A senior systems engineer at a cloud computing firm learns during an internal infrastructure audit that the company is about to acquire a private cybersecurity vendor. Prior to any public announcement, the engineer discloses this confidential information to a former college roommate and suggests buying shares. The roommate subsequently purchases call options on the acquisition target. The engineer does not execute any trades.
Which of the following statements regarding potential insider trading liability under federal securities law are correct?
- The systems engineer can be held liable as a tipper for communicating material nonpublic information in breach of a duty of trust, even though the engineer executed no trades.Answer
- The roommate can be held liable as a tippee because the trade was executed using material nonpublic information derived from a known breach of duty.Answer
- CNeither party can be held liable for insider trading because the transaction involved derivative options contracts rather than common stock shares.
- DThe roommate is exempt from tippee liability because the roommate is not an employee, officer, or corporate insider of either firm.
Answer
The statements confirming that the systems engineer can be liable as a tipper without executing trades and that the roommate can be liable as a tippee for trading on tipped confidential information are correct.
Under federal securities law, tipper liability attaches to an insider or employee who discloses material nonpublic information in breach of a duty of confidentiality, even if that person does not trade or receive direct monetary proceeds. Tippee liability attaches to any outside individual who trades on such information while knowing or having reason to know that it was disclosed improperly.
Step-by-Step Solution
Key Concept
Tipper and Tippee Liability Elements under Insider Trading Rules