A corporate communications director at a publicly traded retail corporation discloses unannounced, highly favorable quarterly financial results to a personal friend during dinner. The friend immediately buys shares of the corporation prior to the public announcement and sells them for a substantial profit after the news is released. Which of the following statements regarding potential insider trading liability under federal securities laws are CORRECT?
- The communications director can be held liable as a tipper even without placing any personal trades.Cevap
- The friend can be held liable as a tippee if they traded while knowing or having reason to know the information was material and nonpublic.Cevap
- CThe friend is exempt from insider trading liability because they are not an employee, officer, or director of the corporation.
- DLiability can only be established if the communications director received direct cash payment in exchange for the information.
Cevap
Both the statement that the communications director can be held liable as a tipper without trading personally and the statement that the friend can be held liable as a tippee if they knew or should have known the information was material and nonpublic are correct.
Under federal securities laws and SEC Rule 10b-5, insider trading rules apply to both tippers and tippees. A tipper is liable for communicating material nonpublic information in breach of a fiduciary duty, even if the tipper does not execute a trade or receive cash. A tippee assumes liability when trading on material nonpublic information if they knew or had reason to know the information was nonpublic and disclosed in breach of a duty.
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Tipper and Tippee Liability under Insider Trading Rules
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