Insider Trading – Penalties can be Very Harsh
Insider trading is no joke, man. The penalties for getting caught can be crazy harsh. Like, we’re talking serious fines and even jail time here. I know it might seem tempting to trade on inside info you have access to, but trust me, it’s so not worth the risk. The SEC does not mess around when it comes to this stuff.
What Exactly is Insider Trading?
Let’s start with the basics. Insider trading is when someone uses confidential or non-public information to make trades in the stock market. This gives them an unfair advantage over other investors and undermines the whole concept of a fair and open market.
There are a few different types of insider trading:
- Corporate insiders – This is when executives, directors, or employees of a company trade that company’s stock using info they have but the public doesn’t. Like if the CEO knows earnings are way up this quarter, he could buy a bunch of stock before that news is released. Super sketchy and very illegal.
- Tippees – These are people outside the company that get tips from insiders and trade on that. Your buddy that works at Goldman Sachs tells you they’re about to acquire another bank? Don’t go buying GS stock before it’s announced, my friend.
- Misappropriators – This is when someone steals confidential info and uses it to trade. Think hacking or corporate espionage. Like if you break into an office and steal their quarterly financials, you can’t go trading on that.
Yeah, all types of insider trading are totally illegal. It undermines public trust in the stock market, which is no bueno.
Serious Fines for Insider Trading
If the SEC catches you insider trading, the fines can be insane. We’re talking like hundreds of thousands, even millions of dollars here.
For individuals, the maximum fine is now $5 million and 20 years in prison. But it can even be worse than that. In 2018, congressman Chris Collins got sentenced to 26 months in federal prison for insider trading. The SEC also fined him $634k in civil penalties. Dude’s political career is ruined and he’s out over half a million dollars. Was it worth it? I don’t think so.
For companies, the potential fines are even higher. In 2016, Salix Pharmaceuticals had to pay $30 million for insider trading by one of its executives. And in 2018, Yandex had to pay $5.3 million in fines related to insider trading. Can you imagine having to write a $5 million dollar check to the SEC? That would suck so bad.
But it’s not just about the fines. There’s also the reputational damage and legal bills to consider. Insider trading cases can take years to resolve and cost a fortune in legal fees. Plus once you have that scarlet letter on you, it can destroy your career or company’s image. Not exactly a slap on the wrist.
How Do They Catch Insider Traders?
You might be wondering how the SEC catches these insider trading villains. Trust me, they have crazy sophisticated tools to spot suspicious trading activity. Here are some of their tricks:
- Tracking unusually high trading volumes – If there’s a spike in trades in a stock before a major announcement, that raises red flags. Especially if it’s an obscure company no one was trading before.
- Looking for traders who have access to information – The SEC examines who would have access to confidential info at a company or firm and then checks if they made profitable trades. Not a good look.
- Reviewing news releases – When a big news announcement comes out, the SEC checks for unusual trading activity in the days and weeks before it. Super sketchy returns can get you investigated.
- Following connections between traders – If someone makes a trade right after connecting with an insider at a company, the SEC will notice that questionable timing.
- Analyzing trading records – The SEC has access to every trade made by any individual or entity. They scan for patterns that indicate insider knowledge.
So while it might seem hard to get caught, the SEC has crazy sophisticated tools to spot insider trading. Not worth taking the risk if you ask me.
Serious Prison Time is Possible
Not only can the financial penalties be massive, you could also end up behind bars for insider trading. We’re talking federal pound-me-in-the-ass prison here.
In 2008, billionaire Mark Cuban was charged by the SEC for insider trading. They said he sold $7.9 million worth of stock in an internet company after learning confidential info about them. While the charges were ultimately dropped, he still racked up millions in legal fees fighting the case. Even being accused can ruin you.
In 2011, Raj Rajaratnam was found guilty of insider trading and sentenced to 11 years in prison. That’s over a decade of eating crappy prison food, mandatory workouts, and uncomfortable communal showers. You really want to risk that?
And in 2014 Mathew Martoma was sentenced to 9 years in federal prison for insider trading. His wife had to divorce him due to the “stigma” of the charges. Damn dude, your wife leaves you and you go to prison for nearly a decade? Talk about a crap deal.
The point is – insider trading ain’t just about writing a check for fines. You could lose years of your life rotting away in a cell. And for what? A little extra trading profit? Is it really worth throwing your life away over?
How Can You Avoid Insider Trading Accusations?
Let’s say you come across some juicy insider info about a stock. Maybe you overhear something at work or an ex-employee leaks confidential docs. What’s the play here?
Well, for starters, don’t freaking trade on it! That should go without saying. But you also can’t tell your golf buddies or your hair stylist or anyone who might trade on it. That’s called tipping and also super illegal.
If you want to be extra careful, don’t trade in that stock or industry at all until the info becomes public. And don’t go spreading rumors or gossip about it either. Loose lips sink ships, ya know?
The SEC also says you should wait at least a couple weeks after info becomes public before trading. This helps avoid any appearance of impropriety or taking advantage of insider info.
And if you come across legit insider info, the ethical thing to do is alert the company or the SEC. There are whistleblower programs that reward people for reporting securities violations. Doing the right thing pays off in the long run.
The Rules are Changing
After some high profile cases, the SEC has really ramped up the rules around insider trading. They’ve increased penalties, expanded definitions of liability, and given themselves more power to investigate.
Some of the key changes include:
- Lower burden of proof – The SEC now only needs a “preponderance of evidence” to prosecute, rather than the higher standard of “beyond a reasonable doubt”. This makes it easier for them to prove wrongdoing.
- Wider range of penalties – In addition to fines, the SEC can now bar people from working in the securities industry or serving as an officer or director of a public company. No more trading or corporate jobs for you!
- More power to investigate – The SEC can now issue subpoenas simply if it’s in the public interest, even without evidence of a securities violation. This makes it easier for them to get records and dig into suspicious trading.
- Greater whistleblower incentives – Whistleblowers can now get 10-30% of penalties collected over $1 million. Big incentives to report wrongdoing!
So the moral of the story is insider trading is risky as hell these days. The SEC is not playing around and coming down hard even on seemingly small cases. Do yourself a favor and don’t walk anywhere near this line. It’s just not worth ending up broke, imprisoned, or with a shattered reputation. Follow your moral compass on this one.
Conclusion
Insider trading may sound tempting, but the harsh potential penalties absolutely make it a terrible idea. We’re talking massive fines in the millions, decades behind bars, and permanent reputational damage. It’s just not worth the risk for a little extra trading profit. So do yourself a favor and steer clear of insider info, no matter how juicy it seems. The SEC is not an enemy you want to make, trust me on that. Keep your trading activity squeaky clean or it could come back to absolutely destroy your finances, freedom, and future. Don’t say I didn’t warn you!