Question

Susan is dating mike, the chief executive officer (ceo) of a major drug company. one particular evening mike seems very preoccupied. concerned about his feelings, susan asks what's wrong and he tells her that a major drug that the company was counting on has not been approved by the food and drug administration (fda). he further tells her that the announcement will be made at 10:00 am the next morning. at 9:00 am the next morning, susan calls her broker and orders the sale of all of her stock in mike's company. after the announcement, stock in mike's company tumbles. by selling, susan has saved over $120,000. which of the following statements is correct regarding this case?

a. Susan is not a true insider so she has no ability.
b. Susan may use the information; however, she is able only if she warns others.
c. Susan is liable only if the sale results in a short swing profit.
d. Susan is innocent, so she has no liability.

Answer 1

Susan could be liable for insider trading due to selling her stock based on material nonpublic information obtained from the CEO of a drug company, an act prohibited under the Securities Exchange Act of 1934.

Step-by-step explanation:

In the scenario presented, Susan has used nonpublic information that she obtained through her personal relationship with Mike, the CEO, to sell her stock in a drug company before the information was made public, thus avoiding significant losses. This is a classic example of insider trading.

Although not a traditional insider, Susan's actions fall under the concept of "tipping" or "tippee" liability, where someone receives material nonpublic information from an insider and trades on that information. The correct statement regarding this case is that Susan could be liable under the Securities Exchange Act of 1934. This act holds that tipping and trading on confidential information is illegal, and those who do so can face civil and criminal penalties regardless of their status within the company, if they are found to have breached a duty of trust and confidence by sharing or using that information.