Insider Trading Investigations: What Every Stock Trader Needs to Know

An allegation of insider trading should be taken seriously. Although the accused trader prevails in the majority of insider trading cases, the process of mounting a successful defense can be daunting. To improve your likelihood of winning, it is a good idea to learn a few details about insider trading cases.

Parallel Investigations

The potential criminal and civil penalties for being found guilty of insider trading are substantial. It’s not uncommon for the accused to face investigations by both the U.S. Securities and Exchange Commission (SEC) and the U.S. Attorneys’ Office. It’s even possible for state officials to become involved in the prosecution of corporate insiders.

This is all part of the ongoing effort to keep insiders from profiting from information that isn’t available to the public. The SEC has wide authority to enforce insider trading statutes, but it relies heavily on the securities industry to police itself. Every U.S. stock exchange has instituted a monitoring and enforcement system to prevent unfair trading practices. The vast majority of insider trading incidents are uncovered by these self-regulating organizations.

Financial Markets

The securities industry employs a sophisticated electronic surveillance network to monitor all publicly traded stocks. The monitoring system automatically alerts securities exchange officials when the price or volume of a stock exceed specified parameters. That stock is then monitored for evidence of unfair trading activity. An insider trading investigation will ensue if it is determined that the increased activity of the stock occurred just prior to the release of information to the public.

A red flag is raised when an insider trading investigation reveals that a company’s directors or officers engaged in trading just prior to the release of important information. If the possible insider trading activity falls outside the purview of a self-regulating organization, the matter is referred to the SEC. SEC officials will be provided with all the available information, including analysis and brokerage statements.

Insider Trading Defense

Initially, the SEC will seek the voluntary cooperation of a suspected insider trader. If the trader chooses not to cooperate, the SEC will open a formal investigation and seek subpoena authority to access relevant information. The investigating SEC attorney will attempt to learn whether the suspected insider trader had access to vital information before engaging in trading activity.

Often times, a trader first learns that they are under investigation when they receive a telephone call from an SEC attorney. Participation in the telephone call is voluntary. It is recommended that the call be postponed until a knowledgeable white collar crimes attorney can participate in the discussion.

The defense lawyer has to quickly learn the details of the case. The suspected trading may have had nothing to do with inside information. If the SEC investigation has progressed to the more serious formal stage, the attorney will need to carefully review the SEC’s formal order of investigation. The formal order will include statute citations and other pertinent information necessary to prepare a proper defense.


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About the Author

Law Office of James Alston. serves people who need legal assistance in their Criminal Defense Cases in Texas.

Houston Criminal Lawyer James Alston represents clients in the Houston area, including Pasadena, Sugar Land, Missouri City, Channelview, Conroe, Galveston, Angleton, Richmond, Rosenberg, Beaumont, Galveston County, Ft. Bend County, Montgomery County, Brazoria County, Harris County and Jefferson County in Texas.