Federal Insider Trading Defense: SEC Enforcement and Criminal Charges

Federal Insider Trading Defense: SEC Enforcement and Criminal Charges

The Charge That Arrives Twice

Insider trading is prosecuted as two proceedings against the same person for the same conduct. The SEC constructs the civil case. The Department of Justice, working from the same trading data and often the same witness testimony, constructs the criminal one. What a defendant says in the first becomes the record for the second.

Most individuals who receive an SEC subpoena do not yet perceive the second investigation forming behind it. The civil inquiry precedes the criminal referral, but that ordering is procedural, not protective. A Wells notice and a grand jury subpoena can arrive within weeks of each other. In FY 2025, nearly a third of all SEC enforcement actions involved insider trading or offering fraud, a proportion that increased from twenty-six percent the prior year, even as total enforcement actions fell to a ten-year low. The Commission collected $808 million in monetary settlements under Chairman Atkins, less than half the prior decade’s average. The proportion of cases targeting individuals rose. That is not a relaxation. It is a reallocation.

Section 32(a) of the Securities Exchange Act permits imprisonment of up to twenty years per count. Criminal fines reach five million dollars for individuals. Prosecutors have broadened their statutory reach: Title 18, Section 1348 carries its own sentencing range and does not require the nexus to a securities transaction that constrains Rule 10b-5. The mail and wire fraud statutes, which federal prosecutors now employ in insider trading cases with some regularity, impose the same twenty-year ceiling. Median sentences have tripled over three decades, though the statutory maximum has not changed.

What changed is the willingness to pursue incarceration.

What the First Call Determines

Before the scope of an investigation is understood, before the SEC has issued its formal order, the posture of the defense has already begun to harden. Retaining counsel in the opening weeks is the determination on which every subsequent determination depends.

The reason is structural. Civil and criminal investigations share witnesses, documents, and trading data. A statement offered to SEC staff during a voluntary interview can appear (and in the cases we have observed, does appear with a regularity that should concern anyone considering cooperation without representation) in a DOJ prosecution memorandum months later. The Fifth Amendment applies in civil proceedings, but invoking it before the Commission permits the trier of fact to draw an adverse inference. Silence carries a civil cost. Disclosure carries a criminal one.

Counsel’s first task is to establish which investigation has advanced further, whether a criminal referral has been made or is probable, and whether the proceedings can be sequenced to preserve the client’s position in both forums. In something like forty percent of insider trading matters that reach the enforcement stage, the agencies have coordinated before the target receives notice. Every hour of delay narrows the range of available defenses.

The Plan That Was Supposed to Protect You

Rule 10b5-1, adopted in 2000, was fashioned to permit corporate insiders to trade their own company’s securities without the perpetual risk of prosecution. The mechanism appeared elegant: establish a written trading plan when the insider possesses no material nonpublic information, specify the terms of future transactions, and execute the plan without deviation. If adopted in good faith, the plan functions as an affirmative defense. For twenty years, executives relied upon it. Thousands still do.

The 2022 amendments to the rule were, if we are being precise, a concession that the safe harbor had admitted water. The SEC imposed mandatory cooling-off periods: ninety days for officers and directors, thirty days for all others. A good-faith certification became compulsory. Overlapping plans were restricted. The Commission required public disclosure of plan adoptions and terminations by Section 16 insiders. These were not adjustments at the margins. They were the regulatory equivalent of boarding up the windows after discovering the structure had been left unlocked for years.

The Peizer prosecution converted suspicion into precedent. In June 2024, a federal jury in the Central District of California convicted Terren Peizer, the former CEO and chairman of Ontrak, on one count of securities fraud and two counts of insider trading. It was the first criminal case to rest on the abuse of a Rule 10b5-1 plan. Peizer was sentenced in June 2025 to forty-two months, ordered to pay $5.25 million in fines, and required to forfeit more than $12.7 million.

The facts were not ambiguous. In May 2021, Peizer learned that Ontrak’s largest customer was contemplating termination of its contract. He established his first trading plan and began selling shares the following business day. Three months later, approximately one hour after Ontrak’s chief negotiator confirmed that termination was probable, Peizer established a second plan. He sold shares the next morning. Two brokers, a senior executive at Ontrak, and several attorneys each recommended a cooling-off period. He declined every time. Six days after the second plan was adopted, Ontrak disclosed the termination and its stock fell by more than forty-four percent.

