Federal Insider Trading Charges

Federal Insider Trading Charges: How Your SEC Cooperation Becomes The Evidence That Convicts You

The SEC investigation is the criminal investigation. You just don’t know it yet. By the time someone tells you the Department of Justice has “taken an interest” in your case, you’ve already given them everything they need to prosecute you. That’s how this works. That’s what nobody explains until it’s too late. When the SEC comes asking questions, most people cooperate because they’re told cooperation matters. They answer questions. They produce documents. They give testimony under oath. Meanwhile, a parallel criminal investigation may already be running at DOJ – and the SEC is legally allowed to not tell you about it. Your civil cooperation becomes criminal evidence. The testimony you gave trying to resolve a civil matter gets read aloud at your criminal trial.

Here’s what makes the parallel investigation structure so devastating: the SEC has civil authority only. They cannot imprison you. They can fine you, disgrace you, and ban you from the industry. But they can’t put you in a cell. That’s DOJ’s job. And the SEC builds DOJ’s case for them. Through “Access Requests,” DOJ obtains everything the SEC collected – every document you produced, every email you turned over, every word of testimony you gave under oath. The criminal prosecutors didn’t subpoena that evidence. You handed it to them voluntarily, thinking you were resolving a civil matter.

The conviction rate tells you what happens next. Federal prosecutors convict in approximately 93% of securities fraud cases. They don’t bring charges they expect to lose. By the time you’re indicted, they’ve reviewed your SEC testimony, analyzed your trading records, interviewed cooperating witnesses, and built a case they believe is airtight. The maximum sentence for insider trading under Section 10(b) is 20 years. For corporate fraud under Sarbanes-Oxley, it’s 25 years. Raj Rajaratnam received 11 years – the longest insider trading sentence in history. This isn’t fine-only territory. People go to prison.

The SEC Investigation IS The Criminal Investigation

Heres how the parallel investigation system actualy works, and why it catches people who think there being smart about cooperating. The DOJ Yates Memorandum, issued in September 2015, explicitly encourages “early and regular communication between civil attorneys and criminal prosecutors handling corporate investigations.” This isnt an informal arrangement. Its official policy. The SEC and DOJ are designed to coordinate.

When you recieve a subpoena from the SEC, you have two options that both seem reasonable. You can cooperate, hoping that voluntary cooperation leads to a better outcome. Or you can fight the subpoena and risk antagonizing the SEC, potentially creating inference that you have something to hide. Most people cooperate. Most lawyers advise cooperation. And most of the time, that cooperation feeds directly into a criminal case you didnt know existed.

Think about the timing. The SEC investigation starts first. You respond to document requests. You sit for testimony. You explain transactions. You’re trying to resolve a civil regulatory matter. Maybe you think your exposure is limited to fines and disgorgement. Meanwhile, DOJ prosecutors are watching. There recieving everything through Access Requests. There building an indictment based on evidence you created. The criminal investigation may have started the day the SEC investigation started – or it may start later, after your testimony gives them what they need. Either way, you wont know until your arrested.

And heres the thing about SEC testimony that nobody explains clearly enough. It happens under oath. You swear to tell the truth. If you shade your answers, if you omit relevant details, if you say anything that isnt completely accurate – you havent just failed to cooperate with a civil investigation. Youve committed perjury. Youve made false statements. You’ve created obstruction charges. Martha Stewart went to prison for lying to investigators about allegations she was acquitted of. She didnt go to prison for insider trading. She went to prison for the cover-up.

How Your SEC Testimony Becomes Criminal Evidence

OK so lets be clear about the mechanics here. The SEC collects testimony using civil subpoena power. In a criminal investigation, you would invoke the Fifth Amendment. You would refuse to answer questions that might incriminate you. But in a civil investigation, invoking the Fifth carries consequences – adverse inference, assumption that your hiding something, potential impact on civil liability. So you talk. You answer. You explain.

