Australia The current Australian legislation arose out of the report of a 1989 parliamentary committee report which recommended removal of the requirement that the trader be 'connected' with the body corporate. This may have weakened the importance of the fiduciary duty rationale and possibly brought new potential offenders within its ambit. In Australia if a person possesses inside information and knows, or ought reasonably to know, that the information is not generally available and is materially price sensitive then the insider must not trade. Nor must she or he procure another to trade and must not tip another. Information will be considered generally available if it consists of readily observable matter or it has been made known to common investors and a reasonable period for it to be disseminated among such investors has elapsed.
Brazil The practice of insider trading is an illegal act under Brazilian law, since it constitutes unfair behavior that threatens the security and equality of legal conditions in the market. Since 2001, the practice is also considered a crime. L as amended by Law 10,303/2001, provided for Article 27-D, which typifies the conduct of ‘Using relevant information not yet disclosed to the market, of which he is aware and from which he must maintain secrecy, capable of providing, for himself or for others, undue advantage, through trading, on his own behalf or on behalf of a third party, with securities: Penalty — imprisonment, from 1 (one) to 5 (five) years, and a fine of up to 3 (three) times the amount of the illicit advantage obtained as a result of the crime.’ The first conviction handed down in Brazil for the practice of the offense of "misuse of privileged information" occurred in 2011, by federal judge Marcelo Costenaro Cavali, of the Sixth Criminal Court of São Paulo. It is the case of the
Sadia-
Perdigão merger. The former Director of Finance and Investor Relations, Luiz Gonzaga Murat Júnior, was sentenced to one year and nine months in prison in an open regime, replaceable by community service, and the inability to exercise the position of administrator or fiscal councilor of a publicly traded company for the time he serves his sentence, in addition to a fine of R$349,711.53. The then member of the board of directors Romano Ancelmo Fontana Filho was sentenced to prison for one year and five months in an open regime, also replaceable by community service, in addition to not being able to exercise the position of administrator or fiscal councilor of a publicly held company. He was also fined R$374,940.52.
Canada In 2008, police uncovered an insider trading conspiracy involving Bay Street and Wall Street lawyer Gil Cornblum who had worked at
Sullivan & Cromwell and was working at
Dorsey & Whitney, and a former lawyer, Stan Grmovsek, who were found to have gained over $10 million in illegal profits over a 14-year span. Cornblum committed suicide by jumping from a bridge as he was under investigation and shortly before he was to be arrested but before criminal charges were laid against him, one day before his alleged co-conspirator Grmovsek pled guilty. Grmovsek pleaded guilty to insider trading and was sentenced to 39 months in prison. This was the longest term ever imposed for insider trading in Canada. These crimes were explored in
Mark Coakley's 2011 non-fiction book,
Tip and Trade.
China The majority of shares in China before 2005 were non-tradeable shares that were not sold on the stock exchange publicly but privately. To make shares more accessible, the China Securities Regulation Commission (CSRC) required the companies to convert the non-tradeable shares into tradeable shares. There was a deadline for companies to convert their shares and the deadline was short, and due to this there was a large amount of exchanges, and many of these were conducted based on critical inside information. At the time, insider trading did not lead to prison time. Generally, punishment may include monetary fees or temporary relieving from a position in the company, but prison time is rare. However, in 2015, the Chinese fund manager
Xu Xiang was arrested for insider trading, and in 2017, he was sentenced to five and a half years in prison and fined 11
billion yuan.
European Union In 2014, the European Union (EU) adopted legislation (Criminal Sanctions for Market Abuse Directive) that harmonised criminal sanctions for insider dealing. All EU Member States agreed to introduce maximum prison sentences of at least four years for serious cases of
market manipulation and insider dealing, and at least two years for improper disclosure of insider information.
India Insider trading in India is an offense according to Sections 12A and 15G of the
Securities and Exchange Board of India Act, 1992, and the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015. Insider trading is when one with access to non-public, price-sensitive information about the securities of the company subscribes, buys, sells, or deals, or agrees to do so or counsels another to do so as principal or agent. Price-sensitive information is information that materially affects the value of the securities. The penalty for insider trading is imprisonment, which may extend to five years, and a minimum of five
lakh rupees (500,000) to 25
crore rupees (250 million) or three times the profit made, whichever is higher.
