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Difficulty: EasyInsider Trading and Misuse of Material Nonpublic Information

An executive at a publicly traded corporation discloses confidential, unannounced acquisition plans to her brother during a holiday dinner. Based on this information, the brother immediately purchases shares of the target company, even though he is not employed by either company. Under federal insider trading regulations, which of the following statements is correct regarding liability?

  1. Both the executive and her brother can be held liable under federal securities laws because tipper and tippee liability applies regardless of employment status.Answer
  2. B
    Only the executive can be held liable because the brother has no fiduciary duty to the corporation as a non-employee.
  3. C
    Neither party can be held liable unless the executive receives a direct cash payment or financial compensation from her brother.
  4. D
    Only the brother can be held liable because liability strictly attaches to the individual who actually places the trade.

Answer

Both the executive (tipper) and her brother (tippee) can be held liable for insider trading because passing material nonpublic information to a family member who subsequently trades constitutes a breach of fiduciary duty under federal securities laws.
Under the Insider Trading Sanctions Act and Rule 10b-5 of the Securities Exchange Act of 1934, insider trading liability extends to both tippers (those who disclose material nonpublic information) and tippees (those who trade on it). Gifting confidential information to a family member satisfies the requirement of personal benefit to the tipper, and non-employees who know or should know the information is confidential inherit liability when trading.

Step-by-Step Solution

1
Identify the nature of the information transmitted.
The executive shared unannounced corporate acquisition plans, which constitutes material nonpublic information (MNPI).
Information is material if a reasonable investor would consider it important in making an investment decision, and nonpublic until broadly disseminated.
2
Evaluate tipper liability.
The executive is liable as a tipper for disclosing confidential material nonpublic information.
Disclosing MNPI for a personal benefit (which includes gifting information to family or friends) violates fiduciary duties.
3
Evaluate tippee liability.
The brother is liable as a tippee for executing trades based on the disclosed MNPI.
A tippee who receives MNPI and knows or should know it was disclosed improperly assumes fiduciary duty and violates securities laws upon trading.

Key Concept

Tipper and Tippee Liability under Insider Trading Regulations
Estimated Time:45s
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Topics

Insider Trading and Misuse of Material Nonpublic Information