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Question

Difficulty: Very hardInsider Trading and Misuse of Material Nonpublic Information

A commercial printing technician reviewing pre-publication files for a corporate presentation reads undisclosed financial details regarding an upcoming cash tender offer for a publicly traded software firm. The technician does not purchase any shares but shares this confidential information with a sibling as a personal favor. The sibling subsequently buys call options on the target company before the public announcement and realizes a substantial profit, though no money or compensation was given back to the technician. Under federal securities laws regarding the misuse of material nonpublic information, which of the following statements correctly describes the potential legal liability of the technician and the sibling?

  1. Both the technician and the sibling can be held liable for insider trading violations because tipping confidential information constitutes a breach of duty regardless of whether the tipper executed trades or received direct monetary compensation.Answer
  2. B
    Only the sibling can be held liable because legal liability for insider trading attaches exclusively to the party who executes market transactions based on nonpublic information.
  3. C
    Neither party can be held liable because the technician is an independent third-party service vendor rather than an employee, officer, or director of the target software firm.
  4. D
    Only the technician can be held liable because an individual who is not a registered securities professional or corporate officer is exempt from tippee prosecution.

Answer

Both the technician and the sibling can be held liable for insider trading violations because tipping confidential information constitutes a breach of duty regardless of whether the tipper executed trades or received direct monetary compensation.
The correct option highlights that both the tipper (technician) and tippee (sibling) are liable under federal securities law. A tipper breaches their duty by disclosing material nonpublic information as a gift or favor, making them liable for the tippee's trades even if the tipper received no monetary profit. The tippee inherits the duty not to trade if they know or should know the information stems from a breach of confidentiality.

Step-by-Step Solution

1
Determine if the information conveyed qualifies as material nonpublic information (MNPI).
The undisclosed cash tender offer details are material (would affect an investor's decision) and nonpublic.
Establishing that the information is MNPI is the foundational element of an insider trading violation.
2
Evaluate the tipper's (print technician's) actions and duty.
The technician owed a duty of confidentiality regarding client documents and breached that duty by conveying the MNPI to a family member.
Under federal insider trading law and the misappropriation theory, passing MNPI as a gift or personal benefit to someone who trades constitutes a breach of duty, creating tipper liability even without personal trading or monetary gain.
3
Evaluate the tippee's (sibling's) actions and liability.
The sibling traded on MNPI obtained from a breach of confidentiality and is subject to tippee liability.
A tippee who knows or should reasonably know that the information was provided through a breach of confidentiality assumes a derivative duty not to trade on that information.

Key Concept

Tipper and Tippee Liability under Insider Trading Law
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Topics

Insider Trading and Misuse of Material Nonpublic Information