The Wall Street Journal, in a 2014 article entitled "Why It's Hard to Catch India's Insider Trading", said that despite a widespread belief that insider trading takes place on a regular basis in India, there were few examples of insider traders being prosecuted in India. One former top regulator said that in India insider trading is deeply rooted and especially rampant because regulators do not have the tools to address it. Three days after Al-Braikan was sued by the SEC, he was found dead of a gunshot wound to the head in his home in Kuwait City on July 26, 2009, in what Kuwaiti police called a suicide. The SEC later reached a $6.5 million settlement of civil insider trading charges, with his estate and others. The longest prison sentence in a Norwegian trial where the main charge was insider trading, was for eight years (two suspended) when
Alain Angelil was convicted in a district court on December 9, 2011.
Philippines Under Republic Act 8799 or the Securities Regulation Code, insider trading in the Philippines is illegal.
United Kingdom Although insider trading in the UK has been illegal since 1980, it proved difficult to successfully prosecute individuals accused of insider trading. There were a number of notorious cases where individuals were able to escape prosecution. Instead the UK regulators relied on a series of fines to punish market abuses. These fines were widely perceived as an ineffective deterrent, and there was a statement of intent by the UK regulator (the Financial Services Authority) to use its powers to enforce the legislation (specifically the
Financial Services and Markets Act 2000). Between 2009 and 2012 the FSA secured 14 convictions in relation to insider dealing.
United States United States law Until the 21st century and the European Union's
market abuse laws, the United States was the leading country to prohibit insider trading on the basis of material non-public information.
Statutory U.S. insider trading prohibitions are based on English and American common law prohibitions against fraud. In 1909, well before the Securities Exchange Act was passed, the
United States Supreme Court ruled that a corporate director who bought that company's stock when he knew the stock's price was about to increase committed fraud by buying but not disclosing his inside information. Section 15 of the
Securities Act of 1933 contained prohibitions of fraud in the sale of securities, which were greatly strengthened by the
Securities Exchange Act of 1934. Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six-month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares. Under Section 10(b) of the 1934 Act,
SEC Rule 10b-5, prohibits fraud related to securities trading. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 place penalties for illegal insider trading as high as three times the amount of profit gained or loss avoided through illegal trading.
SEC regulations SEC
regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material, non-public information to one person, it must simultaneously disclose that information to the public at large. In the case of unintentional disclosure of material, non-public information to one person, the company must make a public disclosure "promptly". that a director who expects to act in a way that affects the value of shares cannot use knowledge of that expectation to acquire shares from those who do not know of the expected action. Even though in general, ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder general knowledge regarding the value of the shares of the company before he purchases any from a shareholder, some cases involve special facts that impose such duty. In 1968, the
Second Circuit Court of Appeals advanced a "level playing field" theory of insider trading in
SEC v. Texas Gulf Sulphur Co. The court stated that anyone in possession of inside information must either disclose the information or refrain from trading. Officers of the
Texas Gulf Sulphur Company had used inside information about the discovery of the
Kidd Mine to make profits by buying shares and call options on company stock. In 1984, the Supreme Court ruled in
Dirks v. Securities and Exchange Commission that tippees (recipients of second-hand information) are liable for insider trading if they had reason to believe that the tipper had breached a fiduciary duty in disclosing confidential information. One such example would be if the tipper received any personal benefit from the disclosure, thereby breaching his or her duty of loyalty to the company. In
Dirks, the "tippee" had received confidential information from an insider, a former employee of a company. The reason the insider had disclosed the information to the tippee, and the reason the tippee had disclosed the information to third parties, was to blow the whistle on fraud at the company. As a result of the tippee's efforts the fraud was uncovered and the company went into bankruptcy. But, while the tippee had given the "inside" information to clients who made profits from the information, the Supreme Court ruled that the tippee could not be held liable under the federal securities laws because the insider from whom he received the information had not released the information for an improper purpose (a personal benefit) but rather for the purpose of exposing the fraud. The court ruled that the tippee could not have been aiding and abetting a securities law violation committed by the insider because no securities law violation had been committed by the insider. In 2019 the U.S. Court of Appeals for the Second Circuit ruled in
United States v. Blaszczak that the "personal-benefit" test announced in
