Securities Fraud – Insider Trading

Insider trading is a white collar offense often associated with Wall Street investors and corporate insiders, who earn millions of dollars trading on information that is not available to the public. The Security and Exchange Commission (SEC) prohibits insider trading because in a law known as SEC Rule 10b-5. This SEC Rule also prohibits securities fraud against the unsuspecting investment public.

Section 10(b) of the Security and Exchange Act states that it shall be unlawful for any person to do the following:

1. To use by means of interstate commerce, or the mails, or any national securities exchange;
2. A deceptive device;
3. In connection with the purchase and sale of securities in contravention of rules proscribed by the SEC.

Miami attorney Ken Swartz has experience in defending those charged with insider trading. Call the Swartz Law Firm to schedule an initial consultation.

Rule 10b-5 prohibits fraud

The SEC adopted Rule 10b-5, which is codified in 17 CFR § 240.10b-5. Rule 10b-5 covers all securities fraud including insider trading. The provision is entitled the “Employment of Manipulative and Deceptive Practices” and makes it unlawful for any person, “directly or indirectly, by use of any means of instrumentality of interstate commerce or of the mails,” or any facility of any national securities exchange, to do any of the following:

1. To employ scheme to defraud;
2. To make untrue statement of a material fact; or
3. To engage in any fraudulent act or business fraud upon any person in connection with the purchase or sale of securities.

The SEC enforces Rule10b-5 where the victims of securities fraud loose money from an investment scam. Often these offenses are charged as wire fraud or as mail fraud crimes.

Insider Trading on nonpublic information

The traditional theory of an insider trading violation takes place when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a “deceptive device” under section 10(b) according to the Supreme Court because a relationship of trust and confidence exists between the shareholder of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation. To prove a person committed insider trading, the government must prove that a person willfully violated the provision. A person may not be imprisoned if he did not have knowledge of the rule.

In U.S. v. O’Hagan, a lawyer began purchasing call options and shares of stock for Pillsbury after the firm the lawyer worked for got hired by a company preparing to make a tender offer for Pillsbury stock. After the company announced its intention to buy the Pillsbury stock, the price rose dramatically and the lawyer sold his stock and options for a profit of $4.3 million. The SEC indicted the lawyer for insider trading on nonpublic information in violation of Rule 10(b)-5.

The SEC has a policy of requiring equal access such that anyone who has material, non-public information must either disclose the information or abstain from trading. In Chiarella v. U.S. the Supreme Court held that a person who has no fiduciary duty to shareholders had no duty to disclose information before trading on it.

Securities crimes such as insider trading and securities fraud are serious offenses that require the highest quality legal representation. If you or someone you know has been accused of one of these offenses, you need a Florida Bar Board Certified Criminal Trial Lawyer on your side. Ken Swartz has the experience and expertise in criminal law to handle your problem. As one of the top Miami criminal defense attorneys in Florida, he is prepared for your defense.