Case Studies On Insider Trading Prosecutions

05 Nov 2025 --
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Introduction

Insider trading occurs when someone trades securities based on material, non-public information in violation of a fiduciary duty or other relationship of trust. Regulatory authorities like the U.S. SEC, SEBI in India, and other securities regulators prosecute such offenses. Courts interpret statutes to balance market integrity with due process rights.

1. SEC v. Martha Stewart, 2004–2005

Background:
Martha Stewart sold ImClone Systems shares shortly before an adverse FDA announcement, based on a tip from her broker, Peter Bacanovic.

Legal Issue:
Does selling based on non-public insider information constitute insider trading, and can obstruction of justice charges apply if false statements are made?

Holding:

Stewart was acquitted of insider trading, but convicted of obstruction of justice and making false statements. She served 5 months in prison.

Impact:

Highlighted that insider trading is difficult to prove without direct evidence of intent.

Demonstrated that related crimes (lying to investigators) can lead to conviction even if trading itself is contested.

2. SEC v. Galleon Group (Raj Rajaratnam), 2009–2011

Background:
Hedge fund manager Raj Rajaratnam ran a network using corporate insiders to trade tech and pharmaceutical stocks before major announcements.

Legal Issue:
Can a hedge fund manager be held criminally liable for trading on tips from insiders?

Holding:

Convicted of 14 counts of securities fraud and conspiracy, sentenced to 11 years in prison, one of the longest for insider trading in U.S. history.

Impact:

Established that tippee liability is significant, even without direct access to non-public information.

Reinforced the SEC’s use of wiretaps and surveillance in prosecuting insider trading.

3. United States v. Joseph Nacchio (Qwest Communications), 2007

Background:
Joseph Nacchio, CEO of Qwest, sold shares before publicly announcing that the company would miss earnings targets, allegedly based on insider knowledge.

Legal Issue:
Does a CEO’s sale based on material non-public information constitute criminal insider trading?

Holding:

Convicted of 19 counts of insider trading, sentenced to 6 years in prison, fined heavily.

Impact:

Reaffirmed that top executives are fiduciaries and violations can lead to severe penalties.

Highlighted that timing of stock sales relative to public announcements is key evidence.

4. SEBI v. Ketan Parekh (India), 2001

Background:
Ketan Parekh, a stockbroker, manipulated stock prices of certain companies using circular trading and insider information in the late 1990s.

Legal Issue:
Can stock price manipulation through insider knowledge and market collusion be prosecuted under Indian securities law?

Holding:

SEBI banned Parekh from trading for several years and ordered disgorgement of illegal profits.

Impact:

Landmark Indian case establishing that insider trading and market manipulation can lead to civil and administrative penalties.

Demonstrated SEBI’s enforcement powers in regulating financial markets.

5. SEC v. Tom Hayes (Libor Scandal), 2015

Background:
Tom Hayes, a trader at UBS, manipulated Libor interest rates and used insider knowledge to trade profitably.

Legal Issue:
Does colluding with banks to manipulate benchmark rates constitute securities fraud and insider trading?

Holding:

Convicted and sentenced to 14 years (later reduced to 11 years) in prison in the UK.

Impact:

Expanded insider trading and market manipulation liability to benchmarks and financial indices.

Demonstrated that insider trading prosecutions can overlap with financial fraud cases.

6. SEC v. Rajat Gupta, 2012

Background:
Former Goldman Sachs board member Rajat Gupta shared confidential information with Raj Rajaratnam about quarterly earnings and investment decisions.

Legal Issue:
Does a board member sharing material non-public information with outsiders constitute insider trading?

Holding:

Convicted of securities fraud and conspiracy, sentenced to 2 years in prison.

Impact:

Reinforced that corporate insiders have a fiduciary duty to maintain confidentiality.

Demonstrated SEC’s ability to prosecute tipper-tippee networks even at the board level.

7. United States v. Dennis Kozlowski (Tyco), 2005

Background:
Dennis Kozlowski, Tyco CEO, engaged in stock transactions and perks based on material non-public information.

Legal Issue:
Do executive stock sales and misuse of corporate funds constitute insider trading?

Holding:

Convicted of securities fraud and grand larceny, sentenced to 8–25 years in prison.

Impact:

Showed that insider trading often overlaps with corporate governance violations and fraud.

Emphasized importance of board oversight and fiduciary responsibilities.

Key Judicial Principles Across Cases

Strict liability for insiders – executives, directors, and board members must not share non-public information.

Tipper-tippee liability – anyone trading on tips from insiders can be criminally prosecuted.

Evidence of intent is crucial – wiretaps, emails, and timing of trades are key in proving violations.

Overlap with fraud and obstruction – lying to investigators or misusing corporate funds may accompany insider trading charges.

International reach – U.S., UK, and India have enforced insider trading laws across borders and markets.

Administrative and civil sanctions – regulators like SEBI can ban trading or order disgorgement, even without prison sentences.

Comparative Table of Cases

Case	Jurisdiction	Defendant	Allegation	Ruling	Significance
SEC v. Martha Stewart	USA	Martha Stewart	Insider trading (ImClone)	Acquitted of trading; convicted of obstruction	Proof of intent required; lying to investigators punishable
SEC v. Raj Rajaratnam	USA	Raj Rajaratnam	Insider trading via tip network	Conviction; 11 yrs	Tipper-tippee liability; use of wiretaps
US v. Joseph Nacchio	USA	Joseph Nacchio	CEO insider trading	Conviction; 6 yrs	Timing of executive trades key
SEBI v. Ketan Parekh	India	Ketan Parekh	Stock manipulation & insider info	Ban & disgorgement	Regulatory enforcement in India
SEC v. Rajat Gupta	USA	Rajat Gupta	Sharing confidential info with outsiders	Conviction; 2 yrs	Fiduciary duty breach at board level
US v. Tom Hayes	UK	Tom Hayes	Libor manipulation & insider trading	Conviction; 11 yrs	Benchmark manipulation constitutes insider trading
US v. Dennis Kozlowski	USA	Dennis Kozlowski	Stock sales & corporate misuse	Conviction; 8–25 yrs	Overlap of fraud and insider trading

These cases illustrate how judicial interpretations emphasize fiduciary duty, intent, and materiality of information, while regulators and courts increasingly prosecute tip networks and international financial manipulations.