Yes, Insider Trading is Felony and Here is Why

Is insider trading a felony? Yes, it is, as Angela A. Turiano, of Scarinci Hollenbeck explains in a post on the firm’s website. The crime can lead to prison, as well as financial ruin.

Corporate officers, directors, and employees, and outside fiduciaries such as attorneys and accountants, are all considered insiders for purposes of the law. If they trade stock based on material, non-public information they can be found in violation of federal law. They are also prohibited from sharing inside information for trading purposes.

Insider trading cases are complex and hard to prove. A trade can’t be prosecuted unless it was a “knowing or willful” violation of the securities laws, so defendants can claim that they lacked the required intent. Pre-existing trading plans or contractual obligations to trade can be raised as a defense.

There are three factors in an insider trading prosecution. First, the allegation that a trade has taken place must be proven. Until recently that was rarely in dispute, but digital assets such as cryptocurrency and non-fungible tokens have muddied the waters.

Prosecutors must then prove that the defendant was in possession of information. They don’t have to prove that the information served as the basis of the trade, but they must prove that it was material, meaning there is a substantial likelihood that a reasonable investor would consider it important in making investment decisions. Finally they have to prove that the information wasn’t public, meaning it isn’t generally available to the marketplace. 

If convicted, violators can be forced to disgorge profits gained or losses avoided, and be subjected to a civil penalty up to three times that sum.

Criminal prosecution is at the discretion of the DOJ. The maximum prison sentence is 20 years. The maximum criminal fine for individuals is $5 million.