Trade Regulation Laws

What To Do When Accused of Insider Trading?

Did you know that insider trading wasn’t always illegal? It wasn’t until 1934 that it became illegal according to the Securities Exchange Act. This act was passed after the Stock Market Crash of 1929, which caused the Great Depression. The US government realized just how harmful fraudulent behavior could be, so they created the Securities Exchange Act to protect the public.

Yet, despite this act, many are still participating in insider trading. In recent years news stories concerning insider trading have frequently been appearing in the media. Many consultants at political intelligence firms, pharmaceutical employees, congressmen, senators, and traders at hedge funds have been accused of participating in insider trading.

A charge of insider trading can be a challenging situation to be involved in. If you have been accused of insider trading, you could be facing serious civil and criminal consequences. That’s why it’s crucial to learn everything you can about insider trading and what you need to do if you believe that you have been wrongly accused of it.

What Exactly Is Insider Trading?

To understand what insider trading is, it’s better to first learn what constitutes an insider. Essentially, an insider can be anyone and not only someone that is involved directly with a company. For example, an insider can be an executive, an employee, an employee’s friend or relative, a CEO, an accountant, an attorney, a director of a company, and even someone not affiliated with the company.

If an insider has in their possession valuable information about a security or company that isn’t known to the public and they trade based on this information, they can be accused of illegal insider trading.

Yet, let’s further analyze this concept. Insider trading involves an insider having non-public knowledge that they use to trade securities to either avoid losses or gain substantial profits. A person can only be convicted of insider trading if it can be proven that the knowledge, they used to prevent losses or obtain profits while trading was insider knowledge.

Case Study: The Martoma Case in Relation to Insider Trading

To give you a real-world example of insider trading, we will look at a case study of the Martoma case. This will help you understand what could be construed as insider trading.

The Martoma case is recognized as being one of the largest single insider trading transactions that resulted in one of the greatest profits in history. Mathew Martoma, who was an American hedge fund trader and portfolio manager at SAC Capital Advisors, made $274.3 million for SAC Capital Advisors in 2008. A criminal complaint was filed by the US Department of Justice alleging that Martoma used tips garnered from two doctors to sell shares of pharmaceutical companies to avoid losses and gain profit. He sold shares belonging to Elan Corporation and Wyeth, who were developing an Alzheimer’s pharmaceutical drug known as bapineuzumab.

Martoma arranged paid consultations with experts, including Sidney Gilman, a doctor on the Alzheimer’s drugs clinical team, to learn more about the drug. Gilman gave Martoma confidential information about the drug trials that included data stating the drug was not performing as well as was expected. Gilman directly broke his contractual agreement to keep the clinical trial results findings secret when he gave Martoma the drug trial information ten days before it was presented to the public.

With this information, Martoma was able to get his hedge fund to reduce its position in the pharmaceutical companies’ stock on the next trading day. He sold their stocks short, which allowed his hedge fund to gain $80.3 million and avoid $194.6 million in losses after the data became public knowledge.

Why can what Martoma did be construed as insider trading? It can be construed as such because he used the tips from the insider Gilman who was a part of the Alzheimer disease bapineuzumab clinical drug trials to avoid losses and gain significant profit. He was able to do this because he had been furnished with information that the Alzheimer’s drug was ineffective and thus would not prove lucrative. For his actions, he was eventually charged with one count of conspiracy to commit securities fraud and two counts of securities fraud.

Martoma’s insider trading case ended up going to trial in 2014, where he pleaded not guilty to formal charges against him. At the conclusion of his trial, Martoma was found guilty on all charges. He also received a sentence of nine years in prison while also forfeiting his $9.38 million bonus that he earned in 2008. His conviction was upheld in 2017 and in 2018 until he was released in July of 2021.

The SEC Insider Trading Whistleblower Program

Although the SEC regularly investigates trading records to uncover suspicious activity, they can only do so much as a Federal Agency, which is why there is an SEC insider trading whistleblower program. The SEC relies on whistleblowers to expose illegal activity and protect the integrity of the markets.

In most instances, whistleblowers are insiders themselves or are people who have frequent proximity to insiders. Since it’s challenging to prove that transactions were illegally executed based on material that was not public information, whistleblowers are incredibly valuable during insider trading cases.

However, not everyone can be a whistleblower. Below are a few of the requirement’s whistleblowers accusing others of insider trading need to adhere to. Yet, it's important to note that even if a whistleblower does not meet these requirements, you could still be in trouble with the law.

Therefore, if you have been accused of insider trading by a presumed whistleblower, you need to consider speaking with an attorney to better understand your situation as it relates to insider trading.

  • The information provided by whistleblowers must have a high likelihood of leading to a successful enforcement action that will have a total monetary sanction above $1 million.
  • The whistleblower needs to have original information about the insider trade you are being accused of that the SEC is not already aware of.
  • The whistleblower in your case needs to have provided the information associated with the insider trading crimes you stand accused of voluntarily to the SEC. The information does not count if it was given in response to a court order or investigation.


