Insider Trading Defense

By Elizabeth Franklin-Best, Esq., and Christopher Zoukis, JD, MBA

An insider trading case usually takes shape long before anyone is charged. The Securities and Exchange Commission flags unusual trading, issues subpoenas for brokerage and phone records, and refers its strongest cases to the Department of Justice for criminal prosecution. If your trading has drawn that kind of attention, speaking with an insider trading lawyer early — while the investigation is still forming — can shape what happens next.

We are Elizabeth Franklin-Best, P.C., a federal criminal defense and appellate firm, and securities cases occupy a central place in our white-collar work. Insider trading is a technical, intent-driven offense built almost entirely on doctrine the Supreme Court has developed case by case — which is why we defend these charges the way they are constructed: element by element, with the government held to its proof on duty, materiality, and state of mind at every step.

This guide walks through the legal framework, the two theories of liability, the personal-benefit rule, the newer Title 18 charging statute prosecutors increasingly prefer, the penalties, and the defenses that actually move the needle. It is general legal information rather than advice about your specific situation. To review an SEC inquiry or a federal charge with us directly, you can book a paid, one-hour initial consultation. This guide sits within our white-collar crime defense practice.

Quick Answer

Question	Answer
What is insider trading?	Buying or selling securities on the basis of material, non-public information in breach of a fiduciary or similar duty of trust and confidence.
What law makes it a crime?	Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5; willful violations are prosecuted criminally under 15 U.S.C. § 78ff.
What must the government prove?	Material non-public information, a breach of a duty, trading on the basis of that information, and willful, knowing intent — beyond a reasonable doubt.
What penalties can apply?	Up to 20 years in prison and fines up to $5 million per individual, plus SEC civil penalties of up to three times the profit gained or loss avoided.
What does an initial consultation cost?	Our initial consultation is paid and runs one hour — time we use to assess your exposure and the realistic defense paths.

Key Takeaways

• Insider trading is not a standalone statute — it is a form of securities fraud built on Section 10(b) and Rule 10b-5.
• Liability requires a breach of duty. Trading on non-public information alone is not a crime; the government must tie the trade to a violated duty of trust.
• Federal law recognizes two theories — the classical theory and the misappropriation theory — and the government must fit the facts within one of them.
• A person who trades on a tip is liable only if the tipper breached a duty for a personal benefit and the trader knew of that breach.
• A criminal conviction requires willfulness; the SEC’s parallel civil case carries a lower burden of proof.
• Materiality, the public or non-public character of the information, and the existence of a duty are all genuine points of contest.
• Statements made to SEC investigators or federal agents can create separate criminal exposure, so counsel should be involved before any interview.

What Is Insider Trading?

Insider trading is the purchase or sale of a security on the basis of material, non-public information in breach of a duty of trust and confidence. The phrase is often used loosely, but the law is precise. Trading while in possession of an information advantage is not, by itself, a crime. What makes the conduct criminal is the breach of a duty — a corporate officer using confidential earnings data, an attorney trading on a client’s pending merger, an employee passing a tip to a friend. Without a violated duty, there is no insider trading.

Federal law recognizes two theories of liability. Under the classical theory, a corporate insider — or a temporary insider such as a lawyer, accountant, or banker — trades in the securities of his own company on confidential information, breaching a duty to that company’s shareholders. Under the misappropriation theory, a person trades on confidential information in breach of a duty owed to the source of the information, even if that source is not the company whose stock is traded. The Supreme Court endorsed the misappropriation theory as a basis for criminal liability in United States v. O’Hagan, 521 U.S. 642 (1997). Most modern prosecutions proceed under one of these two frameworks.

The Law: Section 10(b) and Rule 10b-5

There is no federal statute that uses the words “insider trading.” The offense is built on Section 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b), which makes it unlawful to use “any manipulative or deceptive device” in connection with the purchase or sale of a security. The Securities and Exchange Commission’s Rule 10b-5 implements that prohibition, barring fraud, material misstatements and omissions, and deceptive practices in securities transactions.

The criminal penalties come from a separate provision, 15 U.S.C. § 78ff, which punishes willful violations of the Exchange Act and its rules. That two-part structure matters. The SEC can bring a civil enforcement action for an insider trading violation under a preponderance-of-the-evidence standard. A criminal conviction is different: the Department of Justice must prove a willful violation beyond a reasonable doubt. The same set of facts often produces parallel proceedings, and what a person says or files in one can affect the other.

What the Government Must Prove

To convict in a criminal insider trading case, the government must prove several elements beyond a reasonable doubt. Each is a place where a defense can apply pressure:

• Material information. The information must be material — meaning a reasonable investor would consider it important to an investment decision.
• Non-public information. The information must not have been disclosed to the market. Information that is public, or that reflects a trader’s own research and analysis, does not qualify.
• A duty and its breach. The defendant must have owed a duty of trust and confidence — to shareholders or to the source of the information — and breached it.
• Trading on the basis of the information. The defendant must have bought or sold the security on the basis of the material non-public information.
• Willfulness. For a criminal conviction, the defendant must have acted willfully and with the intent to deceive, manipulate, or defraud — not by mistake or in good faith.

