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Legal Basis of Insider Trading II
The foremost legal basis and the most cited legislative act that is supposed to declare insider trading as unlawful is the Securities and Exchange Act of 1934. The Act not only established the Securities and Exchange Commission it also declared illegal any action that uses manipulative or deceptive devices that are connected to securities trading (Sec. 10(b)-5) as well as trading any information that are material and confidential to the firm (Sec. 10(b) and Sec. 17(a)). Section 16(b), on the other hand, mandated the return of profits obtained by insiders through a short-swing. A short- swing has been described as a ‘round-trip' transaction where the insider sells and then purchases or purchases and sells securities for profit. Section 16 (c) bans the insiders from short sales while Section 16(a) of the same Act mandates all insiders to report to the Securities and Exchange Commission all the purchases and sales that the insider conducted. Such report must be made within the initial ten days of the month that is subsequent to the month that the securities were traded. All of the insider's trading activity is published by the Securities and Exchange Commission in a monthly publication called Official Summary of Insider Transactions. The Commission believes that the publishing of the trading activity of the insiders would deter the insiders to commit any illegal insider trading as well as to help expose any illegal trades that were made by the insiders.
It is only in recent times that the government has become serious in enforcing and prosecuting those that violate the insider trading laws. Insider trading was virtually unknown during the latter part of the 20th Century. It was only in 1961 that the cases and the court's interpretation of the insider trading laws have become more restrictive thereby changing the insider trading landscape. In 1975 the Securities and Exchange Act of 1934, particularly Section 32 thereof, was amended to increase the fines that can be imposed by the courts by up to $10,000 and the term of imprisonment as punishment by up to five years. Regardless of the new amendments, the 1934 Act was not strictly enforced. In fact in the years between 1966 and 1980 the Securities and Exchange Commission only filed thirty seven cases involving insider trading and a majority of these cases, twenty five to be exact, was amicably settled out of courts. That would mean, therefore, that the Commission only filed an average of 2.6 cases each year. In the following years of 1981 to 1986 the Commission increased the cases they filed to up to seventy nine cases increasing the cases filed per year to up to 17.2.
In 1984 the Insider Trading Sanctions Act of 1984 (ITSA) was passed by the legislative which increased the penalty that can be imposed. The ITSA allowed a maximum of $100,000 fine and civil damages. It was only in 1985 that the courts actually imposed any prison sentences. Prior to 1980 none of the defendants in the cases were imprisoned. To further strengthen the enforcement of insider trading laws, the Congress passed the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) of 1988. The ITSFEA rewarded the informants that can give valuable information about illegal insider trading activity. The ITSFEA further held the company's management responsible for any illegal trading activity of their employees. The ITSFEA also increased the imprisonment penalty to as long as ten years.
It is only in recent times that the government has become serious in enforcing and prosecuting those that violate the insider trading laws. Insider trading was virtually unknown during the latter part of the 20th Century. It was only in 1961 that the cases and the court's interpretation of the insider trading laws have become more restrictive thereby changing the insider trading landscape. In 1975 the Securities and Exchange Act of 1934, particularly Section 32 thereof, was amended to increase the fines that can be imposed by the courts by up to $10,000 and the term of imprisonment as punishment by up to five years. Regardless of the new amendments, the 1934 Act was not strictly enforced. In fact in the years between 1966 and 1980 the Securities and Exchange Commission only filed thirty seven cases involving insider trading and a majority of these cases, twenty five to be exact, was amicably settled out of courts. That would mean, therefore, that the Commission only filed an average of 2.6 cases each year. In the following years of 1981 to 1986 the Commission increased the cases they filed to up to seventy nine cases increasing the cases filed per year to up to 17.2.
In 1984 the Insider Trading Sanctions Act of 1984 (ITSA) was passed by the legislative which increased the penalty that can be imposed. The ITSA allowed a maximum of $100,000 fine and civil damages. It was only in 1985 that the courts actually imposed any prison sentences. Prior to 1980 none of the defendants in the cases were imprisoned. To further strengthen the enforcement of insider trading laws, the Congress passed the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) of 1988. The ITSFEA rewarded the informants that can give valuable information about illegal insider trading activity. The ITSFEA further held the company's management responsible for any illegal trading activity of their employees. The ITSFEA also increased the imprisonment penalty to as long as ten years.
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