Insider Trading Liability

Steep sanctions and reputation damage to the company often follow an insider trading event. To a certain degree, insider trading is an elusive concept, mostly because the law has developed primarily through the judiciary and administrative proceedings. No statute or rule defines insider trading per se. However, Section 10(b) of the Securities and Exchange Act of 1934, as implemented by the SEC in the Securities and Exchange Act Rule 10b-5, serves as the chief avenue for imposing liability.

Fraud occurs when insiders obtain unauthorized access to material non-public information and surreptitiously act upon it to gain financial benefit. It is fraudulent if a duty existed to disclose the knowledge in the first place. The failure to disclose is generally categorized into the classical theory and the misappropriation theory of insider trading. Both theories concern individuals who aim to benefit from trading based on the material non-public information in breach of a fiduciary or similar relation of trust and confidence.

The ambiguities in the law on insider trading pose difficulties for implementation of preventive measures. The key to overcoming them is to prioritize the concerns of insider trading and continuously develop the corporate culture based on this priority. Being in the know about insider trading cases and the way the DOJ and the SEC deal with them is paramount. Once aware, the general counsel should continuously reassess policies and execution strategy.