Final answer:
In order to avoid an insider trading violation, an employee of an exchange-traded company should ensure that the information they possess is not material nonpublic information. Among the given scenarios, the only situation where trading would not be considered insider trading is when the information discussed with an outside research analyst is based on public analysis and discussion.
Therefore, the only situation where the employee is allowed to buy or sell securities without committing an insider trading violation is in scenario C, where the information discussed is based on public analysis and discussion.
Step-by-step explanation:
To not commit an insider trading violation, an employee of an exchange-traded company must ensure that the information they possess is not considered material nonpublic information. Based on the given scenarios:
A) The general counsel of the company informs the employee about a legal decision regarding an ongoing class action lawsuit against the company. In this case, the information is material nonpublic information and trading on it would likely be considered insider trading.
B) A colleague of the employee, who works in the corporate headquarters, tells the employee about a conversation she overheard about a possible merger. In this situation, the information is material nonpublic information, and trading on it would likely be considered insider trading.
C) An outside research analyst and the employee discuss why the company's earnings per share could be dramatically lower than prior estimates. In this scenario, the information is not insider information, as it is based on public analysis and discussion.
D) The employee's spouse works for a government agency and discloses to the employee that the company will be awarded a major government contract in the near future. In this case, the information is material nonpublic information, and trading on it would likely be considered insider trading.
Therefore, the only situation where the employee is allowed to buy or sell securities without committing an insider trading violation is in scenario C, where the information discussed is based on public analysis and discussion.