A rideshare driver overhears two corporate executives in the backseat discussing an unannounced tender offer for a publicly traded pharmaceutical company. Recognizing the profit opportunity, the driver buys shares of the target company prior to the public announcement and sells them for a significant profit once the acquisition is announced. Under federal securities laws, which of the following statements correctly assesses the driver's legal liability?
- The driver can be held liable for insider trading under the misappropriation theory for knowingly trading on material, nonpublic information.Answer
- BThe driver cannot be held liable because the driver is neither an officer, director, nor employee of either corporation.
- CThe driver is exempt from insider trading penalties because the conversation took place in a public vehicle where privacy was not guaranteed.
- DOnly the executives who discussed the merger can be held liable, while the driver is legally classified as an unchargeable third-party bystander.
Answer
The driver can be held liable for insider trading under the misappropriation theory for knowingly trading on material, nonpublic information.
Under federal securities laws, insider trading prohibitions apply to any individual who executes securities transactions while in possession of material nonpublic information. Under the misappropriation theory, a non-insider who takes confidential information and uses it to trade for personal profit violates Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
Step-by-Step Solution
Key Concept
Misappropriation Theory and Eavesdropper Liability under Insider Trading Rules