A management consultant attending a private strategy session at a publicly traded automotive company overhears confidential details regarding a major undisclosed safety recall. The consultant discloses this material nonpublic information to a business partner, who subsequently buys put options on the company's stock prior to the public announcement. The consultant does not receive direct cash compensation from the trade. Which of the following statements regarding tipper and tippee liability under federal securities laws are correct?
- The consultant can be held liable as a tipper for disclosing material nonpublic information in breach of a duty of trust.Cevap
- The business partner can be held liable as a tippee for trading on material nonpublic information obtained through an improper disclosure.Cevap
- CThe consultant is completely exempt from liability because no direct monetary payment was received from the business partner's trades.
- DThe business partner is exempt from insider trading rules because tippee liability applies exclusively to direct employees of the issuing corporation.
Cevap
The consultant can be held liable as a tipper for disclosing material nonpublic information in breach of a duty of trust, and the business partner can be held liable as a tippee for trading on material nonpublic information obtained through an improper disclosure.
Under federal insider trading regulations, both tippers and tippees face civil and criminal liability. A tipper is liable for breaching a duty of confidentiality by passing along material nonpublic information, regardless of whether they executed trades or received cash. A tippee is liable if they trade while knowing or having reason to know that the information was derived from a breach of duty.
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Elements of Tipper and Tippee Liability under Insider Trading Regulations