Summary of the Insider Trading Case
Summary of the Insider Trading Case
The case begins with Steve Chen, the husband of the CEO of New World Industries, Judith Chen, at a cookout with his friends. Steve hints to his friend Ken that he should buy stock in New World Industries before the market opens, hinting that the stock will rise at its opening. Steve knows this because his wife shared inside company information about a recent occurrence that will increase the company’s stock value. Ken decides to move his entire portfolio to stocks in New World Industries because of this information. Ken proceeds to offer the same information to another friend, Daniels, for 5% of Daniels’s profit if he buys stock in New World Industries as well, to which Daniels agrees. The stock rises when the market opens, so Ken and Daniels obtain a profit from the stock (McGraw-Hill, 2011).Who is an Insider, Tipper, or Tippee? Judith Chen is the insider in the original exchange during the cookout exchange. She is the CEO of the company, so she is entrusted with corporate information and has a fiduciary duty of confidence to her company and its stockholders to retain the information from the public (Langvardt et al., 2019, p. 1263). Steve Chen would be considered the tipper in the circumstance. Given that he is Judith’s spouse and hears the information from her, he has a duty of trust and confidentiality to the insider information, too (Heakal, 2017). Ken is the tippee in the original exchange, as he received the information from the tipper (Langvardt et al., 2019, p. 1263). Ken becomes the tipper in his exchange with Daniels, as he is now the one detailing the insider information. Daniels is subsequently the tippee receiving the insider trading information, using it, and subsequently benefiting Ken.Tipper and Tippee Liability, Personal Benefit, and Fiduciary DutyAlthough Judith Chen is an insider and shared insider information with her husband, she is not liable as a tipper given that Steve did not use the information for trading, and divulging the information to him did not provide Judith personal benefit. Judith Chen did breach her fiduciary duty, however. She is entrusted with corporate information and has a fiduciary duty of confidence to her company and its stockholders to retain the information from the public, which she breached by telling her husband the information (Langvardt et al., 2019, p. 1263-1266). When Steve informed Ken to buy stock in the company before the market opened because he had information that the stock would dramatically incline, he was gifting Ken confidential, insider information. A similar case is Salman v. United States, 580 U.S. __ (2016), in which the judges found that the tipper, who received insider information, divulged it to his brother, who then shared the information with his friend Salman. The tipper benefited personally because giving the gift of insider trading was equal to insider training himself then gifting the proceeds (U.S. Supreme Court Clarifies Tippee Insider Trading Liability, 2016). When comparing the two cases, Steve would be held liable for tipper liability, as he similarly breached the fiduciary duty of confidentiality with personal interest in the same manner as the Salman case. Since there was a breach in the fiduciary duty of confidentiality with personal interest and Ken knew that the information was a breach given that Steve would not openly describe the circumstance but highly recommended buying the stock, Ken would be held liable for tippee liability (Langvardt et al., 2019, p. 1266). This is also synonymous with the United States v. Newman, 773 F.3d 438 (2d Cir. 2014), given there was a fiduciary duty breach by the insider/tipper, the tippee received the insider information in exchange for a personal benefit, the tippee knew of the breach, and the tippee still used the insider information to trade for personal benefit (Langvardt et al., 2019, p. 1265). The later exchange between Ken and Daniels presents a similar case. Ken knew that the information was a breach of duty but offered it to Daniels for a personal gain of 5% of the profit, making him similarly liable for tipper liability. Daniels is liable for tippee liability, as he knew the information was a breach of duty and knew that Ken would personally benefit from the insider trade (Langvardt et al., 2019, p. 1266).ReferencesHeakal, R. (2017, August 22). Defining Illegal Insider Trading. Retrieved January 08, 2021, from https://www.investopedia.com/articles/03/100803.asp#:~:text=A%20tipper%20could%20be%20the,is%20guilty%20of%20insider%20trading (Links to an external site.).Langvardt, 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.). Retrieved from https://www.vitalsource.com (Links to an external site.)McGraw-Hill. (2011, July 23). Insider trading. [Video file]. Retrieved from http://www.viddler.com/embed/1f5a9785/?f=1&autoplay=0&player=full&secret=97426822&loop=0&nologo=0&hd=0 (Links to an external site.)U.S. Supreme Court Clarifies Tippee Insider Trading Liability. (2016, December). Retrieved January 08, 2021, from https://www.jonesday.com/en/insights/2016/12/us-supreme-court-clarifies-standards-for-tippee-insider-trading-liability#:~:text=S.E.C.%2C%20463%20U.S.%20646%20(1983)%2C%20the%20Supreme%20Court,material%20nonpublic%20information%20at%20issue (Links to an external site.).
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