Common defenses to insider trading charges typically focus on:

  • whether the transaction involved a security;
  • whether the information the trader had at the time of the trade was both non-public and material (MNPI);
  • whether a deceptive act occurred or whether a breach of duty was involved;
  • whether scienter can be established; and/or
  • whether the safe harbor for trading plans implemented under Rule 10b5-1 applies.

For more on the safe harbor, see here.

Other defenses include:

  • that the MNPI was irrelevant to the trade.  The defendant would have to prove that the information was not the reason that he bought or sold the security, and that he would have traded anyway, at the same time and in the same amount, had he not had access to that particular information.1
  • the mosaic theory, which holds that the defendant obtained the information in bits and pieces and came to a decision using his own reasoning and knowledge.  This defense is based on the idea that no single disclosure or piece of information constituted material non-public information.2
  • good faith reliance that the trading would be legal.  This defense is based on the idea that the defendant traded in reliance on the advice of counsel and that the  advice was based on the disclosure of all relevant facts and circumstances.3

1 See SEC v. Adler, 137 F.3d 1325 (11th Cir. 1988).

2 See Selective Disclosure and Insider Trading, Securities Act Release No. 7881 (Aug. 15, 2000), available here.

3 See, e.g., SEC v. Goldfield Deep Mines Co. of Nev., 758 F.2d 459, 467 (9th Cir. 1985).


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