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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 prohibitions.
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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