The Different Types of Insider Trading

Interestingly, there are primarily three different types of insider trading. They are known as classic insider trading, misappropriation of information, and tippee liability.

Classic insider trading is wholly different from misappropriation of information and tippee liability in that it is the form of insider trading done by a person directly associated with a company to gain profit or negate losses.

However, it is crucial to remember that insiders are allowed to make trades. Criminal and civil sanctions only arise if a trade is not reported, is made in secret, or has been completed based on proprietary information.

Classic Insider Trading

Classic insider trading is the type of insider trading that is most often reported, making news headlines. Essentially, classic insider trading occurs when a person working for a company breaks their fiduciary duties and trades non-public information. Let’s look at an example of classic insider trading so that you can get an idea of what this theory is.

Let us assume you are a board member for a corporation and that you are under a fiduciary duty to always act within the best interests of the shareholders of the company. Then one day, during a meeting, you learn that the company will significantly exceed public earnings expectations for the financial quarter. These expectations state that the company’s share prices are likely to rise dramatically when the earnings are announced.

Since you know this information, you decide to buy shares in the company’s stock because you know you are likely to make a profit. By deciding to buy shares based on the information you learned in the meeting, you are directly in violation of your fiduciary responsibility to act in the best interests of your company’s shareholders. Thus you could be accused of committing classic insider trading.

Misappropriation Of Information

Most federal judicial circuits recognize misappropriation of information as a form of insider trading. Misappropriation occurs when you are not directly involved with a company as a director, employee, accountant, lawyer, or executive.

Essentially, if you are privy to confidential information from an insider in a company and they shared this information with you, you owe them a duty of confidentiality. If you breach this duty of confidentiality, you can be accused of insider trading if you use the information, to avoid losses or gain profits.

Tippee Liability

The courts recognize a different form of insider trading that is known as tippee liability. Interestingly, even if you don’t have a confidential relationship with an insider, you can also be accused and convicted of insider trading.

Tippee liability comes into effect if you have traded based on the information given to you by someone whom you know has breached their duty of confidentiality to provide you with that information. Many courts frown upon those who are accused of tippee liability. This is because this type of behavior implies that you provided incentives or encouraged the person you received the non-public information from to breach their duties to their company.

However, it’s crucial to note that you cannot be accused of tippee liability if the information you received and traded on was given to you by someone who did not expect to earn a profit.

What You Need to Do When You Are Accused of Insider Trading

Shockingly, penalties for insider trading are severe. If convicted of this offense, a person can face up to 20 years in prison and a fine of up to $5,000,000, and if a company is convicted, it could face an astronomical fine of up to $25,000,000.

When you have been accused of insider trading, it can be an incredibly daunting situation that is often difficult to navigate. Yet, there are crucial things you can do if you have been accused of insider trading if you want to ensure a favorable outcome.

Understand The Law

When you find out that you are under investigation and are suspected of insider trading, you need to know the laws. Understanding the laws will help you determine how serious your case is and will help you better communicate with your legal counsel.

For example, the most important aspect of insider trading law that you need to know is knowing when a prosecutor could have a successful case against you. Have a look below to learn the elements that a prosecutor needs to prove without a doubt if they want you to be charged with insider trading.

  • You must be guilty of purchasing or selling a security.
  • The information you had in your possession was material.
  • You had in your possession private material information.
  • The information was not publicly known.


There are numerous types of information that can be considered as material, non-public information. For example, non-public information includes strategic plans, prospects, or projections, potential or impending litigation against a company, and earning statements.

Additionally, capital investment plans surrounding the removal or potential removal of board members and impending tender offers, acquisitions, or mergers also count as non-public information.

The Three Common Defenses Against Insider Trading Allegations

There are primarily three common defenses that you and an attorney can potentially use to prove your innocence during an insider trading case.

Defense One: The Insider Trade Was Legal

One of the more common defenses to insider trading involves proving that a trade of a security was legal. If the insider can show that the trades completed on behalf of an insider were part of a pre-existing contract or a formally written binding plan for future trading, this defense can be used. Interestingly, the rule backing up this defense is SEC Rule 10(b)5-1.

Defense Two: The Material Information Was Public Knowledge

When accused of insider trading, another defense you can try to use is that the material information you used to trade a security was public knowledge. In this instance, an attorney can try to argue on your behalf that the material information you relied upon was public knowledge disseminated in advance, even if it was not widely known.

Defense Three: The Information You Traded Was Not Material Information

One of the strongest legal defenses you can have against an insider trading charge is that the information you used was not material. Information that is unlikely to influence an investor’s decision to sell or buy a security is considered to not be material information. Essentially, only the misappropriation or omission of material information can be used against you during your insider trading case. footer logo 4