Peizer’s defense centered on the fact that Ontrak’s compliance officer had approved both plans and that the trades occurred during authorized trading windows. The court was unpersuaded. It held that Peizer’s refusal to observe any cooling-off period, combined with his pattern of selling shares immediately after plan adoption, constituted sufficient evidence of fraudulent intent. The reliance-on-counsel defense failed because Peizer had not disclosed all material facts to the attorneys whose advice he claimed to have followed. The compliance officer’s approval provided no insulation: the court found that the officer had received minimal training, and that insider trading compliance is not a recognized profession for purposes of the defense. I have sat through something like forty preclearance reviews in my practice. The approval of an undertrained compliance officer is the thinnest form of protection available to an executive, and it astonishes me how many treat it as armor.

The Department of Justice described the prosecution as the first action in a data-driven initiative to identify executive abuse of trading plans. A 10b5-1 plan offers no talismanic protection; it is a document, and like any document, it reveals what its author intended at the moment of its creation. If the timing and circumstances of the plan’s adoption indicate awareness of material nonpublic information, the affirmative defense collapses regardless of the certifications signed or the approvals obtained. The form was completed. The jury looked past all of it.

A plan adopted on a Monday, with sales commencing on a Tuesday, after the worst telephone call of the quarter: this is not a defense. This is a confession formatted as compliance.

The appeal is pending.

A Competitor’s Stock, Your Liability

In SEC v. Panuwat, a jury in the Northern District of California found a former Medivation executive liable for purchasing call options in Incyte, a biopharmaceutical competitor, seven minutes after learning that Medivation would be acquired by Pfizer. He did not trade his own company’s stock. He traded a peer company’s. The jury deliberated for roughly two hours.

The court treated this as a standard application of the misappropriation theory recognized in United States v. O’Hagan. The outcome turned on the language of Medivation’s insider trading policy, which prohibited the use of company information to trade securities of any publicly traded company. The Ninth Circuit is expected to review the verdict in 2025 or 2026. Whether it will endorse the expansion, or confine it to Panuwat’s particular facts, is a question that has occupied securities practitioners since the spring of 2024.

No criminal prosecution has been brought on a shadow trading theory. That absence may not persist.

The Architecture of a Federal Case

Detection begins with data. Market surveillance algorithms identify anomalous trading in proximity to material announcements. The DOJ’s Fraud Section has confirmed a data-driven enforcement program targeting 10b5-1 abuse. Encrypted communications and offshore accounts, once regarded as barriers to prosecution, are now treated as evidence of consciousness of guilt.

An investigation then moves through documents. The Commission issues subpoenas for trading records, electronic communications, corporate policies, preclearance forms, and the terms of any trading plan. If the data suggests misconduct and the records do not exonerate, the inquiry advances to testimony. Witnesses are interviewed. Targets receive Wells notices. The matter either settles or it proceeds toward litigation.

And here is where the criminal referral typically originates. The trading data that prompted the SEC’s inquiry is shared with the DOJ through a memorandum of understanding between the agencies. Prosecutors evaluate whether the evidence supports charges under Section 10(b), under 18 U.S.C. Section 1348, or under the mail and wire fraud statutes. The determination depends on considerations that, while familiar in outline, are applied with a discretion that resists prediction: the magnitude of the gain or loss avoided, the sophistication of the scheme, whether the defendant attempted to conceal the trading, and whether the defendant made false statements to investigators or filed misleading certifications with the Commission.

In March 2025, the SEC charged two foreign nationals in connection with an international insider trading ring that generated more than $17.5 million in gains. In August, the Commission charged a former biopharmaceutical director and four associates with trading ahead of a corporate acquisition. In January 2026, an enforcement action targeted a pharmaceutical consultant who had traded on knowledge of clinical trial results. Three cases in ten months, all in the life sciences sector. These are the ordinary output of an enforcement apparatus that has grown more concentrated as its total caseload has declined.

The silence after an investigation closes without charges is the only acquittal this system provides.

The Weight of What Follows

Insider trading enforcement is a question that implicates professional licensure, employment, reputation, and, in the cases that cross from civil to criminal, physical liberty. The penalties have grown steeper not because the statutes have changed but because the institutions that enforce them have chosen to regard insider trading as what it has always been: a corruption of the mechanism by which markets allocate trust.

We have written about this before, in the context of SEC cooperation credit and the strategic considerations that attend parallel proceedings. The calculus has not changed. Early engagement with counsel remains the single most consequential decision a target will make. A consultation is where this conversation begins. Not as a formality. As a diagnosis, conducted by attorneys who have represented individuals through both the civil and criminal phases of federal insider trading investigations, of where the matter stands and what it demands.

The question is never whether to call. It is when.