Illegal Insider Trading Story Time

Dear Penny Stock Millionaire,

Yesterday, I explained what insider trading is, and the regulations the SEC has in place for CEOs and other company executives, and how they can legally do insider trading.

Today were going to look at the opposite side of the coin. I have a few stories about famous illegal insider trading cases, that you’re gonna love.

But let me start out by saying…

Insider Trading Punishment

Crime doesn’t pay! There are some pretty hefty punishments associated with insider trading.

The current maximum prison sentence for insider trading is 20 years. The maximum fine is $5 million for individuals and $25 million for entities.

And it’s not like you’ll hold on to some of the extra profits. The civil penalty for a violator could be an amount up to three times the profit gained or loss avoided as a result of the insider trading violation.

How Insider Trading Is Investigated and Prosecuted

Insider trading can be tough to prove, so there isn’t just one way that it’s monitored. Here are some key ways the SEC keeps tabs on potential insider trading activities:

    • Surveillance: Feel like someone’s watching you? They might be if you’ve been up to no good in the stock market. The SEC has plenty of tools to help them sniff out illegal insider trading, and they get very curious when someone makes huge profits around the same time as big company news or earnings reports.
    • Tip-offs: Whistleblowers are a thing. Plenty of insider trading is tipped off to government agencies from other insiders or traders who get jilted by the insider trade. The SEC gets a ton of calls about potential insider trading. While not all of them will turn into criminal cases, plenty of insider trading cases have started this way.
    • Other sources: Insider trading leads can come from other sources as well, like FINRA, media reports, etc.

Illegal Insider Trading Examples

It’s that time! We all love a good story … so let’s talk about some of the most legendary insider trading cases…

Ivan Boesky

Did you know that Ivan Boesky is reportedly the inspiration behind the legendary Gordon Gekko character from the movie “Wall Street?”

Boesky’s specialty was corporate takeovers: he’d profit from investing based on new partnerships or acquisitions. He did well: by the mid-1980s, he was reportedly worth over $200 million.

Unfortunately, the “greed is good” mentality didn’t serve him well in the long run. In 1987, he was sued over what partners claimed to be misleading documents about partnerships. Soon after, the SEC launched an investigation about information he’d received from corporate officers.

He had several big stock buy-ins just a few days before corporations announced takeovers. At the time, crimes like this weren’t extremely enforced. But this one was a big one, and Boesky informed on others to reduce his prison sentence.

Even so, he was fined $100 million and sentenced to 3.5 years in prison, so crime doesn’t pay!

Albert Wiggin

Once upon a time, Albert Wiggin was the highly respected head of Chase Bank. But then, right before the 1929 stock market crash, it was revealed that he’d shorted 40,000 shares of his own company stock. Conflict of interest? Yes indeed.

Adding insult to injury, he used family-owned corporations to hide his trades and worked from behind the scenes to build a position that would benefit him if the company failed.

Believe it or not, at the time there wasn’t a law against shorting your own company… so Wiggin actually made $4 million in 1929 from his own company’s downfall and went on to take a big ol’ pension.

However, public outcry was strong, so the pension was ultimately declined. The Wiggins debacle is seen as a direct forerunner to the Securities Exchange Act of 1934, which made the rules about insider trading much more strict. Its nickname? The “Wiggin Act.”

Martha Stewart

Here’s proof that directors and CEOs aren’t the only ones who can be convicted of insider trading.

In 2003, the undisputed queen of homemaking was charged with obstruction of justice and securities fraud for selling shares of a stock early to save a big loss based on insider information.

The charges were based on an event in 2001. During that year, ImClone, a biopharmaceutical company, had a drug that failed in the FDA. This caused the shares to fall 16% in one day.

However, before the drop, Stewart sold about 4,000 shares based on a tip from a broker at Merrill Lynch following the company’s CEO selling all of his shares of the company.

Stewart did indeed save about $45K, but her trade was based on information that wasn’t available to the public.

