An independent maintenance contractor working at a publicly traded corporation's headquarters overhears senior executives discussing an unannounced major buyout offer. The contractor immediately purchases shares of the corporation prior to the public press release. Under federal securities laws, which of the following statements regarding the contractor's liability is correct?
- The contractor can be held liable for insider trading because trading on material nonpublic information is illegal regardless of whether the person is employed by the issuer.Answer
- BThe contractor cannot be held liable for insider trading because the contractor is an independent third party and not an employee or insider of the company.
- CThe contractor cannot be held liable because information that is verbally overheard in a workplace is legally considered part of the public domain.
- DThe contractor can only be held liable if the executive officers personally profited from the contractor's trades.
Answer
The contractor can be held liable for insider trading because trading on material nonpublic information is illegal regardless of whether the individual is an employee of the company.
Under the Insider Trading Sanctions Act and Rule 10b-5 of the Securities Exchange Act of 1934, any person who trades securities based on material nonpublic information can be held liable for insider trading. Liability is not restricted to corporate insiders or employees; it extends to anyone who possesses and misuses material nonpublic information.
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Scope of Insider Trading Liability