You’ve probably heard “insider trading” used to describe a serious financial crime. But here’s something you may not know: not all insider trading is illegal. The difference often comes down to what information a person had and how it was obtained or used. Our Wichita criminal defense lawyers at the McConnell Law Firm are breaking down when insider trading is permissible and when it could land you in serious legal trouble.
What Is Insider Trading?
At its simplest, insider trading involves transactions in a company’s securities by people with access to information or a relationship with the company. However, simply knowing something the public doesn’t know isn’t necessarily enough to make a trade illegal. What matters is whether that information qualifies as material nonpublic information (MNPI). This is information that hasn’t been made public and could influence an investor’s decision to buy, sell, or hold a security.
Think of an upcoming merger, unreleased financial results, major litigation, or another significant development that could affect a company’s value. Whether using that information crosses the line into illegal insider trading depends on how the information was obtained, the trader’s relationship to its source, and what they did with it.
When Is Insider Trading Legal?
Despite its reputation, insider trading isn’t automatically against the law. Corporate executives, directors, and employees can legally buy and sell shares in their own companies. The important part is that they follow applicable securities laws and don’t improperly trade based on material nonpublic information.
Let’s See an Example: An executive may sell company stock after important information has been released to the public. Insiders may also use prearranged trading plans, known as Rule 10b5-1 plans, to schedule certain trades in advance. When these plans meet federal requirements, they can provide an affirmative defense against insider trading liability.
When Does Insider Trading Become Illegal?
Insider trading can cross the line into illegal activity when an individual trades while aware of material nonpublic information in violation of a duty of trust or confidence. Suppose an executive learns that their company is about to announce a major acquisition; before the news becomes public, they purchase additional shares expecting the stock price to rise. Trading on that confidential information could lead to allegations of illegal insider trading.
And you don’t have to be a company executive (or even an employee) to face legal scrutiny. Attorneys, accountants, consultants, friends, family members, and others may also find themselves involved in an insider trading investigation depending on how they obtained and used the information.
“Even passing along confidential information can create legal problems,” said Jonathan W. McConnell, founding Wichita criminal defense lawyer at the McConnell Law Firm. “If an insider gives someone a ‘tip’ and that person trades based on it, both the person who shared the information and the person who traded could face consequences.”
Understanding State Insider Trading Laws
Insider trading cases are often associated with federal securities laws, but certain securities-related conduct can also violate Kansas law. Under the Kansas Uniform Securities Act, K.S.A. 17-12a501 prohibits fraudulent or deceptive conduct in connection with the offer, sale, or purchase of securities. An intentional violation of this law can result in felony charges, with the severity of the offense depending in part on the amount of financial loss involved.
Because insider trading allegations may involve both state and federal law, the potential consequences can be significant. Anyone facing an investigation or charges should take the allegations seriously and speak with an experienced Wichita criminal defense attorney before discussing the case with investigators.
Have You Been Accused?
If you’re under investigation or facing charges related to insider trading or securities fraud, we encourage you to contact the McConnell Law Firm as soon as possible. While every case is different, and no conclusions should be drawn without first consulting an experienced Wichita criminal defense law firm about the specifics of your case, it is always in your best interest to have a skilled attorney by your side from the beginning.
