Proof of knowledge of the transaction at issue and intent to deceive or to defraud (also referred to as scienter) is required to prove both civil and criminal insider trading charges.
Civil cases: Scienter may be established by showing that the defendant acted recklessly (i.e., acted in disregard of the consequences) or in conscious avoidance of the truth.
Criminal cases: The prosecution must prove that the defendant acted willfully, which is a higher level of intent than in civil or administrative proceedings. Usually the prosecution needs to prove that the perpetrator acted with intent to deceive or to cause actual harm.1 However, “[w]hen the ‘necessary result’ of the actor’s scheme is to injure others, fraudulent intent may be inferred from the scheme itself.”2
The government can use various types of evidence to prove knowledge and scienter, including emails, chats, telephone records, and audio recordings. Insider trading cases typically involve the use of circumstantial evidence to prove the possession of material, non-public information (MNPI). On the other hand, proof of fraudulent intent is often direct.3
1 United States v. Stavroulakis, 952 F.2d 686, 694 (2d Cir. 1992).
2 United States v. D’Amato, 39 F.3d 1249, 1257 (2d Cir. 1994).
3 See Dirks v. SEC, 463 U.S. 646, 663-64 (1983); SEC v. Obus, 693 F.3d 276, 290 (2d Cir. 2012).