The Supreme Court has made clear, beginning with Chiarella v. United States, 445 U.S. 222 (1980), that there is no general duty to “disclose or abstain” simply because a trader knows more than the market. The duty must arise from a specific relationship of trust and confidence. That principle is the foundation of most insider trading defenses.

Applied insight. Insider trading cases frequently turn on whether the information was truly non-public and truly material. Markets move on rumor, partial disclosure, and analyst inference. When a defense can show that the substance of the information was already circulating, or that no reasonable investor would have weighed it heavily, the government’s theory can lose its footing.

Tipper, Tippee, and the Personal-Benefit Test

Many insider trading prosecutions involve a chain: an insider (the tipper) passes information to someone else (the tippee) who trades. A tippee does not automatically inherit the insider’s duty. Under Dirks v. SEC, 463 U.S. 646 (1983), a tippee is liable only if two conditions are met. First, the tipper must have breached a duty by disclosing the information for a personal benefit. Second, the tippee must have known, or had reason to know, of that breach. If the tipper received no personal benefit, there is no breach to inherit — and no liability down the chain.

What counts as a personal benefit has been heavily litigated. In Salman v. United States, 580 U.S. 39 (2016), the Supreme Court held that the benefit requirement is satisfied when an insider makes a gift of confidential information to a trading relative or friend; the gift itself is the benefit. The personal-benefit element nonetheless remains a meaningful limit, particularly in remote-tippee cases where the trader is several steps removed from the original source and may have had no way to know how the information was obtained or why it was shared.

The Other Charging Statute: 18 U.S.C. § 1348

Rule 10b-5 is no longer the government’s only path to an insider trading indictment. The Sarbanes-Oxley Act of 2002 added a general securities fraud statute to the criminal code, 18 U.S.C. § 1348, modeled on the mail and wire fraud statutes. It reaches any scheme to defraud in connection with the securities of a publicly traded company — or to obtain money or property in connection with their purchase or sale — and it carries a maximum of 25 years in prison, five more than the Exchange Act allows.

Prosecutors increasingly favor § 1348 because it travels lighter than Title 15. A Second Circuit panel in the Blaszczak litigation held that a § 1348 tipping charge does not require proof of the Dirks personal benefit at all. On remand from the Supreme Court, the Second Circuit ultimately vacated the Blaszczak convictions on a different ground — confidential government regulatory information is not “property” or a “thing of value” under the fraud and conversion statutes, United States v. Blaszczak, 56 F.4th 230 (2d Cir. 2022) — and left the personal-benefit question unresolved. One member of the panel wrote separately to call the resulting asymmetry, where a criminal conviction can require fewer elements than a civil penalty, an anomaly that deserves correction. Until a higher court supplies one, defendants should expect indictments that pair § 1348 counts with Exchange Act counts precisely to hedge against the personal-benefit rule.

The vacatur in Blaszczak was not a one-off. The Supreme Court has spent recent terms trimming expansive property-fraud theories — most notably in Ciminelli v. United States, 598 U.S. 306 (2023), which struck down the right-to-control theory of wire fraud. A § 1348 charge changes the argument, not the burden: the government still must prove a scheme to defraud, materiality, and criminal intent, and when an indictment stacks both statutes we press the Dirks framework and the property limits at every stage. These charges sit within the same family as our federal fraud defense practice.

Penalties for Insider Trading

A criminal insider trading conviction is a felony. Under 15 U.S.C. § 78ff, an individual faces up to 20 years in prison and a fine of up to $5 million; an organization can be fined up to $25 million. A conviction under 18 U.S.C. § 1348 raises the ceiling to 25 years. Those are statutory maximums, not typical sentences. The actual sentence is shaped by the United States Sentencing Guidelines, and the insider trading guideline, U.S.S.G. § 2B1.4, keys the offense level to the gain resulting from the offense — the profit made or loss avoided — using the same dollar table that drives federal fraud sentencing. How that figure gets computed is a discipline of its own; our guide to loss and gain calculation explains where the table bites and where it can be challenged.

The criminal case is rarely the only exposure. The SEC can pursue a parallel civil action seeking disgorgement of the trading profits, an injunction, an officer-and-director bar, and a civil penalty of up to three times the profit gained or loss avoided. A conviction or civil judgment also carries collateral consequences — the loss of professional and securities-industry licenses, reputational harm, and lasting career damage. Because the criminal and civil tracks move together, a defense has to account for both from the start. Our federal sentencing practice addresses the Guidelines analysis in greater depth.

