An accounting consultant auditing a publicly traded retailer learns of an unannounced merger that will significantly increase the retailer's stock value. The consultant discloses this material nonpublic information to a friend, who immediately purchases call options on the retailer's stock. The consultant receives no monetary compensation or financial gift from the friend. Under federal securities laws, which of the following statements correctly describes the insider trading liability of both individuals?
- Both the consultant and the friend may be held liable under insider trading regulations, as a breach of duty occurred when the information was disclosed and the friend traded on material nonpublic information.Answer
- BOnly the friend can be held liable, because insider trading violations require an actual security transaction, which was executed solely by the friend.
- CNeither individual can be held liable, because the consultant received no direct financial compensation or profit from the friend's trading activity.
- DOnly the consultant can be held liable, because tippee liability applies exclusively to employees, officers, or directors of the issuing corporation.
Answer
Both the consultant (tipper) and the friend (tippee) can be held liable for insider trading under federal securities laws because the information was material and nonpublic, shared in breach of duty, and traded upon with knowledge of its confidential nature.
Under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, both the individual who discloses material nonpublic information in breach of a duty (tipper) and the individual who knowingly trades on that information (tippee) are liable. Direct cash payment is not required to establish tipper liability, as conveying confidential information to benefit a friend or relative fulfills the personal benefit standard.
Step-by-Step Solution
Key Concept
Tipper and Tippee Liability under Insider Trading Regulations