Insider Trading – Penalties can be Very Harsh

Recently, the SEC imposed the harshest fine ever levied for insider trading in a case that involved former Galleon Group hedge fund manager Raj Rajaratnam. Rajaratnam was fined $10 million, a civil penalty of nearly $93 million, in addition to an 11 years sentence in federal prison.

Roomy Khan, an employee of Galleon worked with the FBI in sealing Rajaratnam’s fate. But although she collaborated and assisted the FBI, the SEC clearly wanted to send a message by jailing Khan for a term of one year in federal prison for illegally passing inside information as well as obstructing justice. The formal charge that led to her incarceration was categorized as wire fraud.

Another well-documented case of insider trading that led to jail time was that of celebrity homemaker Martha Stewart who was given insider information about a pending FDA rejection that was about to be released relating to ImClone’s major drug Erbitux, a biotech company stock that she already owned. Based on the information she was given, Stewart dumped the shares before the announcement was made public. Two days after Stewart sold the shares, ImClone’s stock price plummeted sixteen percent. She was formally charged with securities fraud and insider trading but those charges weren’t pursued and ultimately dropped by the government. However, she was found guilty mainly of making false statements to federal authorities, conspiracy, and obstruction of justice. She received a token five month sentence at Alderson federal prison.

However, in many cases of charges relating to insider trading, a settlement with the SEC that may involve little or no prison time can be reached even if culpability is apparent.

In a recent case that’s featured on my legal blog, Robert Spallina and Thomas Palermo of Parkland, Brian Markowitz of Pompano Beach, Steven Rosen of Coral Springs and Donald Tescher, a Delray Beach resident were basically let off lightly after having insider trading charges settled with the Securities Exchange Commission (SEC) earlier this past fall. Although expensive to the five men in conclusion of the case, their settlements could have been much harsher as described in the examples above.

Most people that invest in the stock market are hoping that in time, the stocks or other financial vehicles (options, bonds, exchange traded funds, mutual funds, etc.) they’ve purchased appreciate in value leading to a profit on their initial investments.

But as most investors know, there are events that will move a stock’s price drastically upward in the short term such as earning releases that are better than expected, announcements of substantial buybacks of a company’s own stock or other announcements such as a dividend being raised substantially and many other actions that can quickly cause a stock price to rocket upward.

And anyone who owns a portfolio in the market always has the vision that one of the companies they own will be bought out by another at a large premium. The feeling of waking up in the morning and finding that a stock that closed at $25 a share the day before which is now trading in the mid-forties because another company announced that they have come to terms for acquiring that company is a dream come true.

Many people get stock tips from legitimate companies via email and other methods of delivery. These services include legitimate websites such as The Motley Fool, earningwhispers.com, the Street.com, and many other authentic services that do intensive research to find stocks that they believe are going to make upward movements.

On any given day, most people who play the market will find these types of emails in their inboxes. Brokerage houses are notorious for selling email addresses to companies that sell these types of mailing lists or the companies find their potential clients by data mining.

There are also not so “up and up” emails that will appear that are nothing more than pump and dump schemes which is a type of securities fraud where a stock price is inflated (pumped) by broadcasting information about it convincing unsuspecting traders that the stock has a great or unique product and will be making a big move very soon, only to be sold en masse (dumped) once the price goes up and reaches a predetermined price level by the swindlers. Most investors that get caught up in these schemes lose all or most of their money.

But even though pump and dump schemes are illegal, the sender of an email, or financial message board poster is not really committing an illegal act. The receiver still has the choice to ignore it, and the sender may only be forwarding information they’ve heard from a third party. These schemes usually involve thinly traded micro-cap (penny) stocks.

And then, there’s insider trading.

Michael Cohen is an aggressive, experienced Fort Lauderdale insider trading lawyer who has vast experience in cases of securities fraud and all cases related to it as well as all other federal criminal charges. If you are accused or arrested for insider trading Mr. Cohen’s law office is the correct choice to fight these types of allegations.

To fully understand this white collar crime, click here to read about it in detail, but to summarize, it’s the leaking or receipt of non-public material insider information and then acting upon it by purchasing a stock or other type of security based on that information. In the case of leaking the information it’s certainly a crime but receiving it without action being taken to generate a profit is not.

If the situation arises where you, a friend or loved one is charged or arrested for insider trading, or have knowledge of an investigation in progress, call me at 954.928.0059 to make an appointment to come into my office for a free consultation and case evaluation. I now offer two centrally located offices in North Fort Lauderdale, right off the Interstate 95 exit at Cypress Creek Road as well as my new office located in downtown Fort Lauderdale.

My extensive experience within the federal system will become a major benefit assisting you with the best possible defense and assuring the best possible outcome.

Call the Law Offices of Federal Criminal Defense Attorney Michael B. Cohen at 954.928.0059. My assistance can help ease your mind and guide you through all options in your specific case and give you answers to any of your legal issues.