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

Insider trading is primarily prosecuted under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which broadly prohibit fraud and deception in securities transactions.

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

The classical theory holds that corporate insiders (officers, directors, and employees) breach their fiduciary duty to shareholders when they trade on material nonpublic information about their company.

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

The misappropriation theory, upheld in United States v. O'Hagan, holds that a person commits fraud when they trade on material nonpublic information misappropriated from an outside source to whom they owe a duty.

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

Under Dirks v. SEC, a tipper is liable only if they received a personal benefit — direct or indirect — from disclosing material nonpublic information to the tippee.

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

Under the Insider Trading Sanctions Act, the SEC may seek civil penalties of up to three times the profit gained or loss avoided as a result of the unlawful insider trading.

Stock Lawyer Practice Test

Stock Lawyer Practice Test

Stock Lawyer Insider Trading Laws