Chapter 6.4 Flashcards Preview

Chapter 6 > Chapter 6.4 > Flashcards

Flashcards in Chapter 6.4 Deck (12):

Insider Trading

Refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped", and securities trading by those who misappropriate such information.


Insiders are usually:

Officers, Directors, and Principal Stockholders


Insiders would also include any person that has access to material nonpublic information and trades on this information. Examples include:

-B/D research analyst
-Individual doing research for an investment publication
-Laboratory technician
-An employee of a printing company


Inside Information

The following guidelines are used to determine whether inside information was used in a transaction or not:
-The information must be material
-The material must be non-public
-The person involved in the purchase or sale is an insider or tippee
-Whether the information was a factor in a person's purchase or sale decision; the amount of time after an announcement before insiders engaged in buy or selling is closely looked at

**Even if the "insider" lost money on the trades the individual still committed an illegal act
**Once material information that is non-public is made public, such as an accurate release of the information through a national news service, trading is permitted
-Anyone involved in the dissemination of non-public information whether they use it or not has violate federal law.


Selling activities on insiders

Insiders are prohibited from selling short or selling short against the box on shares of their own company's stock.


Insider filing requirements

-Insiders must file a record of ownership with the SEC within 10 days of when they become insiders on Form 3.
-Insiders must file records of changes in ownership on Form 4 within 2 business days following the change.


Short Swing Recovery Position

The profits that are received by insiders as result of a sale and purchase or purchase and sale of an equity security of the insiders company made within a 6 month period shall be recoverable by the company.



Any individual, or 2 or more individuals acting jointly, who provides information relating to a violation of securities law to the SEC.


Information for Whistleblowing

Must be "original information" which means that:
-It is derived from independent knowledge or analysis of the whistleblower
-It is not known to the SEC from any other source of the information and
-It is not exclusively derived from an allegation made unless the whistleblower is the source of information


Monetary Sanction Awards for Whistleblowing

Shall pay an amount equal to:
-But not less than 10%, in total, of what has been collected and
-Not more than 30%, in total, of what has been collected

**A dispute arising under the whistleblower statue is not required to be arbitrated


Securities Fraud Enforcement Act of 1988

-Civil liabilities of 3 times the profit gained or loss avoided, but not more than $1,000,000
-Criminal penalties of $5,000,000 for individuals and up to $25,000,000 for non-natural persons with a maximum jail sentence of 20 years.

**The Whistleblower incentives repealed the insider trading and securities fraud enforcement act


Liability to Contemporaneous Traders for insider trading

-Any control person who violates any provision of the rules by communicating any material non-public information or purchasing or selling a security while in possession of material non-public information shall be liable to any person who contemporaneously, with the purchase or sale of securities that is the subject of the violation, has purchased or sold securities of the same class.
-The total amount of damages imposed shall not exceed the profit gained or loss avoided in the transaction.