Stock Lawyer Insider Trading Laws

Question 1

What is the legal basis for prohibiting insider trading under federal securities law?

Accepted Answer

Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5

Answer

Section 11 of the Securities Act of 1933

Answer

Section 16(b) of the Securities Exchange Act of 1934

Answer

Section 5 of the FTC Act

Question 2

Under the 'classical theory' of insider trading, who owes a duty that prohibits trading on material nonpublic information?

Accepted Answer

Corporate insiders who owe a fiduciary duty to shareholders

Answer

Any person who possesses material nonpublic information

Answer

Only company officers and directors

Answer

Only registered broker-dealers

Question 3

What is the 'misappropriation theory' of insider trading liability?

Accepted Answer

Liability for trading on information misappropriated from a source to whom a duty of trust or confidence is owed

Answer

Liability for stealing physical stock certificates

Answer

Liability for misrepresenting stock prices

Answer

Liability for front-running client orders

Question 4

What must the government prove to establish 'tipping' liability against a tipper in an insider trading case?

Accepted Answer

That the tipper received a personal benefit from disclosing material nonpublic information

Answer

That the tipper received monetary payment for the tip

Answer

That the tippee actually traded on the information

Answer

That the tipper intended to defraud the company

Question 5

What civil penalty can the SEC impose on a person found liable for insider trading?

Accepted Answer

Up to three times the profit gained or loss avoided

Answer

Up to $1 million or twice profits gained

Answer

Disgorgement of profits only

Answer

No more than $500,000 per violation

Question 6

Which SEC rule defines 'material nonpublic information' for purposes of insider trading enforcement?

Accepted Answer

There is no single rule — materiality is a facts-and-circumstances test

Answer

Rule 10b-5

Answer

Rule 14e-3

Answer

Rule 144