Receiving Your First Company Stock Bonus? How You Can Avoid Insider Trading Charges
If you're employed at a publicly-traded company, you may be overjoyed to finally qualify for an employee stock purchase plan (ESPP) that will allow you to purchase shares of your company's stock at a discount. In other cases, you may receive shares of your company's stock in lieu of a cash bonus at the end of the calendar year. While these benefits can provide you with a great way to diversify your investment portfolio and grow wealth, for those who sometimes come across confidential information in the course of their official duties, handling the purchase and sale of company stock can seem like a dicey matter. What should you know about ESPPs and stock bonuses to help you avoid inadvertently running afoul of insider trading laws? Read on for some tips and tricks to keep you on the U.S. Securities and Exchange Commission's (SEC) good side.
What types of actions could potentially subject you to charges of insider trading or securities fraud?
The SEC has promulgated a number of securities rules designed to protect investors from fraud, deceit, and market manipulation. One of the most frequently-implicated securities laws deals with insider trading -- using material, non-public knowledge you've gleaned due to your employment or position within a company to buy or sell a security. For example, if you work in your employer's quality control department and are aware of a pending recall that could torpedo your company's stock price, selling all your shares of company stock just before this recall hits the news could draw unwanted attention from the SEC.
Another potential source of securities fraud charges involves deception in an attempt to manipulate the market. In one recent case, an individual was charged for creating several "dummy" social media accounts and disseminating information implying that a company was under investigation by a securities firm. This misinformation caused this company's stock price to drop by nearly 20 percent in a single day, and the person responsible for these false statements spent this time buying and selling stock in an attempt to profit from his own lies.
How can you avoid securities fraud charges if you trade company stock while holding privileged information?
For those who deal with privileged information through the course of employment at a publicly-traded company, receiving stock bonuses or the opportunity to purchase discounted stock may seem like a dangerous proposition. Fortunately, although the rules (and potential penalties) surrounding a charge of securities fraud can be intimidating, there are a few things you can do in the course of accepting your new stock options that will diminish your odds of ever receiving a communication from the SEC.
The first is to funnel all your investment decisions -- including purchases through an ESPP -- through a financial broker or adviser. While making trades yourself online is quick and convenient, going through a broker helps add an additional layer of oversight to your transactions and can help insulate you from potential liability. Your broker will be better able to warn you of specific actions that could draw the SEC's ire.
Your next step should be to create an investment plan and share it with your broker. This plan may have you purchasing shares of company stock once per year (or once per quarter) or selling shares on a pre-determined schedule to limit your exposure to your own company's stock. Even if your trades happen to coincide with sharp price rises and drops, being able to show that these trades are being made pursuant to a previously agreed-upon plan should be sufficient to demonstrate that you did not use non-public information to make trading decisions.
For more help navigating commercial litigation issues, contact a company like FactorLaw.
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