#11701 - The Regulation Of Insider Trading - Business Association (Duke Cox)

Subject to all the requirements of the anti-fraud provision

Non-public

materiality

1. Materiality test for uncertain events: balancing both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of company activity.

2. Mosaic theory: do you have enough pieces of the puzzle to know the ultimate fact

Relationship of confidentiality or trust

1. Insider

2. Misappropriator

3. Knowing tipee

Purchase/ sell on the basis of the information

1. Rule 10b5-1: Person deemed to purchase or sell stock “on the basis” of insider information if “the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.”

2. 10b5-1(c) executives can enter into plans for buying or selling the company’s stock

   1. Problem: executives can have multiple plans

Duties of insiders and constructive insiders:

1. Directors, other who have a fiduciary duty to the corporation with the relevant inside information have a duty to either not trade on such information, or to disclose their intent to do so. 10b-5, Chiarella and Dirks.

Who are misappropriators

1. Anyone who misappropriates (steals) information from their employer and trades on that information in any stock (either the employer's stock or the company's competitor stocks, or the company’s client’s stock) is guilty of insider trading.

2. It was essentially adopted in O’Hagan where insider trading by lawyer who worked for law firm hired by bidder. Adopted by some circuits.

Duties of outsiders:

1. Outsiders having a duty to their own organization, which in turn has some insider information about a transaction, must either refrain from trading on such information, or disclose their intent to do so.

10b5-2 is SEC’s rule that enforces the misappropriation theory.

14e-3(d) provides a statutory version of this rule that applies to inside information about tender offers, specifically.

1. If substantial steps have been taken to begin a tender offer, then one who takes that information and trades on it violate 14e-3

Duties of tippors and tippees

1. Persons who are not entitled to trade on information themselves (on either of the above theories) will be liable for insider trading if

   1. they disclose such information for reciprocal benefit, or to a friend or relative, and

   2. such person trades on the information.

2. A person receiving a tip will be liable if

   1. The tippor is liable (If not illegal for the tippor, not illegal for the tippee to share.)

   2. (i) they trade on the tip and (ii) they know or have reason to know it is inside information, or

   3. without trading on the tip, they (i) pass the tip to another, (ii) the other trades on the information, and (iii) the tippor-tippee knows or has reason to know it is inside information.

Exchange Act Section 16(a)(1)(2), (b) & (c)

1. Jurisdiction Section 12

2. Exception to contemporaneous requirement: any SH can do so, regardless of when he becomes a SH.

3. Statutory insider

   1. Requires “statutory insiders” to file statements

   2. Statutory insiders = directors, officers, principal shareholders (someone who owns more than 10%)

      1. For directors and officers, at the time of either the purchase or the sale.

      2. For 10% owners, at the time of both purchase and sale.

4. Short-swing profits

   1. Any profit realized on a purchase and resale within 6 months can be recoverable by the issuer

      1. Can be purchase and sale

      2. Or can be sale and purchase

   2. Absolute liability, no regard for intention, have to give back the money straight back to...