Can Planning a Wedding Send You to Prison for Insider Trading?

Insider trading – in rough terms, using a company’s confidential information to make money trading its stock – is a well-known white-collar crime. In some instances, insider trading is pretty obvious. The Department of Justice alleges a doctor running a clinical trial of a drug for a company sold his stock in that company after learning (confidentially) that there were problems with the clinical trial. The doctor avoided $160,000 in losses after the clinical trial problems became public and the price of the stock declined. If the DOJ’s allegations are true, there was insider trading. Or the former chairman of a large company says he sold secret information about his company to an investor who used that information to trade the company’s stock. If that was their arrangement, it was likely an insider trading conspiracy.

Other purported insider trading cases are less clear-cut. Stock analysts and investors spend a lot of time trying to find information that will help them predict whether a stock’s price will go up or down. That’s perfectly legal. They cross a red line if they obtain confidential (“non-public”) information from a company insider for the purpose of trading stocks, a practice sometimes called “tipping.” (The “tipper” gives secret information to the “tippee.”) But a grey area exists in the law when friends, colleagues, business associates, or even perfect strangers (perhaps a stock analyst) obtain information from a company employee that the employee does not intend to be used for trading.

In another case, the Department of Justice prosecuted Sean Stewart, a former JPMorgan vice president, for allegedly participating in an insider trading scheme as a “tipper.” The government claimed information Sean gave his father, Bob Stewart, was used by Bob and a friend of Bob to make $1 million in the stock market. Sean testified that he did not tell his father anything for the purpose of helping his father trade stocks, but rather just shared information in the context of planning a wedding and other ordinary life events, since his family was “very close and we talk about everything.” According to Sean, his father used this information to trade stocks without telling Sean. Was Sean criminally responsible for his father’s alleged betrayal of trust? The jury said yes.

The circumstances under which a company employee may be prosecuted for someone else’s use of information received from that person is a disputed issue, with the federal courts split in their interpretation of an old Supreme Court decision, Dirks v. SEC, 463 U.S. 646 (1983). The Second Circuit held the employee must receive something of value in connection with the insider trading, while the Ninth Circuit concluded that an employee who shares a close family relationship with the trader may be held responsible even if the employee received no direct financial benefit. The United States Supreme Court agreed to hear a case this fall which may resolve that question.

In any event, employees who know important non-public information about the company they work for should be mindful about what they reveal about their work to friends and family members, even in casual conversation. If non-public information slips out and is later used to trade stocks, the employee may find him or herself unexpectedly entangled in serious “tipping” allegations.