Insider Trading Flashcards
Insider Trading Rules before 10b-5
Majority “No Duty” Rule
- Directors are free to use inside info for own profit. No duty to shareholders from taking advantage of info for personal gain.
Minority “Duty” Rule
- Absolute duty on corp directors not to use info for own benefit
Plurality “Special Facts” Rule – Strong v. Repide
- Ct would have to look at particular situation to see if some kind of special abuse by director in using inside information to trade.
Current Rule for Insider Trading & Test
- Insiders can not act on material information (information that a reasonable man would deem important to the value of the stock) until the information is reasonably, publicly disseminated.
- Now the test is whether defendants have an advantage over anyone without the information.
Insider Trading
Insider trading only applies to insiders with the duty to disclose or abstain.Damages for private claims difference between the fair market value if information known and price paid at the time of transaction.
10b PRIVATE CAUSE OF ACTION “MARKET MANIPULATION”: In a private cause of action for insider trading under rule 10b the plaintiff must prove:
- Defendant made a material misrepresentation or omission in connection with the purchase or sale of a security,
- reliance,
- scienter, and
- causation.
Must be intentional misleading factual information, honest analyses and projections, although they may affect the market in much the same way, do not fall under this category.
Waiting Period
Insiders who do disclose the information must abstain from trading for a period which will allow the market to absorb the information.
Tipee
- A tippee owes a fiduciary duty to shareholders if the tippee received material nonpublic information from an insider that breached his fiduciary duty by disclosing the information, and the tippee knows of the breach.
- Tipper breaches duty of loyalty (personal gain, including gift) or Tippee knows or should know of a breach committed by the tipper.Tipping liability can arise under the traditional theory or an O’Hagen misappropriation theory (breached a fiduciary duty to the source of the information in secret).Must be a breach of the duty of loyalty, not care (flapping gums).
When does insider (tipper) breach duty?
- Whether insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders.
- If you are giving info to a favored person, you are benefitting. Indirect benefit to you.
Outsider
An outsider who misappropriates confidential information to personally benefit violates Section:10(b) because there is deception in connection with the purchase or sale of a security.
Misappropriation Theory
If you misappropriate information from anyone (breach a fiduciary duty to anyone) and use it to make money trading in securities, you can be held liable under 10b-5.
Missapropriation to Tipees
If a tippee receives information from an insider, knowing of the breach of the fiduciary duty, will become liable for a violation of 10b-5.
Confidentiality under 10b-5
A duty of trust and confidence exists when a person agrees to maintain in confidence, when people have a history of sharing confidences so people should know of a presumption of confidentiality between family members unless it can be proved that the person reasonably did not believe that the information was expected to be kept confidential.
Fair Disclosure
If insider discloses material nonpublic information to anyone, corp must make it public
Market Manipulation
Market manipulation applies to anyone, usually dealing with false information given to the market.Damages for market manipulation can be enormous claims can be brought by participants in the market for paying too much, selling too low etc.
O’HAGAN LIABILITY
must show that corporate insider takes unfair advantage of inside information.
Causation
- INSIDER INFORMATION MUST BE BASIS FOR TRADE:
- The insider information must be the basis of the material non-public information. Mere possession is not enough.
- 10b-5-1 PRESUMPTION:
- 10b-5-1 creates a presumption that someone in possession of the information traded on the basis of that information. The presumption can be rebutted by showing commitment to trade (automatic selling through a plan), blind trust (where someone else has the power to trade for you that doesn’t have access to the information).
