Why are Some Insider Trading Cases Civil and Others Criminal?

Trading Case AnalysisSometimes it seems there is little consistency in how insider trading cases are prosecuted. One person will be charged criminally, another receives a civil fine. Are there factors that seem to point which way a case will go?

In a story in Forbes magazine written by Walter Pavlo, Jordan Thomas, partner at Labaton Sucharow, and former Assistant Director and Assistant Chief Litigation Counsel in the Division of Enforcement at the SEC, discussed his thoughts.

Thomas felt there were three factors that would trigger an insider trading case to be viewed as criminal versus civil.

  1. The significance of the wrongdoing. These would be issues such as the amount of money involved, the duration of the illegal activity, how many people were affected by the trading, and issues like that.
  2. Corroboration of others. This means there usually have to be people that flip for the prosecution, or there have to be taped meetings, etc.
  3. Recidivism. If the person has been caught doing this kind of thing before, there’s a better chance this time around he or she will be looking at prison time.

Involvement of the Department of Justice (DOJ) and other state and federal authorities can also lead to a case moving toward criminal prosecution. For instance, there is regular communication between the SEC and DOJ and sometimes Justice will open its own investigation of an insider trading case if it feels the SEC has enough information to merit a criminal conviction.

In the story, Thomas also thought that prosecutors are more likely now to shoot for a criminal case over civil because of new enforcement tactics such as wiretaps. Because the defendant is on tape discussing his or her wrongdoing, the cases are very strong, so there isn’t any reason for the SEC or DOJ to couch their case and opt for a civil penalty.

If there’s something to take from this changing trend, it’s that those who are privy to inside information during merger discussions, earnings preparations, and the like need to remember the law and not act on that information. Because these days, the odds of that behavior resulting in a criminal case are more and more likely.

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