Dirks does not apply to Title 18 fraud statutes, such as 18 USC 1348. In
Dirks, the court also defined the concept of "constructive insiders" as lawyers, investment bankers, and others who receive confidential information from a corporation while providing services to the corporation. The court held that constructive insiders are also liable for insider trading violations if the corporation expects the information revealed to them to remain confidential, since they acquire the fiduciary duties of a true insider. The next expansion of insider trading liability came in
SEC vs. Materia, 745 F.2d 197 (2d Cir. 1984), the case that first introduced the misappropriation theory of liability for insider trading. Materia, a financial printing firm proofreader who clearly was not an insider by any definition, was found to have determined the identity of takeover targets based on proofreading tender offer documents in the course of his employment. After a two-week trial, the district court found him liable for insider trading, and the Second Circuit Court of Appeals affirmed, holding that the theft of information from an employer, and the use of that information to purchase or sell securities in another entity, constituted a fraud in connection with the purchase or sale of a securities. The misappropriation theory of insider trading was born, and liability was thereby further expanded to encompass a larger group of outsiders. In
United States v. Carpenter (1986), the Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who had received his information from a journalist rather than from the company itself. The journalist
R. Foster Winans was also convicted, on the grounds that he had misappropriated information belonging to his employer,
The Wall Street Journal. In the widely publicized case, Winans had traded in advance of "Heard on the Street" columns appearing in the Journal. The Court stated in
Carpenter: "It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom." However, in upholding the securities fraud (insider trading) convictions the justices were evenly split. In 1997, the U.S. Supreme Court adopted the misappropriation theory of insider trading in ''United States v. O'Hagan'', 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing
Grand Metropolitan while it was considering a tender offer for
Pillsbury Company. O'Hagan used this inside information by buying
call options on Pillsbury stock, thereby realizing profits of over $4.3 million. O'Hagan argued that neither he nor his firm had owed a fiduciary duty to Pillsbury, so he had not committed fraud by purchasing Pillsbury options. The Court rejected O'Hagan's arguments and upheld his conviction. The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between a company insider and the purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information. The Court specifically recognized that a corporation's information is its property: "A company's confidential information ... qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty ... constitutes fraud akin to embezzlement– the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." In 2000, the SEC enacted
SEC Rule 10b5-1, which defined trading "on the basis of" inside information as trades that occur while the trader is aware of material nonpublic information. It is no longer a defense for one to say that one would have made the trade anyway. However, the rule also codified an
affirmative defense for pre-planned trades. In
Morgan Stanley v. Skowron, 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's
faithless servant doctrine, the court held that a hedge fund's
portfolio manager who had engaged in insider trading in violation of his company's code of conduct, which also required him to report that misconduct, was required to repay his employer the full $31 million his employer had paid him as compensation during his period of faithlessness. The court called the insider trading the "ultimate abuse of a portfolio manager's position".
By members of Congress Members of the
US Congress are not exempt from the laws that ban insider trading. Because they generally do not have a confidential relationship with the source of the information they receive, however, they do not meet the usual definition of an "insider". House of Representatives rules may, however, provide that congressional insider trading is unethical. A 2004 study found that stock sales and purchases by senators outperformed the market by 12.3% per year.
Peter Schweizer points out several examples of insider trading by members of Congress, including action taken by
Spencer Bachus following a private, behind-the-doors meeting on the evening of September 18, 2008 wherein
Hank Paulson and
Ben Bernanke informed members of Congress about the issues due to the
2008 financial crisis; Bachus shorted stocks the next morning and cashed in his profits within a week. Also attending the same meeting were Senator
Dick Durbin and House Speaker
John Boehner; the same day (effective the following day), Durbin sold mutual-fund shares worth $42,696 and reinvested it all with Warren Buffett. Also the same day (effective the following day), Boehner cashed out of an equity mutual fund. In May 2007, a bill entitled the Stop Trading on Congressional Knowledge Act, or
STOCK Act was introduced to hold congressional and federal employees liable for stock trades they made using information they gained through their jobs and also regulate analysts or political intelligence firms that research government activities. The
STOCK Act was enacted on April 4, 2012. In the approximately nine month period ending September 2021, Senate and House members disclosed 4,000 trades of stocks and bonds, worth at least $315 million.
