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Difficulty: MediumInsider Trading and Misuse of Material Nonpublic Information

Under federal securities law, an individual who communicates material nonpublic information to an acquaintance (acting as a tipper) can be held liable for insider trading violations even if the tipper never executes a trade in the security and receives no direct financial compensation.

Answer: Answer

Answer

True. A tipper can be held liable for insider trading when passing material nonpublic information to a tippee who trades on it, even if the tipper does not execute a trade or receive direct financial compensation.
The statement is true because tipper liability requires only that material nonpublic information was improperly disclosed in breach of a duty and subsequently traded upon by the tippee. Personal trading or direct financial remuneration by the tipper is not required.

Step-by-Step Solution

1
Analyze the legal definition of tipper liability under federal insider trading rules.
Tipper liability is established when an insider or individual in possession of material nonpublic information breaches a duty of confidentiality by disclosing that information to another party.
Establishing what constitutes a breach of duty is necessary to evaluate tipper responsibility.
2
Evaluate whether personal execution of trades or direct monetary gain is required for liability to apply.
The law does not require the tipper to personally trade securities or receive cash; passing inside information as a gift or favor to someone who trades is sufficient to establish liability.
Both tippers and tippees face civil fines up to three times the profit gained or loss avoided, as well as potential criminal prosecution.

Key Concept

Tipper and Tippee Liability under Insider Trading Regulations
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Topics

Insider Trading and Misuse of Material Nonpublic Information