A corporate executive discloses material, nonpublic information regarding an unannounced acquisition to a personal friend. The friend does not execute any trades, but passes the information to a neighbor, who subsequently purchases shares of the target company for a profit. Which of the following statements regarding liability under federal insider trading regulations are correct?
- The corporate executive can be held liable as a tipper even though the executive did not personally execute any trades.Answer
- The neighbor who purchased shares can be held liable as a tippee for trading while in possession of material nonpublic information.Answer
- CThe neighbor is exempt from tippee liability because insider trading rules apply exclusively to officers, directors, and employees of the issuer.
- DThe friend who relayed the tip to the neighbor cannot be held liable because the friend realized no direct monetary profit from the transaction.
Answer
The corporate executive can be held liable as a tipper despite not trading, and the neighbor who traded on the nonpublic information can be held liable as a tippee.
Both the corporate executive who improperly communicated the nonpublic information and the neighbor who knowingly traded on it face liability under federal insider trading regulations. Tipper liability does not require personal trading by the source, and tippee liability does not require employment with the affected public company.
Step-by-Step Solution
Key Concept
Tipper and Tippee Liability under Federal Insider Trading Laws