An executive assistant at a publicly traded technology firm overhears the Chief Financial Officer discussing an upcoming, unannounced acquisition of a key competitor. The assistant communicates this information to a friend, who subsequently purchases call options on the target competitor prior to the public announcement. Which of the following statements regarding insider trading liability in this scenario are CORRECT?
- The executive assistant can be held liable as a tipper even if the assistant did not execute any personal trades.Answer
- The friend can be held liable as a tippee if they knew, or should have known, that the information was material and nonpublic.Answer
- CThe friend is automatically exempt from tippee liability because they are not an officer, director, or employee of either company.
- DNeither party can be held liable unless direct cash compensation was exchanged between the friend and the assistant.
Answer
Both the statement establishing that the executive assistant can be held liable as a tipper without trading personally, and the statement establishing that the friend can be held liable as a tippee for trading while knowing the information was material and nonpublic, are correct.
Tipper liability applies to anyone who passes material nonpublic information in breach of a duty of trust or confidence, regardless of whether they personally executed trades. Tippee liability applies to any individual who trades based on such information while knowing, or having reason to know, that the information was material, nonpublic, and improperly obtained.
Step-by-Step Solution
Key Concept
Tipper and Tippee Liability under Insider Trading Rules