Insider Trading: Definition, Types, and SEC Whistleblower Awards

The SEC is dedicated to cracking down on insider trading and ensuring that markets participants compete fairly. Insider trading is subject to civil penalties from the SEC in amounts of up to three times the trading profits, and may even be subject to criminal prosecution, punishable with a prison sentence of up to 20 years and criminal fines.

Established by Congress on July 21, 2010, in Section 922 of the Dodd-Frank Act, the SEC Whistleblower Program incentivizes whistleblowers to anonymously report specific, credible, and timely information about potential federal securities laws, such as insider trading.

As of the end of fiscal year 2024, a total of almost $2.2 billion had been awarded to nearly 444 whistleblowers through the SEC’s Whistleblower Program. This figure highlights the success of the program since its inception.

Awards for Reporting Insider Trading

The incentives for whistleblowers include monetary awards paid to those who come forward with high-quality original information that leads to a successful enforcement action. Whistleblower awards range between 10% and 30% of the money collected when over $1 million in sanctions is ordered.

Award percentage amounts vary depending on the assessment of several positive and negative factors, such as the significance of information, the whistleblower’s involvement in the insider trading activity in question, and the level of assistance provided to the Commission, among other factors.

The SEC will post opportunities for whistleblowers to file for an award on their website Notices of Covered Action. The SEC has made it clear that it is the responsibility of the whistleblower to apply for an award before their hard deadline. It’s important to note that if you choose to file your whistleblower submission anonymously, to be eligible for an award you must have an attorney represent you in connection with your submission.

Anti-Retaliation Provisions

Under the Dodd-Frank Act, the SEC implemented rules that enabled the SEC to take legal action against employers who have retaliated against whistleblowers for engaging in a protected activity such as blowing the whistle on insider trading. Those who have experienced retaliation may be able to receive double back pay with interest, reinstatement, reimbursement for certain legal costs and attorney’s fees, and other forms of relief.

Important Considerations

It is advised you consult with legal counsel to understand the potential risks and benefits of whistleblowing. Remember that to file anonymously or become eligible for an award you must have an attorney represent you in connection with your submission.

To learn more, read SEC Whistleblower Program: A Guide to Reporting Financial Fraud.

The process of reporting insider trading as a whistleblower is relatively straightforward. However, proving that someone has performed an illegal trade based on insider information can be difficult. Below are key steps whistleblowers can take to bring successful action against a fraudster:

• Confirm Illegal Insider Trading: illegal insider trading occurs when an individual trades stocks or securities based on material, price-sensitive information not available to the public, in violation of a duty to the source of the information, to make a profit or avoid a potential loss.
• Determine Eligibility: if a whistleblower seeks a reward, the monetary sanctions received by the SEC must exceed more than $1 million. One or more persons may act as a whistleblower and become eligible for rewards, including foreign citizens.
• Hire a Whistleblower Attorney: a knowledgeable whistleblower attorney will help you file tips anonymously and ensure you get the maximum award possible. If your identity is known, an SEC whistleblower attorney will protect you from retaliation by working with the SEC.
• Collect Evidence: the SEC is looking for specific, credible, and timely tips. The more detailed the tip, the greater the chances it will be forwarded to and pursued by an investigator and the greater chance of receiving an award. Evidence in an insider trading case is often circumstantial, which means the SEC must piece together timelines to tell a cohesive story. They must present their findings to authorize staff to bring an administrative action or file a case in federal court. Therefore, it’s important to possess and maintain strong documentation.
• Sign Form TCR: form TCR (TCR stands for Tips, Complaints, and Referrals) is a form that a whistleblower fills out, which provides the SEC with pertinent information about the violations being reported.
• Send Form TCR to Attorney: whistleblowers can hire an attorney to represent them. A whistleblower’s attorney can make the actual submission to the SEC, ensuring the whistleblower’s identity remains anonymous.
• Investigation: once a submission to the SEC has been made, the whistleblower can maintain their anonymity throughout the investigation.
• Award Application: if the SEC sanctions the fraudster for over $1 million, the whistleblower must file a Whistleblower Award Application or Form WB-APP. This form is a request for the payment of an award for the information provided, and requires providing the SEC with information about the whistleblower’s identity. including their identity and proof that the whistleblower provided their attorney with the signed TCR form. The SEC is required by law to maintain the anonymity of the whistleblower under almost all circumstances.

