Insider Trading

Question 1

Insider Trading

Answer 1

Trading on the basis of material nonpublic information

Question 2

Classical Theory

Answer 2

When a corporate insider trades shares of HIS corporation, using material nonpublic information obtained through his position as an insider

Question 3

Missappropriation Theory

Answer 3

A person commits fraud in connection with a securities transaction when he misappropriates confidential information in breach of a duty owed to the source of the information
- an insider exploits an informational advantage by trading in other companies’ stock

Question 4

Constructive/Temporary/FN 14 Insiders

Answer 4

Certain professionals who are retained temporarily by a corporation can become fiduciaries of the shareholders because of the special confidential relationship, and because of their access to info
- ex: lawyers, accountants, etc.

Question 5

Tippers

Answer 5

Those WITH a duty of confidentiality who knowingly make improper tips are liable as participants in illegal insider trading

Question 6

Tippees

Answer 6

Those WITHOUT a duty of confidentiality who knowingly take improper tips
- liability is derivative of the tipper’s

Question 7

What makes a tip improper?

Answer 7

(1) the info is from the tipper in breach of the tipper’s duty to refrain from profiting on undisclosed info
(2) the tippee knows or should know the tip came from a person who breached a confidentiality duty
(3) the tipper expects the tippee to trade
(4) the tipper expects or receives a reciprocal benefit in exchange for the top

Question 8

General Rule for those in possession of material nonpublic information

Answer 8

Anyone in possession of MNPI must either disclose it to the investing public, or, if he doesn’t, must abstain from trading in or recommending the securities concerned while such inside info remains undisclosed

Question 9

“Materiality” Test for Contingent Events

Answer 9

Probability-Magnitude Balancing Test (for events that might happen - Contingent)

Balance:

(1) How likely is this contingent event to occur?
(2) How big of a deal would it be if it happened?

Question 10

Reasonable Investor Standard for “Materiality”

Answer 10

Information is material if a reasonable investor would attach importance in determining his choice of action in the transaction in question

Question 11

FN 14/Constructive/Temporary Insider

Answer 11

Certain professionals retained by a corporation can become fiduciaries of the shareholders because of the special confidential relationship and because of their access to information.

Become a temporary insider when:

(1) Obtain material nonpublic information
(2) with an expectation on the part of the corporation that the outsider will keep info confidential; and
(3) the relationship at least implies such a duty