The penalties for insider trading are among the most severe in securities law, designed to deter misconduct through massive financial penalties and the threat of prison time.
Penalty Summary
| Penalty Type | Individual | Entity |
|---|---|---|
| Criminal fines | Up to $5 million | Up to $25 million |
| Criminal imprisonment | Up to 20 years | N/A |
| Civil penalties (SEC) | Up to 3x the profit gained or loss avoided (treble damages) | Up to 3x the profit gained or loss avoided |
| FINRA sanctions | Fine, censure, suspension, bar | Fine, censure, suspension, expulsion |
Memory Aid: 5 / 25 / 20 / 3x
- $5 million criminal fine (individual)
- $25 million criminal fine (entity)
- 20 years maximum prison
- 3x profit/loss avoided (civil treble damages)
Exam Tip: Gotchas
- Criminal penalties ($5M/20 years) are the same for market manipulation AND insider trading; both are prosecuted under the Securities Exchange Act.
- Treble damages (3x) are civil penalties imposed by the SEC. These are separate from criminal fines.
- A bar applies to individuals; expulsion applies to member firms. A barred individual can never work in securities again. An expelled firm loses its FINRA membership, effectively shutting it down. These are separate sanctions aimed at different subjects.
Controlling Person Penalties
- Controlling persons (supervisors, firms) who fail to prevent insider trading face a separate penalty
- The fine can be up to the greater of $1 million or 3x the profit/loss avoided by the person who actually traded
- This penalty exists even if the controlling person did not personally trade
- Failing to maintain effective compliance programs and information barriers is what exposes a firm or supervisor to this controlling-person liability
Exam Tip: Gotchas
- Controlling persons can be liable even if they did not personally trade, as long as they failed to prevent the insider trading through adequate procedures.
- The controlling person penalty is the greater of $1M or 3x. Both numbers are tested.
Treble Damages Explained
- Treble damages = 3x the profit gained or loss avoided
- Example: If an insider made $100,000 in profit from trading on material nonpublic information (MNPI), the civil penalty could be up to $300,000 (3 x $100,000), on top of giving back the $100,000 in profits (disgorgement)
- This means the total financial cost could be 4x the original profit: $100,000 disgorgement + $300,000 penalty = $400,000
Think of it this way: Disgorgement takes back what you gained. The treble penalty punishes you on top of that. So an insider who profited $100K could owe $400K total: give back the $100K, then pay a $300K penalty.
Exam Tip: Gotchas
- The civil penalty is up to 3 TIMES the profit gained or loss avoided, not just the amount of the profit.
- Disgorgement (giving back profits) comes FIRST; the treble penalty is then calculated on top of it.