A corporate paralegal working at a law firm assisting with a confidential corporate merger mentions details of the pending acquisition to a relative. The relative shares the information with a close friend, who then purchases shares of the target company prior to the public announcement. Which of the following statements regarding insider trading liability under federal securities laws are correct?
- The paralegal can be held liable as a tipper even if the paralegal did not personally buy or sell any shares of the target company.Answer
- The friend who executed the stock purchase can be held liable as a tippee even though they are not an employee or insider of either corporation.Answer
- CA tippee is completely exempt from insider trading violations if the transaction took place on a public exchange at prevailing market prices.
- DTipper liability applies only if the tipper received a direct cash payment from the individual who ultimately traded the shares.
Answer
Under federal securities laws, both the statement that the paralegal can be held liable as a tipper without personally trading and the statement that the friend can be held liable as a tippee despite not being a corporate insider are correct.
Tipper liability applies to anyone who breaches a duty by disclosing material nonpublic information, regardless of whether that individual executes a trade. Similarly, tippee liability applies to individuals who trade while knowing the information was confidential and wrongfully passed along, even if they have no employment connection to the underlying corporation.
Step-by-Step Solution
Key Concept
Elements of Tipper and Tippee Liability under Insider Trading Rules