Insider Trading Fraud: What Investors Need to Know
Insider trading, a type of investment fraud, occurs when someone buys or sells securities using material, non-public information—often referred to as “inside information.”
What Is Insider Trading?
Insider information is not available to the general public and can significantly impact a company’s stock price once disclosed. Examples of insider information include:
- Unreleased earnings results
- Pending mergers or acquisitions
- Major corporate announcements
- Regulatory actions or investigations
When brokers, financial advisors, or corporate insiders use this information to trade securities, they gain an unfair advantage over other investors—violating securities laws and undermining market integrity.
Is Insider Trading Illegal?
Yes. Insider trading is illegal under federal securities laws and can result in both civil and criminal penalties, including:
- Significant fines
- Disgorgement of profits
- Industry bans
- Prison sentences
Under the Securities Exchange Act of 1934, corporate insiders—such as executives, directors, and large shareholders (owning more than 10%)—must disclose their trades to regulators.
Required filings include:
- Form 3 – Initial ownership disclosure
- Form 4 – Changes in ownership (filed within two business days)
These disclosures promote transparency, but trading on undisclosed, material information remains strictly prohibited.
Real-World Insider Trading Cases
High-profile cases highlight how seriously regulators treat insider trading:
- Martha Stewart was convicted in connection with trades involving ImClone Systems and served prison time after being found guilty of obstruction-related charges tied to insider trading activity.
- Steve Cohen, founder of SAC Capital Advisors, was not personally convicted, but his firm paid a $1.8 billion penalty tied to widespread insider trading by employees—one of the largest enforcement actions in history.
Warning Signs of Insider Trading by a Broker
If your broker or financial advisor is engaging in improper trading activity, there are often red flags. Investors should watch for:
Unusual Trading Activity
Trades that do not align with your investment objectives or risk tolerance.
Consistently Abnormal Returns
Returns that significantly outperform the market without a clear, legitimate strategy.
Suspicious Timing of Trades
Buying or selling securities just before major news events or announcements.
Unusual Communications
References to “confidential” or “exclusive” information not available to the public.
Conflicts of Interest
Connections between your broker and corporate insiders or company executives.
Regulatory History
Prior complaints, investigations, or disciplinary actions involving your advisor.
If something feels off, it often is. These patterns can indicate misconduct beyond insider trading, including unauthorized trading or fraud.
How Regulators Like FINRA Investigate Insider Trading
The Financial Industry Regulatory Authority (FINRA) actively monitors trading activity across brokerage firms to detect suspicious behavior.
FINRA may:
- Analyze trading patterns and market activity
- Investigate unusual price movements before announcements
- Coordinate with the SEC on enforcement actions
If violations are found, FINRA can:
- Impose fines and sanctions
- Suspend or permanently bar brokers
- Revoke brokerage licenses
What Should You Do If You Suspect Insider Trading?
If you believe your broker may be engaging in insider trading or other misconduct:
- Document all account activity and communications
- Request explanations for suspicious trades
- Report concerns to regulators, such as the SEC or FINRA
- Consult a securities fraud attorney to evaluate your legal options
You may be able to recover losses through FINRA arbitration, a process designed to resolve disputes between investors and brokerage firms.
Can You Recover Losses from Insider Trading?
Yes, in some cases. If your broker’s misconduct—including insider trading—caused financial harm, you may be entitled to compensation through a FINRA arbitration claim.
Common claims include:
- Unauthorized trading
- Unsuitable investment recommendations
- Misrepresentation or omission of material facts
- Breach of fiduciary duty
- Failure to supervise
Speak with a Securities Fraud Attorney
The White Law Group has extensive experience representing investors in disputes involving broker misconduct and securities fraud. The firm has handled hundreds of FINRA arbitration claims involving:
- Insider trading concerns
- Unauthorized trading
- Churning and excessive trading
- Private placement fraud
- Misrepresentation and negligence
With offices in Chicago and Seattle, the firm represents investors nationwide.
Free Consultation
If you are concerned about insider trading or suspicious activity in your account, you may have legal options.
Contact The White Law Group for a free, confidential consultation to discuss your case and potential recovery options.
888-637-5510
whitesecuritieslaw.com
Frequently Asked Questions
What qualifies as insider trading?
Insider trading occurs when someone buys or sells a security using material, non-public information about a company. This can include corporate insiders—such as executives or directors—or even brokers or third parties who receive confidential information and trade on it before it becomes public.
How can I tell if my broker is engaging in insider trading?
While insider trading can be difficult to detect, common warning signs include unusual or well-timed trades, consistent above-market returns without explanation, or references to “inside” or confidential information. If your account activity does not match your investment goals or risk tolerance, it may be worth investigating further.
Can I recover losses caused by insider trading?
Yes, investors may be able to recover losses through FINRA arbitration if a broker’s misconduct—such as insider trading, unauthorized trading, or misrepresentation—caused financial harm. An experienced securities fraud attorney can evaluate your claim and help determine the best path forward.