DOJ prosecutors couldnt have compelled the same testimony in a criminal investigation becuase you would of invoked the Fifth Amendment. But the SEC collected it for them. You basicly testified against yourself at your own criminal trial, years before the trial even happened, becuase nobody told you the criminal investigation was already underway. And even if it wasnt underway then, it is now – triggered by what you said.

The Access Request system makes this sharing formal and legal. DOJ submits an Access Request to the SEC. Under certain limitations, the SEC provides copies of all documents and testimony obtained during there investigation. This isnt a leak. This isnt improper coordination. This is how the system is designed to function. Your civil cooperation becomes the criminal case file.

And heres were it gets worse. Settlement with the SEC dosent prevent DOJ prosecution. There seperate agencies with seperate interests. Your civil resolution means nothing criminally. You can pay fines, accept disgorgement, consent to an industry bar – and still be indicted the next day on criminal charges using all the evidence you provided during settlement negotiations. The SEC settlement isnt a deal with DOJ. Its just a deal with SEC.

The FINRA Trap: Fifth Amendment vs. Career Destruction

FINRA creates its own seperate trap that catches people who think they understand there rights. If your registered with FINRA – which you are if you work in the securities industry – FINRA Rule 8210 requires you to provide information and testimony whenever FINRA asks. This isnt optional. And heres the part that destroys people: the Fifth Amendment dosent apply.

In FINRA proceedings, if you invoke your Fifth Amendment right against self-incrimination, FINRA treats that as a failure to cooperate. The consequence is automatic suspension followed by permanent bar from the securities industry. Not a fine. Not a warning. Permanent bar. You can never work in securities again, anywhere, for any firm. Your career ends the moment you invoke the Fifth to FINRA.

So you face an impossible choice. Answer FINRAs questions and create evidence that might be used to convict you criminally – becuase FINRA shares information too. Or invoke the Fifth, preserve your criminal defense, and accept that your career in securities is permanantly over. Some lawyers call this the FINRA trap. There is no good option. There is only damage control.

Heres the calculation most people face. If your facing a criminal investigation, and you know it, you might decide to invoke the Fifth with FINRA and accept the bar. Better to be barred then imprisoned. But if your not sure wheather criminal exposure exists – if the SEC investigation hasnt clearly gone criminal yet – you might answer FINRA questions and hope for the best. And then those answers become evidence. The trap works becuase you dont always know your in it untill its to late.

Tipper-Tippee Liability: Everyone In The Chain Gets Caught

Insider trading liability dosent stop with the person who had the information. It extends to everyone who recieved it and traded on it. This is tipper-tippee liability, and it can catch people who never thought they were doing anything wrong.

The legal framework comes from Dirks v. SEC. A “tipper” is someone with inside information who shares it. A “tippee” is someone who recieves it. Under Dirks, tippees are liable when the tipper recieved a “personal benefit” from sharing the information. That personal benefit dosent have to be money. It can be reputational benefit that translates into future earnings. It can be a gift of information to friends and relatives. The Supreme Court has held that sharing information as a gift with intent to benefit the tippee counts as personal benefit.

And the chain keeps extending. You recieve information from someone who recieved it from someone who recieved it from an insider. Your a remote tippee. You might not even know who the original source was. Dosent matter. If you knew the information was confidential and divulged for personal benefit, and you traded on it anyway, your liable. The government has to prove you knew these things – but trading patterns, communications, and circumstantial evidence can establish that knowledge.

Heres the thing about enforcement. The SEC uses data analytics that can detect aberrational trading in seconds. Unusual options activity before a merger announcement. Stock purchases that spike before earnings. Trading patterns that deviate from your history. The surveillance systems flag these automatically. Then investigators pull your communications, your relationship networks, your prior trades. By the time there asking questions, they already know the answers. There testing wheather you’ll lie.