Stewart was eventually charged and ended up serving five months in a federal corrections facility.

R. Foster Winans

Talk about journalistic integrity… or lack thereof.

In the 1980s, R. Foster Winans worked for the “Wall Street Journal” writing a column called “Heard on the Street,” where he profiled stock picks.

Often, his influence would affect a stock… the public would often buy or sell based on his opinions.

Unfortunately, he used that influence for some shady dealings.

In 1985, he was convicted of insider trading and mail fraud. As it turns out, he’d leaked the contents of his column to a stockbroker, and taken a kickback of the proceeds. He went on to serve about nine months in a federal facility.

Reliance Industries

Reliance Industries is a conglomerate company with headquarters in Mumbai. They’ve been under SEBI’s (The Securities and Exchange Board of India) scrutiny several times.

In 2007, directors at Reliance got approval to sell part of their stake in Reliance Petroleum. Then, later in the year, several parties connected to Reliance began to take short positions in Reliance Petroleum.

Soon after, Reliance began selling the approved stake. Then, they placed a series of large orders below the market rate, leading stock prices to fall. This led to what some consider unlawful gains from the related entities.

SEBI contended that the entities had traded on behalf of Reliance, and that the profits were ultimately transferred to the company and accounted for as “other income.”

By doing this, Reliance made some huge gains. But things didn’t move fast.

It wasn’t until a decade later that SEBI passed an order forcing Reliance to give up some of the unlawful gains and had them pay back interest since 2007.

Joseph Nacchio

Talk about a fall from grace. Joseph Nacchio was once the CEO and chairman of the board at Qwest… pretty sweet gig.

But in 2005, he and other former Qwest execs were sued by the SEC after being accused of $3 billion worth of financial fraud.

The SEC stated that Nacchio made unrealistic claims that Qwest would be able to meet revenue targets even though he knew they were highly unlikely. This helped them gain the ability to acquire another rival, among other things.

But then… he sold $100 million worth of his own Qwest stock. A funny thing for someone to do when they were making such amazing claims.

Though Nacchio argued that he truly believed that the company would be benefitting from big government contracts and was doing well, the judge disagreed.

He was indicted in 2005 on 42 counts of insider trading charges … and found guilty on 19 of them.

In 2007 he was sentenced to six years in federal prison. He also received a $19 million fine and had to give up the $52 million he got from the illegal stock sales.

Yoshiaki Murakami

This Japanese financier and former head of the Murakami Fund and self-proclaimed corporate raider became famous for loading up on shares in corporations and then forcing them to increase value for shareholders.

However, in 2006 he was arrested for suspected insider trading.

The story? He bought a ton of shares of NBS after he got advance intel of a potential takeover.

Murakami bought over $80 million worth of NBS shares, driving up the price and giving him a big profit, even though the takeover didn’t happen.

He pleaded not guilty, but the powers that be disagreed. In 2007, he was given two years in jail.

Raj Rajaratnam

In 2011, billionaire hedge fund manager Raj Rajaratnam was sentenced to 11 years in prison for insider trading — one of the stiffest sentences to date.

According to the SEC, he created and pulled the strings behind a massive insider trader ring including 29 individuals and entities, ranging from corporate insiders to hedge fund advisers to Goldman Sachs board members to other Wall Streeters.

Rajaratnam was said to be involved in the insider trading of more than 15 public companies, and responsible for over $90 million in avoided losses or illegal profits.

In a lawsuit brought by the SEC, Rajaratnam was ordered to pay $93 million in penalties, $10 million in fines, and to forfeit $54 million… in addition to the prison sentence.

The Bottom Line

There are plenty of legal ways to take advantage of big moves in the market without engaging in shady insider trading practices like penny stock pump and dumpers do.

Yes, it means that you have to study and work, and you can’t just cheat your way to success, but the trade off is learning skills that will keep you out of jail, and build lasting wealth.

I think the choice is obvious.


Tim Sykes
Editor, Penny Stock Millionaires