Question

Difficulty: MediumInsider Trading and Misuse of Material Nonpublic Information

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a corporate insider who discloses material nonpublic information to an acquaintance can be held liable as a tipper even if the insider never executes a trade themselves or receives direct monetary compensation from the acquaintance's trades.

Answer: Answer

Answer

True. An insider who passes material nonpublic information to an acquaintance in breach of a duty can be held liable as a tipper regardless of whether they personally executed trades or received monetary payment.

The statement is True because tipper liability under insider trading rules does not depend on the tipper placing orders or receiving direct profits. Communicating material nonpublic information to a friend or acquaintance fulfills the legal criteria for tipper liability whenever it breaches a duty of confidentiality.

Step-by-Step Solution

1

Identify the legal standard for tipper liability under insider trading laws.

Tipper liability requires passing material nonpublic information in breach of a fiduciary duty or relationship of trust for a personal benefit.

Personal benefit includes soft benefits such as making a gift of confidential information to a friend, family member, or acquaintance.

2

Evaluate whether personal trading or financial profit is required for the tipper to be liable.

Neither personal trading nor monetary kickbacks are mandatory prerequisites to establish tipper liability.

The act of disclosing material nonpublic information for an improper purpose establishes the violation under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Key Concept

Tipper and Tippee Liability Elements

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Topics

Insider Trading and Misuse of Material Nonpublic Information