Insider Trading

Question 1

Rule 10b-5?

Answer 1

ONLY TRIGGERED WHEN YOU ACTUALLY MAKE A STATEMENT.

J.S.S.R.D. – Johnny So Shady Real Dick

J - Jurisdiction (interstate commerce) (intrastate telephone call is okay)

S - Standing (actual buyer / sell of stock, existing sh, SEC, DOJ (if willful))

S - Scienter (the defendant intended to scam people.) (fraud, deceive, manipulate)

M - statement was material

R - Reliance / Causation

D - Damages

It is a CoA where a plaintiff (typically class action) relies on material misrep. or omission of another party in sale or purchase of a security.

Question 2

What makes for a material fact?

Answer 2

If it is a past event / fact

Ask: Whether a reasonable sh would find the fact may impact the stock price.

If it is forward-looking fact

Balance the probability that event will occur * the magnitude of the tx.

Question 3

Insider

Answer 3

One who gets nonpublic information by virtue of their position in a company.

e.g., officer, director or controlling shareholder.

Question 4

Insider Trading

Answer 4

People with nonpublic information in some cases are not allowed to trade on that information.

So you next want to ask if they have a duty to disclose or abstain from trading. They can argue that they had no duty or that the information was not material.

Information is material if it is info. that a reasonable investor would want to know and there was a high probability of the event occuring.

A person is liable when:

i. While in possession of material nonpublic information,
ii. They knowingly use that information to their advantage in the purchase or sale of a security
iii. HOWEVER, absent a duty to disclose the nonpublic information—there is no liability for insider trading
1. DUTY
a. Officers/directors have a fiduciary duty of loyalty. Where an insider is in possession of non-public information they have a duty not to use that information for their personal benefit.
2. There can also be tippee duties or misappropriation duties.

Question 5

Texas Gulf Sulfur?

Answer 5

Duty to disclose or abstain from trading if have possession of material non-public information.

Question 6

Chiarella?

Answer 6

No affirmative duty to disclose, must be in a position when the duty arises. If it arises then need to disclose or not trade.

Question 7

Tipper

Answer 7

An insider who passes along inside information for an improper purpose.

Question 8

Tippee

Answer 8

One who receives inside information from a tipper.

Liable for insider trading only if she knows or should have known that the tipper has violated a fiduciary duty to the corporation.

Will only be liable if the tipper is liable.

Question 9

16(b) - Short Swing Profits

Answer 9

A director, officer, or 10% or more shareholder must return to the corporation any profit realized from any “purchase and sale” or any “sale and purchase” of the corporation’s stock within six months.

Public Policy: To prevent internal manipulation of price.

This is a strict liability standard, therefore, no need to show fraud or unfair use of the information.

Recall, you can sell high and buy low, they will consider the difference as profit.

You can also buy low and sell high.

The trick thing is that if you are a 10% > sh, then you need to have had been 10% before you purchased and when you sold.

Note for officers / directors, you just need to have the title at the buy OR the sale.

MUST BE A REPORTING COMPANY.

Question 10

Tipper-Tippee Liability

Answer 10

1. tipper breached fiduciary duty in passing along info.
2. tipper RECEIVES A BENEFIT in exchange for sharing the info; AND
3. tippEE knew or should have known that disclosure was WRONGful

KEY: personal benefit test–whether the insider will personally benefit directly or indirectly from sharing the nonpublic information.