On January 14, 2011, Nj.com reported in “Ridgefield lawyer pleads guilty to N.Y. insider trading charges” that a Ridgefield, NJ resident plead guilty to charges in what New York prosecutors have called history’s biggest hedge fund insider trading case. The lawyer, who worked at an international firm, pleaded guilty to two insider trading charges in federal court in Manhattan, NY. A plea agreement signed with prosecutors recommended the 34-year-old lawyer be sentenced to two-and-half to three years in prison. He allegedly earned over $50 million in profits. He was allegedly paid $32,500 for providing tips to friend he went to college with.

Insider trading is a serious crime in New Jersey. The public policy behind insider trading laws is that those privileged with confidential information should not be allowed to use the special knowledge they have to gain profits or avoid losses on the stock market, to the detriment of the source of the information (i.e. the corporation), and to the typical investors who do not have the advantage of “inside” information.

Under the securities laws, it is unlawful for any person to purchase or sell securities while in the possession of material nonpublic information. It is also unlawful to disclose to another person, as the Ridgefield resident lawyer did his friends in the news article, material nonpublic information for purposes of purchasing or selling securities.

Information is “material” if a reasonable investor would consider it important in making a decision to buy or sell a company’s securities. For instance, a New Jersey engineer may find semiconductor chips volume to be information affecting an investment decision, but a reasonable person may not know the significance of this technical information. Both positive and negative information may be material. In general, information that is likely to affect the market price of a security is likely to be considered material. Examples of material information:

• news of a pending or proposed merger or acquisition;
• changes in earnings estimates;
• changes in management;
• announcement of new products;
• delay of a new product release.

The consequences of violating the insider trading laws can be serious. Individuals who trade on inside information (or tip inside information to others) are subject to civil penalties of up to three times the profit gained or loss avoided, a criminal fine of up to $1,000,000 and a jail term of up to ten years. A company that fails to take appropriate steps to prevent illegal trading may be subject to civil and criminal penalties, and private lawsuits.

When charged with a crime, an experienced criminal defense attorney may strategize to negotiate reduced sentencing and penalties in return for cooperation or plead not guilty to ensure the prosecution proves every element of its case.