Penalties for insider trading can be severe and include both criminal and civil consequences:

Civil Penalties:

• Disgorgement of Illegal Profits: the individual must return any profits made from the illegal trading.
• Civil Monetary Penalties: the SEC can impose fines of up to three times the profit gained or loss avoided.
• Injunctions: the court can order the individual to stop engaging in securities fraud.
• Officer and Director Bars: potential ban from serving as an officer or director of a public company.

Criminal Penalties:

• Imprisonment: up to 20 years in prison; depends on the amount gained and the history of the offender.
• Fines: up to $5 million for individuals and $25 million for corporations.

Ishan Wahi (2024)

Ishan Wahi, a former Coinbase product manager, and his associates, including Sameer Ramani, were involved in an insider trading scheme involving crypto asset securities. Wahi used confidential information about upcoming listings on the Coinbase platform to tip Ramani and his brother, Nikhil Wahi. The recipients of the tips then traded on this MNPI, generating significant profits. The SEC’s investigation and subsequent lawsuit resulted in default judgments against all three individuals, with Ramani ordered to pay over $2.4 million in disgorgement and penalties.

Matthew Panuwat (2024)

Matthew Panuwat was found liable for insider trading by a jury in a case brought by the U.S. Securities and Exchange Commission (SEC). Panuwat, while employed at Medivation, Inc., used confidential information about Pfizer Inc.’s impending acquisition of Medivation to purchase out-of-the-money call options of Incyte Corporation. This illicit trading generated over $100,000 in profits for Panuwat. The SEC’s investigation and subsequent lawsuit led to the jury verdict, which held Panuwat accountable for his illegal actions.

Terren S. Peizer (2023)

Terren S. Peizer, Executive Chairman of Ontrak, Inc., was charged by the SEC with insider trading. Peizer allegedly used Rule 10b5-1 trading plans to sell over $20 million of Ontrak stock while in possession of MNPI about the company’s largest customer. Despite knowing about the deteriorating relationship with the customer, Peizer executed the trading plans, avoiding significant losses when the news of the contract termination was publicly announced.

Raj Rajaratnam (2011)

Raj Rajaratnam, a billionaire hedge fund manager, was fined a record $92.8 million by the SEC for insider trading. He and his firm, Galleon Management, engaged in a massive scheme that generated over $52 million in illegal profits. This was part of a larger SEC investigation that uncovered over $90 million in illicit gains from insider trading across multiple companies. Rajaratnam was also convicted in a parallel criminal case and sentenced to 11 years in prison and over $63 million in fines and forfeitures.

SEC Charges 14 in Wall Street Insider Trading Ring (2007)

A major insider trading scandal involving top Wall Street firms, including UBS and Morgan Stanley, was uncovered by the SEC. The scheme, involving eight Wall Street professionals, two broker-dealers, a day-trading firm, and three hedge funds, netted over $15 million in illegal profits.

The scheme involved trading on stolen information about upcoming analyst upgrades, downgrades, and corporate acquisitions. Key individuals like Mitchel Guttenberg (UBS), Eric Franklin, David Tavdy, and Randi and Christopher Collotta were involved in stealing and sharing confidential information. The scheme also involved a network of tippees who profited from the illegal trades.

Led by former SEC acting chair and commissioner Allison Herren Lee, former SEC Senior Counsel Andrew Feller, and renowned whistleblower attorney Stephen M. Kohn, our team has been shaping the landscape of whistleblower protection for over 35 years. Contact us today for a free case evaluation. Your information is covered under client-attorney privilege and there’s no fee unless we get you an award.