medical use and a high potential for abuse while Schedule V drugs are used for medical treatment and have the lowest potential for abuse/dependence.

WHAT ARE THE POTENTIAL PENALTIES IF I AM CONVICTED OF A FEDERAL DRUG CRIME?

If you are convicted of a federal drug crime, the penalties you face will depend on several factors, including the type and amount of drugs involved, whether you have a criminal history, and the presence of aggravating or mitigating factors.

By way of example, a conviction for distributing 100 grams of heroin, 5 grams of methamphetamine, or 500 grams of cocaine as a first-time offender carries five to 40 years in prison and a fine of up to $5 million. The potential penalties increase to 10 years to life in prison and a fine of up to $10 million for a kilogram of heroin, 50 grams of methamphetamine, or five kilograms of cocaine. Your sentence may also be increased if there was a firearm involved, you sold drugs to a minor or near a school, or someone was injured during the commission of the crime.

Many controlled substance offenses carry a mandatory minimum sentence if convicted. The average sentence for drug trafficking in 2022 was 78 months in prison, and almost two out of three defendants were subject to mandatory minimum sentencing, according to the U.S. Sentencing Commission.

DO I HAVE A DEFENSE TO FEDERAL DRUG CHARGES?

While being targeted in a federal drug investigation or facing federal drug charges can be frightening, you may have a viable defense. Only an experienced federal criminal defense attorney can review the facts of your case and determine what defensive strategies might apply; however, some common defenses in a federal drug crime prosecution include:

• Excluding illegally obtained evidence. Evidence obtained during a search of your vehicle, home, business, or person, may be excluded if that evidence was not obtained pursuant to a valid warrant and the prosecution is unable to prove that an exception to the warrant required applied.
• Challenging the credibility or reliability of informants. While law enforcement officers may use informants during a drug investigation, an informant must be reliable and credible. A common defense strategy is to arrack the reliability and/or credibility of an informant.
• Reasonable doubt. The prosecution must prove every element of a criminal offense beyond a reasonable doubt for the defendant to be convicted. Sometimes, the prosecution’s case is weak enough that the best defense is simply to point out the prosecution’s failure to meet its burden.
• Substantial assistance. If it appears that a conviction cannot be avoided, providing “substantial assistance” to the prosecution is one way to decrease your sentence.