And shadow trading is now fair game. In April 2024, the SEC won its trial against Matthew Panuwat for trading in a competitors stock based on information about his own company. He didnt trade in his employer’s stock. He traded in a company his employer was about to compete against. The SEC argued this was still trading on material non-public information. The jury agreed. The definition of insider trading just got broader.

The 93% Conviction Rate: Why Federal Prosecutors Don’t Lose

Lets talk about why fighting federal insider trading charges is statisticaly futile for most defendants. The 93% conviction rate isnt becuase defendants are always guilty. Its becuase prosecutors only bring cases there certain to win. And there certainty comes from how cases are built.

By the time your indicted, prosecutors have reviewed everything. Your SEC testimony. Your trading records going back years. Your brokerage statements. Your communications. There’ve interviewed cooperators – former colleagues, trading partners, people who knew what you knew and decided to flip. In the Rajaratnam case, prosecutors used wiretaps – the first time wiretaps were used in an insider trading prosecution. They had recordings of conversations planning trades based on inside information. You cant explain that away.

The sentencing stakes are enormous:

• Raj Rajaratnam – 11 years in federal prison, $53.8 million forfeiture, $92.8 million SEC penalty
• Lawrence Billimek – 70 months (2024) for front-running scheme
• Maximum criminal fine – $5 million for individuals, $25 million for corporations

The penalties have become harsher over time, not more lenient. Judges and prosecutors take securities fraud seriously becuase it undermines market integrity.

And the financial penalties compound the prison time. Criminal fines can reach $5 million for individuals. Disgorgement can take every dollar of profit you made – and then some, with prejudgment interest. Civil penalties can be three times the profit gained or loss avoided. Industry bars end careers. When you add up the prison time plus financial destruction plus career elimination, the total cost of an insider trading conviction is catastrophic.

What To Do If Your Facing SEC Investigation Or Insider Trading Charges

If your reading this becuase youve recieved an SEC subpoena, a FINRA inquiry, or contact from federal investigators about securities trading, heres what you need to understand immediatly. Every decision you make from this moment forward – especialy about wheather to answer questions – will determine wheather you end up in prison.

First: assume parallel criminal exposure exists untill proven otherwise. This single assumption changes everything about your strategy. Dont assume the SEC investigation is “just civil.” Dont assume DOJ isnt already involved. Until you know definitively that no criminal investigation exists, treat every document you produce and every word you speak as potential criminal evidence.

Second: get a securities defense attorney who handles both SEC and criminal matters. Not just a securities lawyer. Not just a criminal defense lawyer. Someone who understands the parallel investigation structure, the Access Request system, and the interaction between civil cooperation and criminal exposure. The decisions you face require someone who sees both sides.

Third: understand the FINRA trap before you answer FINRA questions. If criminal exposure exists, invoking the Fifth with FINRA may end your career but preserve your freedom. Answering FINRAs questions may preserve your career temporarily but create evidence that destroys it anyway through criminal conviction. Your attorney needs to evaluate this calculation based on your specific situation.

Fourth: do not provide testimony without understanding what the SEC already has. Before you sit for SEC testimony, you should know what documents theyve already collected, what other witnesses have said, and what trading patterns theyve identified. Walking into testimony blind is walking into a trap. Your explanations need to account for evidence they already possess.

Fifth: consider wheather cooperation or fighting makes sense. Some defendants recieve meaningfull benefits from cooperation – reduced sentences, declined prosecution, favorable treatment. Others cooperate and recieve no benefit while creating the evidence that convicts them. Cooperation is not automaticaly good. The calculation depends on the strength of the governments case and your own exposure.

The federal securities enforcement system is designed to work against you. The SEC collects evidence with civil authority. DOJ prosecutes with criminal power. FINRA enforces with career-ending bars. The information flows between them while you make decisions without knowing the full picture. The 93% conviction rate exists becuase the system is overwhelming by design.

By the time you recieve the first subpoena, the investigation has already been running. They already have trading data. They already have communications. There asking questions they know the answers to.

Dont create evidence against yourself thinking your resolving a civil matter.