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Difficulty: MediumInsider Trading and Misuse of Material Nonpublic Information

A freelance audio transcriber is retained to transcribe a recorded executive meeting for a publicly traded pharmaceutical company. During the recording, the transcriber learns that the company's primary drug candidate received unexpected FDA approval. Before the information is made public, the transcriber passes this information to a family member, who immediately purchases 1,000 shares of the company's stock. Under federal securities regulations governing insider trading, which of the following statements correctly describes the legal liability of the transcriber and the family member?

  1. Both the transcriber (as the tipper) and the family member (as the tippee) can be held liable for insider trading violations.Answer
  2. B
    Only the family member can be held liable because the transcriber did not personally buy or sell any shares of the company stock.
  3. C
    Only the transcriber can be held liable because the family member is not an employee or corporate insider of the company.
  4. D
    Neither individual can be held liable because the transcriber is an independent contractor rather than an employee of the firm.

Answer

Both the transcriber (as the tipper) and the family member (as the tippee) can be held liable for insider trading violations.
Under the Insider Trading and Securities Fraud Enforcement Act and SEC rules, anyone who possesses material nonpublic information and breaches a duty of trust by sharing it (the tipper) or trading on it (the tippee) is subject to civil and criminal liability. The transcriber breached a duty of confidentiality owed as a temporary insider, making the tip unlawful. The family member acted on the tip knowing it was nonpublic material information, establishing liability for both parties.

Step-by-Step Solution

1
Determine whether the information involved is material nonpublic information.
Unannounced FDA approval for a key drug candidate is material nonpublic information because a reasonable investor would consider it significant in making an investment decision.
The information directly impacts the company's market valuation and is not yet available to the general public.
2
Evaluate the tipper's status and actions.
The transcriber owed a duty of confidentiality (as a temporary insider/contractor) and breached it by disclosing the information to a third party.
Tipping material nonpublic information breaches fiduciary duty or duty of trust, establishing tipper liability regardless of whether the tipper traded.
3
Evaluate the tippee's status and actions.
The family member traded based on information received from someone breaching a duty of trust.
A tippee inherits the duty not to trade on material nonpublic information if they know or should know the tip originated from a breach of confidentiality.

Key Concept

Tipper and Tippee Liability under Insider Trading Regulations
Estimated Time:1m 15s
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Topics

Insider Trading and Misuse of Material Nonpublic Information