I bought a token right before it listed on Coinbase. I made a huge profit. The SEC accused me of acting on non-public information (insider trading). I wasn’t an employee, just a researcher who saw on-chain movements. I needed a lawyer. My insurance denied my request for defense costs.
Key Takeaways
- “Intentional Acts” Exclusion: Liability insurance covers accidents (negligence). Insider trading is considered a crime or an intentional fraud. Insurance never defends you against criminal charges or intentional securities fraud.
- Civil vs. Criminal: If it’s a civil lawsuit (from other investors), you might get defense costs advanced under a D&O policy until a final judgment of guilt is made.
- Personal Umbrella Won’t Help: Personal umbrella policies exclude “Violation of Securities Laws.”
- The “Shadow” Defense: Your best defense is proving you used public info (on-chain data), not insider info. But you have to pay the lawyer yourself to prove that.
The “Why” (The Trap)
The trap is “Securities Law.”
Crypto is increasingly treated as securities. If you trade based on material non-public info, you are violating the law. Insurance contracts are void if they cover illegal acts.
“Conduct Exclusions”: Policies explicitly state they will not pay if the insured gained illegal profit.
The Investigation (I Talked to Defense Attorneys)
- Cost: A federal securities defense case costs $250,000 minimum just to get to discovery.
- Who Pays: You pay. Or your company pays (if you were an employee indemnified by them).
Comparison Table
| Accusation | Personal Insurance | Corporate D&O Insurance |
| Negligence (Accident) | Covered (Maybe) | Covered |
| Insider Trading (Fraud) | Denied | Defense Costs Only (until guilty) |
| Wash Trading | Denied | Defense Costs Only |
Step-by-Step Action Plan
- Delete Nothing: Spoliation of evidence (deleting chats) is a separate crime. Preserve your research notes to prove you found the trade publicly.
- [IMAGE: Screenshot of on-chain analysis showing public wallet movements]
- Hire a Securities Lawyer: Do not talk to the SEC without one.
- Check Corporate Indemnification: If you traded for a fund, check the fund’s bylaws. They might be required to pay your legal fees.
- Silence: Do not tweet about your “alpha.”
FAQ
Is it insider trading if I’m not an employee?
Yes. If you received the info from an insider (tipper) and knew it was confidential, you are liable (tippee).
Does ‘Crypto’ count as securities?
The SEC says yes. The courts are deciding. Assume yes for risk management.