2020 congressional insider trading scandal Further Anil Kumar, a senior partner at management consulting firm
McKinsey & Company, pleaded guilty in 2010 to insider trading in a "descent from the pinnacle of the business world".
Chip Skowron, a
hedge fund co-
portfolio manager of FrontPoint Partners LLC's
health care funds, was convicted of insider trading in 2011, for which he served five years in prison. He had been tipped off by a consultant to a company that the company was about to make a negative announcement regarding its
clinical trial for a drug. Skowron initially denied the charges against him and his defense attorney said he would plead not guilty, saying "We look forward to responding to the allegations more fully in court at the appropriate time". However, after the consultant charged with tipping him off pleaded guilty, he changed his position, and admitted his guilt.
Rajat Gupta, who had been managing partner of McKinsey & Co. and a director at
Goldman Sachs Group Inc. and
Procter & Gamble Co., was convicted by a federal jury in 2012 and sentence to two years in prison for leaking inside information to
hedge fund manager
Raj Rajaratnam who was sentenced to 11 years in prison. The case was prosecuted by the office of United States Attorney for the Southern District of New York
Preet Bharara.
Mathew Martoma, former hedge fund trader and portfolio manager at
S.A.C. Capital Advisors, was accused of generating possibly the largest single insider trading transaction profit in history at a value of $276 million. With the guilty plea by Perkins Hixon in 2014 for insider trading from 2010 to 2013 while at
Evercore Partners, Bharara said in a press release that 250 defendants whom his office had charged since August 2009 had now been convicted. On December 10, 2014, a federal appeals court overturned the insider trading convictions of two former
hedge fund traders, Todd Newman and
Anthony Chiasson, based on "erroneous" instructions given to jurors by the trial judge. The decision was expected to affect the appeal of the separate insider-trading conviction of former SAC Capital portfolio manager Michael Steinberg and the U.S. Attorney and the SEC in 2015 did drop their cases against Steinberg and others. In 2016, Sean Stewart, a former managing director at
Perella Weinberg Partners LP and vice president at
JPMorgan Chase, was convicted on allegations he
tipped his father on pending health-care deals. The father, Robert Stewart, previously had pleaded guilty but did not testify during his son's trial. It was argued that by way of compensation for the tip, the father had paid more than $10,000 for Sean's wedding photographer. In 2017,
Billy Walters, a Las Vegas sports bettor, was convicted of making $40 million on private information about Dallas-based dairy processing company
Dean Foods, and sentenced to five years in prison. Walters's source, company director Thomas C. Davis, employing a prepaid cell phone and sometimes the code words "Dallas Cowboys" for Dean Foods, helping Walters to realize profits and avoid losses in the stock from 2008 to 2014, the federal jury found. Golfer
Phil Mickelson "was also mentioned during the trial as someone who had traded in Dean Foods shares and once owed nearly $2 million in gambling debts to" Walters. Mickelson "made roughly $1 million trading Dean Foods shares; he agreed to forfeit those profits in a related civil case brought by the Securities and Exchange Commission". Walters appealed the verdict, but in December 2018 his conviction was upheld by the 2nd Circuit Court of Appeals. In 2018, David Blaszczak, the "king of political intelligence"; Theodore Huber and Robert Olan, two partners at hedge fund
Deerfield Management; and Christopher Worrall, an employee at the
Centers for Medicare and Medicaid Services (CMS), were convicted for insider trading by the
U.S. Attorney's Office in the Southern District of New York. Worrall leaked confidential government information that he stole from CMS to Blaszczak, and Blaszczak passed that information to Huber and Olan, who made $7 million trading securities. The convictions were upheld in 2019 by the Second Circuit Court of Appeals; that court's opinion was vacated by the Supreme Court in 2021 and the Second Circuit is now reconsidering its decision. In 2023,
Terren Peizer was charged with insider trading by the SEC, which alleged that he sold $20 million of Ontrak Inc. stock while he was in possession of material nonpublic negative information. Peizer was the CEO and chairman of Ontrak. The case was tried in the
U.S. District Court for the Central District of California. He was convicted of all three charges in June 2024, and faces up to 65 years in prison. ==See also==