Schlecht, Shevlin & Shoenberger A Law Corporation
801 E. Tahquitz Canyon Way, Suite 100, P.O. Box 2744 Palm Springs, CA 92263-2744
Schlecht, Shevlin & Shoenberger A Law Corporation

760-320-7161

Insider Trading: What You Do Know Can Hurt You

Insider trading prosecutions are sending a loud message to all those who think the benefits of insider trading outweigh its risks. The $15 billion dollar hedge fund SAC Capital recently agreed to pay fines of more than $600 million dollars to settle insider trading charges on only two trades without admitting liability — it remains to be seen whether SAC Capital chief Steve Cohen, the reigning monarch of the hedge fund billionaires, will face criminal or civil charges on the basis of those trades. 

Sometimes inside trading is legal

Insider trading is not always illegal. When officers, directors or employees of a company — the “corporate insiders” — trade their own company’s stock in accordance with company policy, those trades are perfectly legal. Insider trades must be reported on SEC Form 4, but other than that, there is no restriction on this kind of activity. In fact, a mutual fund has actually been created that takes advantage of legal insider trading  by analyzing SEC Form 4 filings — assuming corporate insiders have the most accurate knowledge of their company’s worth, this mutual fund watches what the insiders are doing and mimics their trades.

Insiders and outsiders

Corporate insiders who trade on significant, confidential corporate developments as well as outsiders who obtain information from them may run afoul of §10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. In a California securities law case involving a $29 million dollar scheme, the SEC filed charges against a hedge fund analyst who allegedly traded on confidential information he received from a company executive. Indeed, there are ever-widening circles of outsiders who have access to material, non-public information, because they work for businesses providing services to corporations or have social connections with corporate insiders or with people who are in a position to get tips from insiders.   

Who gets hurt?

There are some who argue that when investors trade on insider information, the market becomes more efficient because the price of shares quickly reflects more accurate information.  However, insider trading laws are concerned with fairness, not economic efficiency. When one side of the transaction has information that the other side does not, it is fundamentally unfair to the side that is in the dark — that party may be selling their shares at a discount to the insider trader who is in a position to know what they are really worth.

Securities Act pros and cons

On one hand, the Securities Act raises the confidence of investors by enforcing the rules against those who might abuse the confidence of those who have entrusted them with confidential information. On the other hand, the Securities Act net has been cast quite broadly.  In fact, the Act once captured two unlikely defendants — railway workers who tipped off their relatives about the pending buyout of their company after they saw men in suits walking in the railway yard.

Securities professionals labor under a multitude of securities regulations overseen by dozens of state and federal regulatory agencies. Securities litigation in San Bernardino County, as elsewhere, requires extensive knowledge of securities laws and securities defense tactics. 

The firm of Schlecht, Shevlin & Shoenberger, A Law Corporation, recognizes that individuals and businesses governed by the Securities Law run the risk of violation due to the law’s complexity and its strict enforcement by federal and state governments. If you have a California corporate securities question, contact our firm. We have a reputation throughout California for successful securities litigation, including civil lawsuits and violations.

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Schlecht, Shevlin & Shoenberger A Law Corporation is located in Palm Springs, CA and serves clients in and around Palm Springs, Cabazon, Rancho Mirage, Mountain Center, Lake Elsinore, Thousand Palms, Idyllwild, Palm Desert, North Palm Springs, Nuevo, Desert Hot Springs, Moreno Valley, Indian Wells, White Water, Indio, Hemet, Cathedral City, La Quinta, Anza and Riverside County.

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