Federal Crimes

Understanding Insider Trading Laws in Texas

Insider trading is a complex area of securities law, and the consequences of violating these laws can be severe. If you’re involved in trading stocks, bonds, or other securities, it’s important to understand what constitutes insider trading, how it is prosecuted, and the legal nuances involved in a potential case.

In Texas, while federal law largely governs insider trading cases, there are instances where state laws or local regulations may apply. Navigating insider trading laws can be tricky, and knowing how these laws may affect your case if you’re under investigation is essential.

If you or someone you know is accused of insider trading, contact Sellers Law Firm to protect yourself and find out more about your options. 

What are the rules for insider trading?

Insider trading refers to buying or selling a security based on material, non-public information about that security. In essence, when someone who has access to confidential information — such as corporate officers, directors, or even outsiders in some circumstances — uses it to gain an unfair advantage in the market, they are engaging in illegal insider trading.

The core issue with insider trading is the imbalance it creates in the marketplace. Investors who have access to non-public information can make decisions that lead to massive profits or avoid significant losses, all while other investors without that information are left in the dark.

In the United States, insider trading is primarily governed by the Securities Exchange Act of 1934, specifically Section 10(b) and Rule 10b-5, which make it unlawful for any person to use deceit or manipulation in connection with the purchase or sale of a security. Penalties for insider trading can include fines, imprisonment, and the disgorgement of profits made from illegal trades.

How do people get caught for insider trading?

The U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are primarily responsible for investigating and prosecuting insider trading cases. Insider trading investigations can arise from suspicious market activity, whistleblowers, or regulatory oversight.

Red flags for insider trading include unusual trading patterns, such as a significant spike in stock purchases right before the release of a major corporate announcement. The SEC has sophisticated tools to track unusual trading behaviors and works closely with other regulatory bodies to investigate suspicious trades. Additionally, tips from insiders, auditors, or analysts can trigger an investigation into suspicious activity.

Continue reading about the Healthcare Whistleblower Protection Act

What is not considered insider trading?

Not every case of trading on information qualifies as insider trading. For an action to be considered insider trading, the information must be both material and non-public, and the person trading must have a duty to keep that information confidential.

For example, if an investor makes a decision based on public news reports, even if those reports are speculative, it is not insider trading. Similarly, if someone makes a trade based on information that isn’t material, this would also not be classified as insider trading.

Is it insider trading if you overhear something?

One gray area in insider trading cases is whether overheard information can lead to prosecution. The answer depends on whether the person trading based on that overheard information had a duty to keep the information confidential.

If you overhear a conversation about a company merger in a public place and act on that information without having any direct connection to the company, and where you had no reason to believe it was privileged or confidential, it may not constitute insider trading. 

However, the SEC could argue that you acted on non-public information, depending on how you obtained it and your relationship with the parties involved. Courts will examine the nature of the information, how it was acquired, and whether the trader should have known the information was privileged or confidential.

How does the SEC prove insider trading?

The SEC faces a high burden of proof in insider trading cases. To secure a conviction, the SEC must prove that the accused person had access to material, non-public information and knowingly used that information to gain an advantage in the securities market.

What is required to prove insider trading? Proving insider trading involves tracing patterns of behavior, communications, and the timing of trades. The SEC often looks at:

  • The relationship between the accused and the source of the information: Did the individual have a duty to keep the information confidential?
  • The timing of trades: Were trades made in close proximity to corporate announcements or other material events?
  • The trader’s behavior: Did the trader attempt to conceal their trades by using an alias, an offshore account, or a proxy?

The SEC frequently uses email records, phone calls, and other communications to demonstrate that an individual knowingly engaged in illegal trading. Additionally, they may interview company insiders or employees to uncover evidence of wrongdoing.

Facing an insider trading suit? Learn about criminal defense strategies available in white collar crime cases.

What is Rule 144?

Rule 144, issued under the Securities Act of 1933, governs the sale of restricted and control securities. While it does not directly deal with insider trading, Rule 144 allows insiders of a company, such as officers or large shareholders, to sell shares as long as they comply with certain conditions.

Rule 144 is essentially a piece of regulation that provides guidelines for the sale of securities outside of public markets: restricted, unregistered, and control securities. The rules for selling these securities are much different and more stringent than those for selling public securities, and are intended to encourage fair, transparent private trading. 

Control securities are stocks held by individuals in a controlling position within a company. These individuals must follow Rule 144 when selling their shares to avoid allegations of insider trading. Rule 144 is designed to protect the market by preventing significant shareholders from dumping large volumes of stock, which could impact market stability.

Accused of insider trading? Sellers Law Firm will review your case.

If you or someone you know has been accused of violating insider trading laws, the consequences can be life-changing. From hefty fines and the potential loss of your career to a white collar crime prison sentence, an insider trading charge is something no one should take lightly.

At Sellers Law Firm, we have experience with securities law and can provide the legal counsel necessary to navigate complex insider trading cases. Whether you’re a corporate executive, employee, or investor facing allegations, one of our top white collar crime lawyers will work to understand the specifics of your case and craft a defense that ensures your rights are protected.

We have a proven track record of defending clients against all types of accusations and are well-versed in both federal and Texas-specific regulations. Our attorneys understand how the SEC operates and how to mount a strong federal criminal defense to reduce or dismiss charges.

Don’t wait until it’s too late — contact Sellers Law Firm today for a comprehensive review of your case and to explore your legal options.

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