Pg 51

Question 1

What are the different ways that people that are not closely connected to a corporation but still improperly use inside information can be held liable?

Answer 1

– Misappropriation of information

– Tippee liability

Question 2

Who does the misappropriation of information with relation to insider trading apply to?

Answer 2

This applies to functional or temporary insiders, which are people that are not in the permanent employ of a corporation but still have assumed a position of trust and confidence regarding material information shared with them.

Question 3

If a defendant is a financial printer that got inside information about the identities of corporate targets for a takeover bid, and then he bought stock in the target corporation knowing the price would rise soon, what is his liability?

Answer 3

Because he is not an employee of the corporation but was in a position of trust and confidence regarding that material information, he became a temporary insider that had a duty to disclose or abstain. He violated that duty, so the breach of it is enough to be insider trading under misappropriation of information. He stole [misappropriated] valuable non-public information that was given to him in confidence.

Question 4

On an exam what is the best way to figure out what relationships rise to the level of misappropriation of information and which do not for insider trading?

Answer 4

The key is whether there is an expectation of confidentiality that was either express or implied. If so, that triggers the temporary insider status.

Question 5

If an accountant learns nonpublic information about a corporation’s finances while doing its taxes, then he buys stock in the corporation before he files the taxes, what has happened?

Answer 5

He is liable for insider trading under misappropriation of information because he became a temporary insider

Question 6

How does someone become a temporary insider in order to be liable for insider trading under misappropriation of information?

Answer 6

These all create an automatic relationship of trust and confidence:

• when a person agrees to maintain information in confidence
• there is a history or practice of sharing confidences between two people so the recipient would know that the information is material nonpublic information and that he is expected to keep it in confidence
• if someone gets material nonpublic information from a spouse, parent, kid, or sibling

Question 7

Can you be guilty of misappropriation of information under insider trading if you give a non-answer?

Answer 7

No, because the standard is affirmative misrepresentation

Question 8

What is Tippee Liability with regard to insider trading?

Answer 8

When an insider gives material nonpublic information to someone else and that other person trades on it

Question 9

What is a tipper and what is a tippee with regard to tippee liability for insider trading?

Answer 9

– Tipper: the person making the tip. This involves insiders like directors, officers, people with fiduciary duties, etc.
– Tippee: the person the tip is made to

Question 10

What would be considered a tip with regard to tipper liability for insider trading?

Answer 10

When an insider makes a selective disclosure of material nonpublic information.

Question 11

Who usually gets the harsher punishment for Tippee Liability?

Answer 11

The tipper’s actions are usually more reprehensible, so he is usually penalized more and he’s often liable for the profits of the tippee (but the tippee is also liable).

Question 12

What are the elements of tippee liability for insider trading?

Answer 12

• tip must be improper
  – tippee must be aware that disclosure is improper
  – tipper doesn’t have to know that the tippee will trade on the information
  – fair disclosure

Question 13

What is involved in the element of tippee liability that says the tip must be improper?

Answer 13

This happens when:

• a tip is given to a relative or friend
• the tipper expects to get a pecuniary gain from the disclosure because the tippee is in a position to confirm that type of benefit

Question 14

What is involved in the element of tippee liability that says the tippee must be aware that disclosure is improper?

Answer 14

If the tippee is not a relative or a friend of the tipper and isn’t in a position to confer a pecuniary benefit on the tipper, then the tippee would likely not be aware that the disclosure was improper

Question 15

When will the tippee not have liability under tippee liability?

Answer 15

If an officer gives his 18-year-old daughter material nonpublic information about a corporation and she trades on it not realizing that it is improper, only the officer would be liable because the tippee had no scienter

Question 16

What is involved in the element of tippee liability for insider trading that says the tipper need not know that the tippee will trade on the information?

Answer 16

The only thing the tippee has to know is that disclosure was a breach of the tipper’s duty to the corporation.

Question 17

What is involved in the element of tippee liability that calls for fair disclosure?

Answer 17

If a corporation gives material nonpublic information to a stock analyst or a shareholder and believes that person will trade on it, the corporation has to make a simultaneous public disclosure of the information. This gives the innocent tipper a way to purge himself of a violation.

Question 18

If a corporation is required to disclose information because some material nonpublic information got out, how must this be done?

Answer 18

Any public forum or venue is OK. This could include: a luncheon speech, panel discussion at a public forum, press release, filing information with a commission, public notice of a meeting, webinar, etc.

Question 19

What is involved in 16B short swing profits for insider trading?

Answer 19

The focus is on actual trading done by corporate insiders. This tries to prevent directors and officers from making money buying and selling shares in their own publicly traded corporations after taking advantage of information that equitably belonged to the publicly traded corporation.

Question 20

What is the difference between 10b-5 and 16B with regard to insider trading?

Answer 20

These are totally different.
– 10b-5: has duties
– 16B has no duties. This is meant to prevent the unfair use of information gotten by a beneficial owner, director, or officer because of his relationship to the corporation. There’s strict liability against short swing trading

Question 21

What is short swing trading?

Answer 21

When someone purchases and sells stock within a six month period.

Question 22

What are the three major groups of corporate insiders?

Answer 22

• officers
  – directors
  – shareholders and beneficial owners of more than 10% of any class of equity security registered under the securities act

Question 23

Who is included in officers of a corporation to be liable for insider trading?

Answer 23

CEO, president, principal financial officer, principal accounting officer, any VP in charge of a principal business unit like sales, admin, finance, any other officer that performs a policy making function. This only includes people with significant functions.

Question 24

Would the head of janitorial services be included as an officer of a corporation?

Answer 24

No, because his job is not significant to the business’ success

Question 25

Who is included in the directors of a corporation with regard to insider trading?

Answer 25

This is members of the corporation’s board and any director or any person that performs similar functions regarding an organization.

Question 26

What are examples of directors that could be liable for insider trading?

Answer 26

The sole general partner in a limited partnership, managers of a manager-managed LLC, etc.