A paralegal at a law firm learns of an upcoming confidential acquisition while reviewing merger documents and tells their spouse, who subsequently purchases shares of the target company before the public announcement. Which of the following statements regarding tipper and tippee liability under federal securities regulations are CORRECT?
- The paralegal can be held liable as a tipper for disclosing material nonpublic information in breach of a duty of trust.Answer
- The spouse can be held liable as a tippee for trading while knowing or having reason to know the information was material and nonpublic.Answer
- CThe spouse is completely exempt from tippee liability because they are not an officer, director, or employee of either company involved.
- DThe paralegal cannot be held liable as a tipper unless they directly executed stock trades or received monetary compensation for the tip.
Answer
Both the statement establishing tipper liability for the paralegal and the statement establishing tippee liability for the spouse are correct.
Under federal securities laws, insider trading liability extends to both tippers and tippees. A tipper is liable for improperly communicating material nonpublic information in breach of a duty, and a tippee is liable for trading on that information when they knew or should have known it was nonpublic and material.
Step-by-Step Solution
Key Concept
Tipper and Tippee Liability under Insider Trading Rules