An IT technician working at a financial printing firm discovers unannounced positive Phase III clinical trial results for a publicly traded pharmaceutical company while servicing a document server. The technician informs a college roommate about the confidential trial results. The roommate subsequently purchases call options on the pharmaceutical company's stock, while the technician executes no trades. Which of the following statements regarding insider trading liability under federal securities regulations are correct?
- The roommate can be held liable as a tippee even though they are not an employee or insider of the pharmaceutical company.Answer
- The IT technician can be held liable as a tipper even though they did not personally buy or sell any securities of the pharmaceutical company.Answer
- CThe roommate is exempt from tippee liability because the information was obtained through a third-party vendor employee rather than a corporate officer of the issuer.
- DThe IT technician cannot be held liable because federal securities laws strictly require the tipper to execute a personal securities transaction to establish a violation.
Answer
Both the statement affirming tippee liability for the roommate and the statement affirming tipper liability for the IT technician are correct.
Under federal securities laws and the misappropriation doctrine, insider trading violations apply to both tippers and tippees. A tipper incurs liability by improperly sharing material nonpublic information regardless of whether they execute trades themselves. A tippee incurs liability by trading on such information despite having no direct employment connection to the issuing company.
Step-by-Step Solution
Key Concept
Tipper and Tippee Liability under Insider Trading Rules