A corporate communications director at a national freight logistics firm confidentially learns that the company is about to secure a major long-term contract with a global retail giant. Over lunch, the director discloses this confidential information to a former college roommate. Although the roommate does not purchase any shares, the roommate relays the information to a neighbor, who subsequently buys 2,000 shares of the logistics firm prior to the public announcement. Which of the following statements regarding legal liability under federal insider trading rules are correct?
- The corporate communications director can be held liable as a tipper even if the director did not personally execute stock trades or directly profit from the transaction.Answer
- The neighbor who purchased the shares can be held liable as a tippee if the neighbor knew or had reason to know that the information was material and nonpublic.Answer
- CThe former college roommate is completely immune from insider trading liability because the roommate did not execute any securities transactions.
- DInsider trading prohibitions apply strictly to corporate officers and directors, exempting non-employee tippees from civil monetary penalties.
Answer
Liability extends to the original corporate insider who breached confidentiality (tipper liability), the intermediate conduit who passed along the tip, and the ultimate trader who knowingly acted on material nonpublic information (tippee liability).
Under federal insider trading regulations, tipper liability attaches to any insider who breaches a fiduciary duty by disclosing material nonpublic information, regardless of whether that insider traded. Furthermore, tippee liability attaches to anyone who trades on that information while knowing or having reason to know it was material, nonpublic, and improperly obtained.
Step-by-Step Solution
Key Concept
Tipper and Tippee Liability Elements under Insider Trading Law