Many investors write the SEC each year about whether company
insiders, brokers or other persons have engaged in insider trading.
They want to know under what circumstances trading by "insiders" of a
company violates the law.
Insider trading can occur when a person who possesses material non-
public information trades securities or communicates such information
to others who trade. The person who trades or "tips" information
violates the law if he has a fiduciary duty or other relationship of
trust and confidence not to use the information. The most common
examples of insider trading involve corporate officers and directors;
they owe a duty either not to trade the securities of their own
company or not to disclose any material non-public information they
possess. Trading is also prohibited when a person who receives
information through a confidential relationship uses
("misappropriates") the information for his or her own trading or
tips to others. People who receive information in confidence can
include a broad range of persons involved in the securities markets.
From time to time, the SEC has charged investment bankers,
arbitragers, attorneys, law firm employees, accountants, bank
officers, brokers, financial reporters and even a psychiatrist with
misappropriating information and violating insider trading
The SEC investigates and litigates a significant number of cases each
year alleging that the defendants traded while they possessed
material, non-public information. The Commission brings insider
trading cases under several provisions. Section 10(b) of the
Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 of
the Act, which are the general "catch-all" antifraud provisions, are
the primary provisions used by the SEC to combat insider trading.
The SEC can seek a court order against a person who violates this
rule, and can also obtain orders requiring them to give up
("disgorge") their trading profits. The SEC can also seek a penalty
in an amount up to three times the trading profits. Section 14(e) of
the Exchange Act, and Rule 14e-3, also specifically prohibits insider
trading in connection with some kinds of corporate takeovers. Under
the Insider Trading and Securities Fraud Enforcement Act of 1988,
corporations, brokerage firms or other "controlling persons" who
supervise a person who violates the insider trading rules may also be
liable. A "controlling person" can be penalized if he knew or
recklessly disregarded the fact that the controlled person was likely
to engage in insider trading and failed to take steps to prevent it.
The SEC may also award bounties of up to 10 percent of penalties
recovered, through litigation or settlement, to informants who
provide information leading to successful enforcement actions against
insider traders. Questions about insider trading can be directed to
the Office of Consumer Affairs, Securities and Exchange Commission,
Washington, DC 20549.
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