Affirmative defense for an insider trading investigation

On behalf of Brewer, Pritchard & Buckley, P.C. posted in sec compliance and enforcement on Thursday, November 1, 2018.

Texas businesses and investors are always seeking an advantage to make wise decisions. Getting information – or “tips” as it is often called – can be alluring and seem harmless. However, when the Securities and Exchange Commission believes wrongdoing has taken place and there was inside information shared illegally, it will not hesitate to try and pursue and prosecute those who are alleged to have taken part. Not all cases will result in a person being charged and convicted. There are defenses against these allegations that should be known.

Understanding insider trading and how to lodge a defense against it is key to avoiding hefty penalties. One strategy that can be used is an affirmative defense. With an affirmative defense, if the person can show that the information received did not play a role in the trade decision, it can avoid a violation of the federal securities law and the requisite penalties. There are certain factors that must be in place for affirmative defense to be effective.

The person must show that before he or she learned of the information, there was a binding contract and instructions were given to have a written plan for the securities to be bought or sold and it was done in good faith without an attempt to circumvent the rules. In the contract, plan or instructions, it must do one of the following: have a specified amount, price and date of transaction; have a written formula to determine the dates, prices and amounts; or not allow the trader to have future influence over the trade provided the person is not aware of information that is not available to the public. It can also be an affirmative defense if the buying or selling happened due to a previous contract, instructions or a plan.

Adhering to these requirements will shield a person from allegations and convictions for insider trading. Even if a person or business has taken these steps, it does not mean that the SEC will automatically decline to pursue charges. Having legal assistance when facing allegations of violations related to SEC compliance and enforcement can help with using the affirmative defense and combat the charges.