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
| 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 under the Insider Trading Sanctions Act (ITSA)) | Up to 3x the profit gained or loss avoided |
| FINRA sanctions | Fine, suspension, bar, expulsion | Fine, censure, expulsion |
| Private lawsuits | Contemporaneous traders can sue for damages under Section 20A | Same |
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.
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
- Under the Insider Trading and Securities Fraud Enforcement Act (ITSFEA), failing to adopt effective compliance programs and information barriers counts as evidence of "reckless disregard"
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.
Who Can Sue?
- Section 20A gives private lawsuit rights to contemporaneous traders: investors who traded in the opposite direction at the same time the insider was trading
- Example: If an insider bought stock based on MNPI, investors who sold that stock during the same period can sue for damages