2

SEC Rule 10B5-1 prohibits:

the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information.

but what if there is no "breach of a duty of trust"? Is there some other United States law, rule, or court ruling covering cases when one gains such information from the outside?

For example, consider some private Company A that is about to release a product that will likely lower the share price of some public Company B. Would an employee of Company A making trades (e.g. buying put options for Company B) based on this information be committing an illegal act?

A very similar question was asked here:

Insider Trading

but it only considers the question in a very general sense and does not address regulations in the United States specifically. Are there any recent examples of the application of laws, rules, or court cases related to this scenario in the United States?

Update:

Assume for the sake of this question that there is no breach of trust being committed against the source of the material nonpublic information (Company A). If it helps, imagine that Company A is a sole proprietorship where the employee committing the trades is the company's only employee (and consequently also the head of the company) and that there are no outside investors or stake holders involved with Company A whose trust could be breached.

nellapizza
  • 165
  • 5

1 Answers1

2

Is it still insider trading if from the outside with no breach of trust?

No, because "insider trading is the abuse of a fiduciary position" Fry v. UAL Corp., 84F.3d 936, 938 (1996). Furthermore, Chiarella v. U.S., 445 U.S. 222, 232 (1980) refutes the notion that "[t]he use by anyone of material information not generally available is fraudulent". For it to be fraudulent, there would have to exist "with the sellers of the target company's securities" some prior dealings, or a relation of trust and confidence, a fiduciary position, Id. at 232.

In its rather unqualified formulation, the scenario you outline does not reflect an [employee's] abuse of fiduciary position. There is a duty the employee owes to company A, but the employee's informational advantage was neither a result of misappropriation nor used in a way that amounts to misappropriation, abuse, or leakage of A's trade secrets. A company's decision to release a product does not typically depend on the stock price of its competitor(s), and your description does not otherwise reflect that A's interests are directly or indirectly influenced by the value of B's options/securities. Most important, your update clarifies that the employee's trading has A's consent.

Although the proposition "for" in "buying put options for company B" suggests that the employee purchased put options on behalf of company B, it appears that you mean that "he [for his own personal profit] bought B put options". Again, your edit and comment reinforce the latter.

Iñaki Viggers
  • 45,677
  • 4
  • 72
  • 96