Insider Trading: Theories of Liability, Common Defenses and Recent Cases

By Angela Machala

Angela Machala is a partner at Scheper Kim & Harris LLP. Her practice focuses on the representation of companies and corporate executives in regulatory and white collar criminal investigations, as well as state and federal civil litigation. She has spoken as a panelist at both the ABA White Collar Crime National Institute and the NACDL West Coast White Collar Seminar on topics related to criminal investigations and effective negotiations with the government.

Insider trading cases brought by the SEC and the Department of Justice often get extensive coverage in the press, perhaps because such cases appeal to the investing public’s basic sense of fairness. After all, any semblance of a level playing field for investors is undermined if corporate insiders (and their family and friends) can trade with impunity based on information unavailable to other investors. In the parlance of the SEC and DOJ, insider trading laws are necessary to guard against loss of investor confidence in the integrity of the securities markets.

In 2013, insider trading cases dominated headlines more than ever before, from the SEC’s high-profile loss to Mark Cuban, the owner of the Dallas Mavericks, to the indictment and guilty plea of SAC Capital Advisors. Below is a primer on the two most common theories of insider trading liability, as well as some common defenses to each theory, followed by a discussion of recent insider trading cases.