Some investors have knowingly or unknowingly purchased and sold company stocks on the stock exchanges using insider trading tips. If Securities and Exchange Commission (SEC) discovers unethical practices within an organization involving traders, the consequences can result in federal prison time and/or hefty fines and penalties.
Phil Mickelson, a professional golfer, is an example of a trader who had involvement in an SEC case that federal prosecutors had under investigation in a trading scheme in 2011. Phil Mickelson insider trading was illegal that resulted in him paying over $1 million in fines plus a $105,000 penalty in interest.
It is the primary reason investors must perform due diligence on all securities before investing their capital in stocks, indexes, bonds, and annuities. Billy Waters, a friend of Mickelson, provided the insider trading tip after he received confidential information from his friend Tom Davis, who served as a board member at Dean Foods. Phil purchased over $2 million in the company’s stock and made a whopping profit of $931,000. The FBI and SEC became involved and investigated the trading transactions, but never charged him with any crime.
What saved Phil Mickelson in court was the Newman rule because the charges against him were difficult to prove in court. His defense team used the rule to reduce the charge to a citing for benefiting from wrongdoing. Whether he knew about the insider trade, he probably learned a valuable lesson as an investor. Investors should investigate a security to determine if the company is legitimate and honest in their business affairs. If the investment will expose you to fraud and legal prosecution, it is best to avoid investing your capital into a stock.
How to Research if a Company Is Legitimate and Has Integrity
The only way to know if a security is legitimate is to do your research on the broker or brokerage firm and the securities. You, as an investor, must investigate a business before making an investment in public security or into a private company as an angel investor. To offer securities on US stock exchanges, companies must register with SEC, pay annual federal income taxes, and file the forms with SEC. If a business owes back taxes and has a lien against the company, investors should seek other investment opportunities.
Angel investors should be knowledgeable of companies not listed on stock exchanges and do thorough research on whether the company has integrity. Those entities should be in good standing with IRS and have a professional tax preparer or a tax attorney.
You can find out information on a company not listed on a stock exchange and its legitimacy by hiring a business lawyer specializing in taxes and business law. Legal representation will ensure you have information about the financial conditions of a company and its registration with the state or city.
Ways You Can Check if a Security Is Legitimate
- If you are using a broker or brokerage firm to make investments in securities, research the companies on the SEC site first. You want to make sure brokerages are legit and not running a scam to take your capital. To purchase or sell securities, they must have a license to conduct business in their country or state. You can find this information on the FINRA website to evaluate the background of a firm or broker
- Visit the SEC website to search for the registration of companies listed on the New York Stock Exchange, NASDAQ, and other stock exchanges. SEC does not offer advice on whether a security is a wonderful investment, but reviews registration statements for securities. The federal agency requires businesses to abide by its disclosure rules.
- Check Edgar database to research the financial information and operations of a publicly-traded company. The service is free to the public for all investors to review filings of companies on its website. SEC has a link to the Edgar database to research information about variable annuities, mutual funds, and exchange-traded funds (ETFs).
Investors can perform their own due diligence about the integrity and legitimacy of securities and companies, or rely on the expertise of an attorney. Phil Mickelson is an example of an investor who had to pay over a million dollars in fines and penalties for his role in insider trading. Whether he knowingly or unknowingly secured the investment, there were legal repercussions for his actions and involvement.
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