For someone to be considered an inside trader, several elements must be met.
For someone to be considered an inside trader, several elements must be met. A person must be a corporate insider trusted with a fiduciary duty that he or she breached for personal benefit to a person who used the information to trade securities or gave another person the information (United States of America v. Todd Newmann, 2014). According to rule 10(b)(5) of the 1934 securities act, people considered insiders must be officers, directors of the business, or anyone entrusted with confidential corporate information. It also states that information must be publicly disclosed to prevent any wrongdoing by people privy to private corporate information (Langvardt, 2019).Judith Chen is considered an insider because she was entrusted with private corporate information (Mcgraw-Hill, 2011). When she communicated the information to her husband Steve Chen, he became an insider. Steve Chen is considered an insider because his wife disclosed to him nonpublic information about a corporation that she had the duty to keep private. Ken Hastings and Tim Daniels became insiders when they became tippees of private information from Steve Chen. Even if the question of Steve having any insider information was asked in jest, Ken Hastings and Tim Daniels became insiders when the information was given to them. The information Tim and Ken were the recipients of was not public information, therefore, they are considered insiders by having the information.Judith Chen breached her fiduciary duty to keep information about a company confidential by communicating it to her husband. She was entrusted with information that could give an unfair advantage to people who trade securities. The information was required to remain confidential until the public announcement of the information. Per the Securities Act of 1934, anyone entrusted with corporate information has a duty to keep it confidential (Langvardt, 2019). It was known by the parties involved that the information was nonpublic. Therefore, the information should have remained private until a public disclosure was made.Judith Chen has tipper liability, as well as her husband Steve Chen, because her husband disclosed the private information to Tim and Ken. Her husband was a tippee, a recipient of an inside tip, until he distributed the information to other people. As a tippee, Steve Chen had the responsibility of not disclosing the private information he received, and, of not allowing a situation to exist in which the inside information could be discussed, overheard, or relayed (Langvardt, 2019). Originally, the only duty was with Judith. It was her responsibility to not allow the information to be made known to others. When she relayed the information to her husband, that responsibility passed to him as well. When the information was made known to tippees Tim and Ken, it was their responsibility to not act on it or benefit from it. They knew the information was disclosed as the result of a breach of a fiduciary duty. The tippee’s liability derives from the liability of the tipper (United States of America v. Todd Newmann, 2014). Tim and Ken benefited from the inside tip. They gained money from it and the ability to brag about having an inside source to help them out with investing. At first glance, it does not appear that Steve or Judith benefitted from the inside information being disclosed. Yet, when one looks a little closer, Steve and Judith Chen benefitted more so than if they had used the information to invest in securities. Steve Chen received recognition and power from divulging the private information to people who used it to make money. As a business owner, it works to his favor to have people who regard him as a resource for information. It benefits his business in the future. The people who used the information are now his allies. It is a great help in business to have people who are on your side instead of not. It expands his network and his net worth. Word of mouth can create a lot of opportunities for people. If he gains because of his disclosure, so does his business. He also benefits by the power it affords his wife. Judith Chen is now a source of information. People will want her advice or hold her in higher regard than if she were not someone who had access to private corporate information.ReferencesLangvardt, A. W., Barnes, A. J., Prenkert, J. D., McCrory, M. A., & Perry, J. E. (2019). Business law: The ethical, global, and e-commerce environment (17th ed.).McGraw-Hill. (2011, July 23). Insider trading (Links to an external site.) (Links to an external site.) [Video file]. Retrieved from http://www.viddler.com/embed/1f5a9785/?f=1&autoplay=0&player=full&secret=97426822&loop=0&nologo=0&hd=0United States v. Newman, 773 F.3d 438 (2d Cir. 2014).
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