Insider Trading Flashcards
Insider Trading
Trading on the basis on material non-public information by someone with a duty not to trade
State Law as a Basis for Inside Trading
Majority: No duty rule
Minority: Duty rule
Special circumstances rule: Supreme Court held although directors generally owe no duty to disclose material facts when trading with SH, such a duty can arise when (1) highly information (2) concealment of identity by the defendant or other active fraud (3) especially vulnerable plaintiff
Classical Insider Trading
Typically, a corporate insider trades [buys or sells] shares of his corporation, using material, non public information obtained through his position as an insider
-This insider exploits his information advantage (which is a corporate asset) at the expense of the corporation’s shareholders
Who does the classical theory apply to?
The classical theory applies to traditional insiders [directors, officers, 10% shareholders] AND to temporary fiduciaries as described in Footnote 14
Misappropriation
Misappropriation [or outsider trading] prohibitions target the trading based on non public information by someone in breach of the duty he owed to the source of his information.
- an insider exploits an informational advantage by trading in other companies’ stocks when he learns that his firm [or a related firm] will do something that affects the value of another company’s stock, and trades on this material non public information.
- The insider “misappropriates” the information at the expense of his firm, through a breach of trust or confidence.
Materiality: Two standards
(1) The basic test of materiality is whether a reasonable man would attach importance in determining his choice of action in the transaction in question
(2) Balancing Test: a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.”
Agency: Duty to not use confidential information
If a company wants to keep the information confidential, the insiders will not have the right to disclose it. The agent is subject to a duty to the principal not to use confidential information given to him by the principal or acquired by him during the course of or account of his agency
When can an insider trade on inside information?
Insiders must wait to trade until the information has been effectively disseminated, until the information is effectively disclosed in a manner sufficient to insure its availability to the investing public.
Tippee
Someone who gets information from someone else
=Those without a duty of confidentiality [so not otherwise bound to “disclose or abstain”] who knowingly take improper tips. In general, the tippee’s liability is derivative of the tipper’s, “arising from his role as a participant after the fact in the insider’s breach of a fiduciary duty.”
FN 14 (Constructive/Temporary Insiders):
Certain professionals who are retained temporarily by the corporation can become fiduciaries of the shareholders because of the special confidential relationship, and because of their access to information
- lawyers and accountants who enter into confidential relationships with corporations and are given access to inside information for corporate purposes would be temporary insiders when they (1) obtain material nonpublic information from the issuer with (2) an expectation on the part of the corporation that the outsider will keep the disclosed information confidential and (3) the relationship at least implies such a duty
- have an abstain or disclose duty when they are aware of material nonpublic information that they got in a relationship of trust or confidence. They are prohibited from knowingly trading on the basis of that information. The outsider’s breach of confidence to the source of the nonpublic information is deemed a deception that occurs “in connection with” his securities trading.”
Tipper
Those with a duty of confidentiality who knowingly make improper tips are liable as participants in illegal insider trading. Tippers can be insiders or outsiders. The tipper is liable even though he/she didn’t trade his/herself, as long as the tippee trades.
What makes a tip “improper”
- the information is from the tipper in breach of the tipper’s duty to refrain from profiting on undisclosed information
- the tippee knows or should know the tip came from a person who breached a confidentiality duty
- the tipper expects the tippee to trade
- the tipper expects or receives a reciprocal benefit in exchange for the tip
(1) First, the tipper must be breaching a fiduciary duty
All disclosures of confidential corporate information are not inconsistent with the duty insiders owe to shareholders.”
A duty of trust and confidence exists:
A duty of trust and confidence exists in the following circumstances, among others:
(1) if you agree to maintain the information in confidence;
(2) where you have a pattern or practice of sharing confidences so that you know or should know that you are expected to keep the information in confidence; or
(3) when you get material nonpublic info from your spouse, kid, parent or sibling unless you can show there was no reasonable expectation of confidentiality even with that familial relationship.
14e-3 (Tender Offers)
It is not triggered until the offeror has taken substantial steps towards making the offer and, more important, is limited to information relating to a tender offer.
