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Question

Difficulty: MediumInsider Trading and Misuse of Material Nonpublic Information

A corporate communications director at a publicly traded company learns during an internal executive briefing that the company is about to be acquired at a significant premium. The director does not trade any shares but shares this information with a sibling, who immediately purchases call options on the company's stock prior to the public announcement. Under federal securities regulations, which of the following statements correctly describes the legal liability of the parties involved?

  1. Both the communications director (tipper) and the sibling (tippee) can be held liable for insider trading violations.Answer
  2. B
    Only the sibling (tippee) can be held liable because the communications director (tipper) did not execute any securities transactions.
  3. C
    Only the communications director (tipper) can be held liable because the sibling is an outsider with no fiduciary duty to the issuer.
  4. D
    Neither party can be held liable because communications between immediate family members are exempt from insider trading rules.

Answer

Both the communications director (tipper) and the sibling (tippee) can be held liable for insider trading violations.
The correct option identifies that both the tipper and the tippee face insider trading liability under federal securities laws. The insider (tipper) violated fiduciary duties by leaking material nonpublic information, while the tippee knowingly traded on that confidential information prior to public disclosure.

Step-by-Step Solution

1
Analyze the nature of the information transferred.
The upcoming acquisition news is both material (would affect an investor's decision) and nonpublic.
Insider trading regulations apply to any material nonpublic information.
2
Evaluate the tipper's status and actions.
The communications director breached a fiduciary duty of confidentiality by disclosing confidential corporate information to a family member.
Executing trades is not required for tipper liability; disclosing material nonpublic information is sufficient.
3
Evaluate the tippee's status and actions.
The sibling acted on the tip by buying call options before public dissemination.
A tippee who knows or should reasonably know that the information was provided in breach of duty inherits liability upon trading.

Key Concept

Tipper and Tippee Liability under Insider Trading Regulations
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Topics

Insider Trading and Misuse of Material Nonpublic Information