Applied insight. The “gain” figure drives an insider trading sentence the way the “loss” figure drives a fraud sentence. How that gain is measured — which trades count, how profit is calculated, whether avoided losses are included — is often worth more to the outcome than the headline charge, and it deserves close attention well before sentencing. One trap worth knowing: under the guideline’s commentary, a tipper can be sentenced on the gains of the people who traded on the tip, not just any profit of their own. The charging statute can also shift the guideline itself — courts have applied the general fraud guideline, § 2B1.1, rather than § 2B1.4 to some § 1348 counts, which swaps a gain-based table for a loss-based one and can change the math considerably.

Defending an Insider Trading Case

An insider trading defense is built element by element. Because the government must prove every element beyond a reasonable doubt, a single failed element can defeat the charge. Depending on the facts, a defense may show that the information was already public or immaterial, that the defendant owed no duty of trust and confidence, or that no duty was breached. In tipping cases, the defense may show that the tipper received no personal benefit, or that the trader did not know — and had no reason to know — that the information came from a breach.

Intent is often the strongest ground. A criminal conviction requires willfulness, and many trades have innocent explanations: independent research, a long-standing investment thesis, a pre-existing and properly adopted Rule 10b5-1 trading plan, portfolio rebalancing, or a personal need for cash. We examine the trading history, the timing, the communications, and the documentary record to test whether the government can actually prove a guilty state of mind. We also engage during the investigative stage, where it is sometimes possible to persuade the SEC or the Department of Justice not to bring charges at all. No lawyer can responsibly guarantee a result, and we never will; what we offer instead is rigor — every element, every assumption, and every government exhibit gets tested.

What Changed in Insider Trading Law (2023–2026)

The terrain has shifted measurably in the last three years, and the changes cut in both directions. The SEC’s amendments to Rule 10b5-1, effective for trading plans adopted on or after February 27, 2023, tightened the affirmative defense considerably: directors and officers now face a cooling-off period before trading can begin under a new or modified plan, every plan requires good faith, insiders must certify in writing that they hold no material non-public information when the plan is adopted, and overlapping or repeated single-trade plans lose the defense entirely. For anyone whose trades ran through a plan, the adoption date and the plan’s mechanics now matter nearly as much as the trades — and prosecutors have begun building criminal cases on the theory that a plan was adopted or amended while the insider already knew what was coming.

“Shadow trading” also became a live theory. In SEC v. Panuwat, No. 21-cv-06322 (N.D. Cal.), a federal jury in 2024 found a biopharmaceutical executive liable for trading in the options of a competitor — not his own employer — based on confidential knowledge of his employer’s pending acquisition, and the court sustained the verdict, reasoning that an employee entrusted with confidential information breaches a duty to the employer by trading in the securities of an economically linked company. Panuwat was a civil enforcement action, but nothing in its logic confines it to civil cases, and anyone who traded in a peer company’s stock around a corporate event should treat the theory as charged conduct waiting to happen.

At the same time, the defense gained ground on the doctrinal edges. The personal-benefit rule of Dirks and Salman remains good law, the Supreme Court’s property-fraud retrenchment in Ciminelli and the Second Circuit’s Blaszczak decision have narrowed what the government can call “property,” and courts continue to scrutinize remote-tippee cases where knowledge of the original breach is thin. A current defense has to track all of it — the statutes, the rules, and the appellate trendlines — because insider trading law is still being written.

Why Work With Elizabeth Franklin-Best, P.C.

Our firm handles federal criminal matters and nothing else — investigations, trials, sentencings, appeals, and post-conviction work. Elizabeth Franklin-Best, our principal attorney, is admitted to the bar of the United States Supreme Court and every one of the twelve federal circuit courts of appeals, appears pro hac vice in district courts around the country, and wrote Reversing Your Criminal Conviction. Her recognition maps onto this practice area directly: Chambers USA 2026 ranks her for Litigation: White-Collar Crime & Government Investigations, and Best Lawyers in America selected her as the 2026 “Best Lawyer” in Appellate Practice.

That appellate grounding matters here more than in most practice areas, because insider trading guilt often turns on doctrines — duty, personal benefit, materiality — that the appellate courts are still actively shaping. That orientation rests on a deep federal record: our principal attorney has handled more than 330 federal proceedings, including over 100 appeals, and has appeared in all twelve federal circuit courts of appeals and at the certiorari stage of the United States Supreme Court. We build the trial record with those open questions in mind from the first day, run our own factual investigation rather than accepting the government’s account, and shape strategy around the specific client and trades at issue. This guide belongs to our broader white-collar crime defense practice; securities cases also frequently arrive bundled with federal conspiracy counts, and an investigation handled badly can spawn separate obstruction of justice exposure of its own.

Talk With an Insider Trading Lawyer

An insider trading investigation rarely announces itself politely — it arrives as a subpoena, a brokerage records request, or two agents at the door. Wherever your case stands, we can assess the government’s likely theory, identify the elements where it is weakest, and map the decisions in front of you. Our initial consultation is a paid, one-hour session, booked online at your convenience.

Frequently Asked Questions