The purchase or sale of securities of a company on the basis of inside or non-public material information about the company is considered illegal when the transaction is in breach of a fiduciary duty or a relationship of trust and confidence. Illegal insider trading may result in an enforcement action by the Securities and Exchange Commission or a criminal action by the Department of Justice. Penalties may be assessed in such actions. For example, the Commission may obtain penalties of up to three times the amount of any profit or avoided loss resulting from the insider trading.
Persons who report insider trading to the Commission may obtain a bounty from the Commission for up to ten percent of the penalty obtained by the Commission on the basis of the provided information. Section 21A(e) of the Insider Trading and Securities Fraud Enforcement Act, 15 U.S.C.S. § 78u-1(e), provides in part:
There shall be paid from amounts imposed as a penalty under this section and recovered by the Commission or the Attorney General, such sums, not to exceed 10 percent of such amounts, as the Commission deems appropriate, to the person or persons who provide information leading to the imposition of such penalty. Any determinations under this subsection, including whether, to whom, or in what amount to make payments, shall be in the sole discretion of the Commission, except that no such payment shall be made to any member, officer, or employee of any appropriate regulatory agency, the Department of Justice, or a self-regulatory organization. Any such determination shall be final and not subject to judicial review.
The Commission has adopted regulations, 17 C.F.R. Part 201, Subpart C, Rules 61-68, to implement the insider trading bounty statute. Bounty awards of up to ten percent of actually recovered penalties may be awarded according to the sole discretion of the Commission. All Commission determinations regarding bounties, including to whom payments are made and the amount of any payment, are in the sole discretion of the Commission.
However, the Commission has stated that it will be guided in its determinations by the purposes of the bounty statute, including Congressional intent to encourage persons to come forward with information regarding possible occurrences of insider trading. The Commission also may consider factors that it considers relevant such as:
- Importance of the information provided by the person seeking a bounty;
- Whether that information was provided voluntarily;
- Whether other persons provided information and are seeking a bounty in the same matter; and
- The amount of penalties assessed and collected from which any bounty may be paid.
To apply for a bounty, a person must file a document with the Commission clearly titled "Application for Award of a Bounty." The application must comply with Commission rules and provide a detailed statement of the information that the person is providing regarding possible insider trading.
The application for a bounty does not have to filed at the time that information is provided to the Commission that results in an enforcement action. The Commission encourages the reporting of information on insider trading at any time, and it will accept a written application for a bounty if it is filed within 180 days after the day on which a court orders payment of a civil penalty from which the bounty would be paid.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.