Report Insider Trading to the SEC; Earn a SEC Whistleblower Award
Individuals are liable for insider trading violations when they buy or sell a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security (see definitions below). Under the SEC Whistleblower Program, individuals are eligible for an award if they report original information about insider trading to the SEC and that information leads to a successful enforcement action with recoveries in excess of $1 million. Individuals can report insider trading to the SEC anonymously if represented by an attorney. Since 2011, the SEC has issued more than $262 million in awards to whistleblowers
Under federal securities laws, a “relationship of trust and confidence” may exist in many circumstances, as highlighted in SEC Rule 10b5-2. Information is considered “material” if it would be important to a reasonable investor in making an investment decision.
For example, insider-trading violations may occur when an individual:
- tips material, nonpublic information;
- trades securities based on tipped information; or
- trades securities based on misappropriated information.
Recently, the Supreme Court has even lowered the bar for prosecuting individuals who trade on inside information from family or friends. In Salman v. United States, the Supreme Court held that government prosecutors are not required to show that money, property, or something of tangible value was provided in exchange for insider information from relatives or friends. The Court reasoned that “[i]n these situations, the tipper personally benefits because giving a gift of trading information to a [relative or friend] is the same thing as trading by the tipper followed by a gift of the proceeds.”
If you are aware of insider trading, you might be eligible for an SEC whistleblower bounty. Contact the leading SEC whistleblower lawyers at Zuckerman Law at 202-262-8959 to learn about a potential SEC whistleblower reward and about federal laws protecting whistleblowers.
Read more about the success of the SEC Whistleblower Program in our column in Forbes: One Billion Reasons Why The SEC Whistleblower-Reward Program Is Effective.
Tips for Qualifying for a SEC Whistleblower Award
Purpose of Insider Trading Laws
Insider-trading laws are designed to protect market integrity and prevent individuals from profiting unlawfully. Prosecuting insider-trading violations is a top enforcement priority of the SEC and the agency will bring cases against individuals trading on inside information even when their profits are not relatively insignificant to other areas of enforcement.
For example, on March 23, 2017, the SEC announced that it settled charges against Steven A. Hartung who allegedly earned $60,000 on a family member’s inside information about Merck & Co. Inc.’s 2014 acquisition of Idenix Pharmaceuticals. The SEC disgorged his gains and Hartung agreed to pay an equivalent penalty and interest for a total settlement of $123,000. While this settlement amount would not qualify a whistleblower for an award under the SEC Whistleblower Program, it nevertheless underscores that the SEC is targeting any individual who trades on inside information – even if it does not result in a multi-million-dollar profit.
Types of Insider Trading Cases Bought by the SEC
According to the SEC’s Insider Trading webpage, the agency has brought insider-trading cases against:
- corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
- friends, business associates, family members, and other ‘tippees’ of such officers, directors, and employees, who traded the securities after receiving such information;
- employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
- government employees who learned of such information because of their employment by the government; and
- other persons who misappropriated, and took advantage of, confidential information from their employers.
SEC Insider Trading Enforcement Actions
- On September 21, 2016, hedge-fund manager Leon G. Cooperman and his firm, Omega Advisors, were charged with insider trading related the sale of a company for $650 million. According to the SEC’s complaint, Cooperman learned of Atlas Pipeline Partners’ (“APL”) sale of its natural-gas processing facility from the company’s executive in advance of the public announcement. During this conversation, Cooperman allegedly told the executive that he would not to use the information for trading purposes. Thereafter, the hedge-fund manager purchased a millions of dollars worth of APL’s stock, whose value increased by approximately 31% after the sale of the gas-processing facility. The SEC is seeking to disgorge of all ill-gotten gains plus interest, penalties, and obtain permanent injunctions against Cooperman and Omega Advisors.
