Federal-based liability | Brian JM Quinn | November 15, 2013


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Federal-based liability

Original Creator: Brian JM Quinn Current Version: Brian JM Quinn Show/Hide
In additional to state-based liability, traders trading on the basis of inside information may also be liable under the federal securities laws. Federal insider trading liability carries with it potentially both civil and criminal liability. Like state-based liability, federal liability for insider trading is derived from the common law. There is no federal statute that explicitly prohibits insider trading. Rather, courts have interpreted Section 10b of the Securities Act of 1934, the Act’s anti-fraud provision, as prohibiting insider trading. EDIT PLAYLIST INFORMATION DELETE PLAYLIST

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  1. 2 Show/Hide More SEC v Texas Gulf Sulphur
    Original Creator: Brian JM Quinn
    The following case, Texas Gulf Sulphur is an early federal insider trading case.  In TGS, the court starts from the position that insiders, as fiduciaries, have an obligation not to use the corporation’s information for their personal benefit. As fiduciaries, insiders have an obligation to “disclose” the confidential inside information, or “abstain from trading” while in possession of the corporation’s material, confidential inside information.  Questions arise as to what information is material and when is information no longer confidential such that an insider may freely trade on it.
  2. 3 Show/Hide More Tipper/Tippee Liability
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    What about liability for insider trading in situations where the trading doesn't involve an insider? The knottiest of these problems involve situations where insiders have tipped outsiders who then trade.

    Tipping is a direct challenge to the classical insider trading doctrine and requires some development of the law. Because the recipient of inside information does not have a fiduciary duty to the shareholders or the corporation, classical insider trading theory does not extend to recipients of inside information. Courts have responded to these situations by finding ways to extend liability to recipients of inside information, “tippees”. Because courts built tippee liability for insider trading on an ediface of fiduciary duty, the reach of liability can at times be limited.

    1. 3.1 Show/Hide More Dirks v. SEC
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Tipper/Tippee liability
    2. 3.2 Show/Hide More SEC. v. Switzer
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Not all tippees will be subject to liability for trading on a corporation’s materail, confidential inside information. In the case that follows, the court tests the limits of liabilty for tippees.
    3. 3.4 Show/Hide More U.S. v. Chestman
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      There are many situations in which it might be unreasonable for the court to seek evidence of a breach of fiduciary duty. For example, where a spouse learns inside information and trades on it. The courts and SEC have adapted in response to those situations.
  3. 4 Show/Hide More Misappropriation Theory
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    Classical insider trading theory generates liability for insiders, temporary insiders, and tippees in the event any of them trade in the stock of the corporation to which they own a fiduciary duty while in possession of material inside information.

    However, this classical theory has an obvious limitation. Under the classical theory of insider trading, there is no liability if the insider uses the material inside information of the corporation to trade in the stock of ANOTHER corporation and not the corporation to which the insider has a fiduciary duty.

    The following cases lay out the courts' response to the limitations of the classical insider trading theory while holding on to its fiduciary duty core.

    1. 4.2 Show/Hide More U.S. v. O'Hagan
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    2. 4.3 Show/Hide More SEC v. Dorozhko
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Like tipper/tippee liability, there are limits to use of misappropriation theory. In Dorozhko, the Second Circuit extends misappropriation theory in a novel way. Dorozhko involves a Ukrainian hacker who steals inside information and then trades on it. The lack of a fiduciary relationship to the source of the information should mean there is no liability under misappropriation theory. However, here the court agrees with the SEC's theory and extends liability but in a novel way, suggesting that fiduciary relationships are not actually required in order to establish liability under 10b-5.

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July 27, 2017

insider trading corporate

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