Insider trading refers to the buying or selling of a security based on material, nonpublic information in violation of a duty to keep that information confidential. It can lead to a variety of civil and criminal repercussions. Understanding the elements of insider trading can help you protect yourself if you face charges.
There are generally 3 elements prosecutors must prove to bring insider trading charges against a defendant.
1. Material nonpublic information
The information in question must be both material and nonpublic. Information is material if there is a substantial likelihood it would affect the decisions of reasonable investors. Examples could include unpublished financial results, plans for a merger or acquisition, important executive changes or the gain or loss of a major contract. For information to be nonpublic, it must not yet be available to the general public.
2. Breach of duty
The second key element is that the person trading must have breached a duty to keep the information confidential. This duty may arise from a fiduciary duty owed to shareholders, an employment agreement or another special confidential relationship. For example, a CEO trading based on inside knowledge of upcoming quarterly earnings would likely breach their fiduciary duty.
The third element prosecutors must prove is that the person willfully and intentionally sought to exploit the confidential information for personal gain. Negligence or accidental insider trading is not enough to bring criminal charges. The prosecution must show intent to use confidential knowledge to gain an unfair advantage in trading.
Understanding these elements can help clarify this complex area of securities law. Consider how these factors might apply to your defense.