Courts and the Securities and Exchange Commission (SEC) have rules to protect the investment from the effects of insider trading. And they continue to develop approaches to reach non-employees, through the examples of misappropriation and temporary-insider theories.
For example, the SEC now aggressively scrutinises hedge funds for evidence of insider trading. The SEC may pursue a person for insider trading even if secret inside information didn’t influence their decision to trade.
An example would be an insider-trading case in 2016 involving professional golfer Phil Mickelson and a corporate director. It shows that when the SEC finds insider trading somewhere in a chain of events, all who profited will be forced to pay back their gains.
Even if they didn’t know that the information in question was tainted. In the SEC’s action, Mickelson was named as a relief defendant, an individual who must turn over ill-gotten gains arising from schemes perpetrated by others.
Another risk for officers and directors is that they can be liable as controlling persons if for example they’re reckless in not preventing insider trading by their employees.
Recent cases have involved types of information that can move a company’s stock price in less obvious ways, and the SEC often brings these cases to test the edges of the law’s reach. An example: The insider-trading case that the SEC brought against Mark Cuban, owner of the Dallas Mavericks basketball team.
Cuban sold stock in a public company when, allegedly, he knew that it was about to raise private financing. After the SEC brought a civil suit against him, the jury in his trial found him not guilty.
In a blog commentary, attorneys at Jones Day warn that the decision in the Cuban case will not alter the SEC’s enforcement practices when it brings insider-trading cases that fall into grey areas of the law. Moreover, it illustrates the fact-specific nature of insider-trading cases and the expensive process involved in challenging the SEC by taking a case to trial.