Conviction for insider trading must prove breach of a duty owed

Chuck Smith Attorney at Law

California is home to some of the world’s most profitable technology companies, and many residents actively trade in their stocks. Some trading techniques encourage following an executive’s actions as signals for when to buy or sell a company’s stock. According to MarketWatch, the consensus is that because corporate insiders have “skin in the game,” they are more likely to possess key insights into their company and its future.

Information about a company posted on its website, or viewed through press releases, news reports and the Securities Exchange Commission is generally a public record. Using this information to buy and sell stocks is not usually a violation of any federal securities laws. Under certain circumstances, however, specific types of information may be confidential, and using it to trade for substantial profits may land an individual in trouble.

Information that is not public

Gaining access to confidential company information not intended for the public may result in allegations of insider trading. For a prosecution to occur, however, an individual must first gain some inside confidential information and use it for personal gain by taking action to buy or sell stock.

In one such instance, a portfolio manager at a billion-dollar hedge fund company learned about a confidential transaction involving Yahoo, as reported by Reuters. Afterward, the portfolio manager purchased some Yahoo stocks. He then discussed the transaction with an analyst at an investment research firm who had access to confidential information.

Owing a duty of confidentiality

Because the investment firm’s analyst received confidential information about a not-yet-publicly disclosed transaction, the analyst owed a fiduciary duty to refrain from buying or selling Yahoo stocks. The portfolio manager, however, did not owe that duty. Although the SEC investigated the portfolio manager, who faced charges for insider trading, a judge found there was insufficient evidence to prosecute. Because the portfolio manager did not owe a duty of confidentiality, the judge found that he could not face conviction for insider trading.

Criminal defense