Penalties for Insider Trading

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

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.

Private Lawsuits by Contemporaneous Traders

• Investors who traded at the same time as the insider (contemporaneous traders) can bring their own private lawsuit for damages against the insider
• This is separate from the SEC's civil penalties and from the government's criminal case
• It lets harmed investors recover directly, on top of any government action

Exam Tip: Gotchas

• A contemporaneous-trader lawsuit is a private action, not a government penalty. The insider can face SEC penalties, criminal charges, AND a private suit for the same conduct.

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.

What Should You Check on Exam Day?

• Can you state the maximum criminal fine and prison term for an individual convicted of insider trading?
• Do you know the memory aid numbers for insider trading penalties: 5, 25, 20, and 3x?
• Can you explain the controlling person penalty and why it applies even without personal trading?
• Do you know who a contemporaneous trader is and what kind of lawsuit they can bring?
• Can you explain how disgorgement and the treble penalty combine into total financial cost?