Yes, insider trading is a felony under federal law. A conviction under the Securities Exchange Act carries up to 20 years in prison and a fine of up to $5 million for an individual, and prosecutors can also charge the conduct as securities fraud under a separate statute that raises the prison maximum to 25 years. Corporate defendants face fines of up to $25 million. On top of criminal exposure, the SEC can bring a civil case seeking disgorgement of every dollar of profit plus a penalty of up to three times the gain.
What Counts as Insider Trading
The offense has two elements: trading securities while holding information that is both material and nonpublic. Information is material when a reasonable investor would consider it significant to a buy-or-sell decision.1U.S. Securities and Exchange Commission. Assessing Materiality – Focusing on the Reasonable Investor When Evaluating Errors Think pending mergers, undisclosed earnings misses, or an FDA approval. Nonpublic means the news hasn’t yet reached the investing public.
“Insider” sweeps in more people than most readers assume. Corporate officers, directors, and employees obviously qualify, but so do lawyers, accountants, and bankers who learn confidential facts through a working relationship. Family members and friends who receive a tip can also be caught in the net.
Two legal theories carry the law. Under the classical theory, a corporate insider who trades on material nonpublic information breaches a duty owed to the company’s shareholders. Under the misappropriation theory, someone with no connection to the company can still be liable if they trade on confidential information obtained in breach of a duty to the source. The Supreme Court endorsed that second theory in United States v. O’Hagan (1997), treating the use of someone else’s confidential information for trading as a form of fraud.
Liability also extends to tippers and tippees. The person who passes the tip can be charged when they intended to receive a personal benefit, which under Dirks v. SEC can be as modest as a reputational boost or a gift to a friend. The person who trades on the tip is liable when they knew or should have known the information came through a breach of duty.
Criminal Penalties
Insider trading is prosecuted primarily under Section 10(b) of the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5, which prohibit fraud in connection with the purchase or sale of securities.2Office of the Law Revision Counsel. 15 USC 78j – Manipulative and Deceptive Devices A conviction under the Exchange Act exposes an individual to as much as 20 years in federal prison and a $5 million fine. Entities face fines of up to $25 million.3Office of the Law Revision Counsel. 15 USC 78ff – Penalties
Prosecutors sometimes charge the same conduct as securities fraud under 18 U.S.C. ยง 1348, a provision added by the Sarbanes-Oxley Act. That statute raises the maximum prison term to 25 years.4Office of the Law Revision Counsel. 18 USC 1348 – Securities and Commodities Fraud
These numbers are not abstract. In 2025, a former CEO of a publicly traded health care company was sentenced to 42 months in federal prison, fined $5.25 million, and ordered to forfeit more than $12.7 million in profits for insider trading in his own company’s stock.5U.S. Department of Justice. Former Chairman and CEO of Publicly Traded Health Care Company Sentenced to 42 Months in Prison Earlier high-profile cases have produced sentences of 11 years or more and financial penalties in the hundreds of millions.
Civil Penalties From the SEC
Criminal exposure is only half the risk. The SEC runs a parallel civil enforcement track, and because civil cases use a lower burden of proof, the agency can win even when the Department of Justice declines to prosecute.
The civil penalty can reach three times the profit gained or loss avoided through the illegal trades.6Office of the Law Revision Counsel. 15 USC 78u-1 – Civil Penalties for Insider Trading The SEC can also demand disgorgement of all trading profits, obtain injunctions against future violations, and in serious cases bar an individual from ever serving as an officer or director of a public company.
Liability can extend beyond the trader. A person or entity that controls someone who commits a securities violation is jointly liable to the same extent as the violator, unless the controlling person can prove good faith and that they did not directly or indirectly cause the violation.7Office of the Law Revision Counsel. 15 USC 78t – Liability of Controlling Persons and Persons Who Aid and Abet Violations That rule puts brokerage firms, hedge funds, and employers in the frame when their compliance programs fail.
What the Government Has to Prove
Not every trade placed by someone who happens to know something ends in liability. The law requires scienter, meaning a culpable state of mind, and the standard shifts depending on whether the case is criminal or civil.
For a criminal conviction, prosecutors must show the defendant acted willfully, that is, knowingly committed a wrongful act. That high bar is one reason federal prosecutors are selective about which cases they take to trial.
In a civil case, the SEC needs to prove at least recklessness. Simple negligence will not support a case, but the agency does not have to prove the same willful state of mind required for prison time. The gap between the two standards is why a defendant can escape criminal charges and still lose a civil enforcement action over the same trades.
How Long the Government Has to Charge You
The clock on insider trading runs from the date of the trade, not the date the government discovers it. For civil penalty actions, the SEC has five years from the illegal purchase or sale to file.6Office of the Law Revision Counsel. 15 USC 78u-1 – Civil Penalties for Insider Trading Criminal cases are generally subject to the five-year federal statute of limitations as well.8Office of the Law Revision Counsel. 18 USC 3282 – Offenses Not Capital
Five years is longer than it sounds in practice. Investigators build cases from trading pattern analysis, phone records, and cooperating witnesses, so a charge filed years after a trade is routine.
When Insider Trading Is Not a Crime
Corporate insiders who always hold some nonpublic information still need a way to sell their own shares. Rule 10b5-1 solves that problem by letting an insider adopt a written trading plan in advance, at a time when they do not possess material nonpublic information. Trades executed later under the plan get an affirmative defense against insider trading liability.9U.S. Securities and Exchange Commission. Rule 10b5-1 – Insider Trading Arrangements and Related Disclosure
The SEC tightened these plans after concerns that some insiders were using them to game the system. Officers and directors now face a cooling-off period of at least 90 days (up to 120 in some cases) between adopting or modifying a plan and the first trade, and other insiders face a 30-day wait. Officers and directors must also certify in the plan that they do not hold material nonpublic information at the time of adoption and that they are acting in good faith. Overlapping plans are limited, and single-trade plans are capped at one per 12-month period.
A properly structured 10b5-1 plan is the exception. Without that kind of advance protection, a trade made while sitting on material nonpublic information is a federal felony, and the penalties reach well beyond any profit the trade produced.