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Difficulty: EasyInsider Trading and Misuse of Material Nonpublic Information

Under federal securities regulations governing the misuse of material nonpublic information, which of the following actions constitutes an insider trading violation?

  1. Buying shares of a company after receiving nonpublic earnings data from an insider who breached a fiduciary dutyAnswer
  2. B
    Trading shares of a public company based on nonpublic information while believing non-employees are exempt from prosecution
  3. C
    Purchasing stock immediately following a public announcement made by the issuing company during an earnings call
  4. D
    Selling shares of a security based on an unverified public market rumor published on a financial news website

Answer

Buying shares of a company after receiving nonpublic earnings data from an insider who breached a fiduciary duty
Purchasing stock based on material nonpublic information communicated by an insider in breach of fiduciary duty constitutes an insider trading violation for both the tipper and the tippee.

Step-by-Step Solution

1
Identify the key legal definition of an insider trading violation.
Insider trading occurs when securities are traded based on material, nonpublic information obtained through a breach of trust or fiduciary duty.
Federal regulations aim to maintain fair capital markets by preventing individuals from exploiting confidential information for personal gain before it is made available to the general public.
2
Evaluate the choices to identify the scenario that represents illegal trading on material nonpublic information.
Trading on nonpublic earnings information obtained from an insider who breached a fiduciary duty directly satisfies the criteria for an insider trading violation.
Both the insider (tipper) and the individual trading on the tip (tippee) are liable under federal securities laws.

Key Concept

Insider Trading and Material Nonpublic Information
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Insider Trading and Misuse of Material Nonpublic Information