Insider Trading: When is it considered a Felony?
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.