BoardroomDirect ®

BoardroomDirect®
Update on the current board issues: May 2013

Inside this edition

Putting the spotlight on illegal insider trading

Insider trading has been making big headlines lately. Since 2010 168 actions have been filed against nearly 400 individuals and entities.

Illegal insider trading is defined as trading in a corporation’s securities while in possession of material non-public information, which is in breach of a fiduciary duty or other relationship of trust and confidence to either the corporation or the source of the information. Some trading activity by insiders is not considered to be “illegal insider trading” if it occurs under Rule 10b5-1, as discussed below.

The financial, reputational, and criminal penalties for illegal insider trading can be severe for individuals and companies. Violators can face civil penalties such as being disgorged of profits gained or losses avoided, paying three times that amount in fines, and being barred from serving as a director or officer of a public company. Criminal penalties include fines up to $5 million and up to 20 years in prison. Employers may face potential civil and criminal exposure; either vicariously liable for the actions of their employees, or for recklessly failing to prevent employees from engaging in illegal trading. There’s also the potential for negative publicity that can impact a company’s reputation.

While the most high-profile insider trading allegations have historically been made against individuals, more recently, the focus has shifted. The SEC and US Department of Justice (DOJ) are now investigating hedge funds, expert networks, 10b5-1 plans—and even directors.

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