An IT consultant performing server maintenance at a biotechnology firm overhears two executives discussing the unannounced approval of a key drug candidate by the FDA. The consultant immediately buys shares of the biotechnology firm and also informs a personal friend, who subsequently purchases call options on the stock prior to the public announcement. Which of the following statements regarding potential insider trading liability in this situation are CORRECT?
- The IT consultant can be held liable for insider trading under the misappropriation theory for breaching a duty of trust owed to the firm.Answer
- The friend can be held liable as a tippee for trading while knowing that the material information was nonpublic and improperly disclosed.Answer
- CThe IT consultant is exempt from insider trading sanctions because the information was obtained through an overheard conversation rather than an official corporate document.
- DThe friend is shielded from liability unless the IT consultant received direct financial compensation in exchange for providing the tip.
Answer
The statements establishing that the IT consultant can be held liable under the misappropriation theory and that the friend can be held liable as a tippee are both correct.
Both statements identifying liability for the IT consultant and the friend are correct. Under the misappropriation theory, individuals who misappropriate material nonpublic information in breach of a duty of loyalty or confidentiality (including outside contractors) are liable for insider trading. Furthermore, a tippee is liable if they trade while knowing or having reason to know that the information was material, nonpublic, and disclosed in breach of a duty. Neither contractor status, the informal nature of overhearing information, nor the absence of financial compensation shields either party from liability.
Step-by-Step Solution
Key Concept
Insider Trading Misappropriation Theory and Tipper/Tippee Liability Elements