- On May 11, 2017, the SEC charged a former partner at an international law firm and his neighbor with making more than $1 million in illicit profits by insider trading around corporate announcements. According to the SEC’s complaint, the partner accessed confidential documents on his law firm’s internal computer network related to at least 11 impending announcmets involving law firm clients. The partner traded with this material nonpublic information and often tipped his neighbor about the information as well. The neighbor similarly traded in company stocks before the announcements were made public.
- On May 24, 2017, the SEC charged a former government employee who tipped a political intelligence consultant about confidential information regarding upcoming decisions by the Centers for Medicare and Medicaid Services (CMS). The consultant relayed this information to analysts at a hedge fund advisory firm that paid him as a consultant. The analysts the used the information to trade the stocks of four health care companies and generate more than $3.9 million in illicit profits.
- On July 12, 2017, the SEC announced charges against a scientist who used inside information about two acquisitions to make approximately $120,000 in unlawful profits. To avoid detection (unsuccessfully), Mr. Yuan placed the trades using a brokerage account opened in China bearing his mother’s name. The SEC’s investigation revealed several “smoking guns,” including Internet searches conducted by Mr. Yuan about how to evade detection, including a search for “insider trading in an international account.” Click here to read the complaint.
- On September 20, 2017, the SEC charged the former CEO of a Silicon Valley-based fiber optics company, Alliance Optics Products, with insider trading in company stock that generated $2 million in illicit profits and losses avoided. According to the SEC’s complaint, the CEO used secret brokerage accounts in the names of his wife and brother and trade company shares after attending board meetings where confidential information was discussed. In addition, the CEO tipped his brother about the company’s performance prior to earnings announcements as well as prior to an announcement that the company would be acquired by Corning.
Additional recent SEC enforcement actions for insider trading that have resulted in monetary sanctions in excess of $1 million include:
- SEC v. Thomas D. Melvin, et al.
- Securities and Exchange Commission v. Yu-Cheng Lin – $7.3 million
- SEC v. Sigma Capital Management, LLC – $14 million
SEC Whistleblower Reward Program
Under the SEC Whistleblower Program, whistleblowers may be eligible for monetary awards when they voluntarily provide the SEC with original information about violations of federal securities laws that leads the SEC to bring a successful enforcement action that results in monetary sanctions exceeding $1 million.
SEC Whistleblower Bounties
Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected. On September 22, 2014, a whistleblower was awarded more than $30 million for providing key information that led to a successful enforcement action.
Whistleblower Protection for SEC Whistleblowers
The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Furthermore, the Dodd-Frank Act and Sarbanes-Oxley Act protect whistleblowers from retaliation by their employers for reporting violations of securities laws.
For more information about protections and remedies for corporate whistleblowers, download our free guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers
Washington DC SEC Whistleblower Law Firm
The experienced whistleblower lawyers at Zuckerman Law represent whistleblowers worldwide before the SEC under the Dodd-Frank SEC Whistleblower Program. The firm has a licensed Certified Public Accountant and Certified Fraud Examiner on staff to enhance its ability to investigate and disclose complex financial fraud to the SEC, and two of the firm’s attorneys served in high-level position at a government agency that protects whistleblowers. Firm Principal Jason Zuckerman has been named by Washingtonian Magazine as a “Top Whistleblower Lawyer” and the firm has been ranked by U.S. News as a Tier 1 Firm in Labor & Employment Litigation.
Whistleblower law firm Zuckerman Law has substantial experience investigating securities fraud schemes and preparing effective submissions to the SEC concerning a wide range of federal securities violations, including:
- Accounting fraud;
- Investment and securities fraud;
- EB-5 investment fraud;
- Manipulation of a security’s price or volume;
- Fraudulent securities offerings and Ponzi schemes;
- Unregistered securities offerings;
- Investment adviser fraud;
- False or misleading statements about a company or investment;
- Inadequate internal controls; and
- Violations of auditor independence rules.
For more information about the SEC Whistleblower Program, see the following resources:
Zuckerman Law’s Guide to the SEC Whistleblower Program (click the eBook below)
Zuckerman Law SEC Whistleblower Reward Program FAQ