Examkin

Question

Difficulty: HardInsider Trading and Misuse of Material Nonpublic Information

A senior software engineer at a publicly traded technology firm learns during an internal product strategy session that the firm is about to be acquired by a competitor at a 50% premium. The engineer does not execute any securities transactions, but discloses this information to a close friend. The friend does not trade either, but passes the information to their sibling, who immediately purchases call options on the firm's stock and realizes a significant profit upon the merger announcement. Under federal securities laws governing insider trading, which of the following statements regarding liability are correct?

  1. The software engineer can be held liable as a tipper even though the engineer did not personally execute trades or receive direct monetary compensation.Answer
  2. The sibling can be held liable as a remote tippee if the sibling knew or had reason to know that the information was material, nonpublic, and derived from a breach of fiduciary duty.Answer
  3. C
    The software engineer is completely exempt from insider trading penalties because civil liability attaches exclusively to the individual who executed the order.
  4. D
    The sibling cannot be found liable as a tippee because insider trading laws apply only to direct tippees who receive information directly from an insider.

Answer

The software engineer can be held liable as a tipper despite not executing a trade, and the sibling can be held liable as a remote tippee if they knew or should have known the information stemmed from a breach of fiduciary duty.
Under federal securities laws, tipper liability attaches when an insider communicates material nonpublic information in breach of a duty of confidentiality, even if the insider never executes a trade or receives direct proceeds. Furthermore, tippee liability extends to downstream (remote) tippees who trade while knowing, or having reason to know, that the information was material, nonpublic, and derived from a breach of duty.

Step-by-Step Solution

1
Evaluate the tipper's liability
The engineer breached a fiduciary duty of confidentiality by passing material nonpublic information.
Personal trading or financial gain is not a prerequisite to establish tipper liability under federal securities laws.
2
Evaluate the remote tippee's liability
The sibling executed trades while in possession of nonpublic material information derived from an insider source.
Liability extends down communication chains to remote tippees who know or have reason to know that the information was disclosed in breach of duty.

Key Concept

Tipper and Remote Tippee Liability under Insider Trading Rules
Estimated Time:2m 0s
Rate this question

Topics

Insider Trading and Misuse of Material Nonpublic Information