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Question

Difficulty: EasyInsider Trading and Misuse of Material Nonpublic Information

An administrative assistant at a legal firm learns about an impending merger while formatting confidential transaction documents. During dinner, the assistant tells their spouse about the pending deal. Knowing that the information is confidential and material nonpublic, the spouse buys 500 shares of the target firm prior to the public announcement and sells them for a profit shortly after. Which of the following statements correctly describes the legal liability under federal securities laws?

  1. Both the administrative assistant and the spouse can be held liable for insider trading violations.Answer
  2. B
    Only the administrative assistant can be held liable because the spouse is not an employee of the firm or target company.
  3. C
    Neither individual can be held liable because the administrative assistant received no financial payment from the spouse.
  4. D
    Only the spouse can be held liable because no securities orders were executed by the administrative assistant.

Answer

Both the administrative assistant and the spouse can be held liable for insider trading violations.
Both the administrative assistant (tipper) and the spouse (tippee) face liability under federal insider trading rules. The assistant violated a duty of confidentiality by revealing material nonpublic information, and the spouse knowingly traded on that confidential information prior to public disclosure.

Step-by-Step Solution

1
Determine if the information shared constitutes material nonpublic information.
The details regarding the pending merger are material and nonpublic.
Information is material if an investor would consider it significant in making an investment decision, and nonpublic because it has not been broadly disseminated to the public.
2
Assess the legal liability of the tipper (administrative assistant).
The assistant breached a duty of confidentiality by disclosing nonpublic deal facts.
Disclosing confidential corporate information to a third party violates a duty of trust, establishing tipper liability.
3
Assess the legal liability of the tippee (spouse).
The spouse traded while aware that the information was material, nonpublic, and improperly obtained.
A tippee who knows or should know that the information was communicated in breach of a duty inherits the obligation not to trade.

Key Concept

Tipper and Tippee Liability under Federal Securities Laws
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Topics

Insider Trading and Misuse of Material Nonpublic Information