My friend Joe works at a drug company, and he heard that in a week, the...

My friend Joe works at a drug company, and he heard that in a week, the drug company is going to approval for its newest blockbuster drug to cure cancer. Before the world knows about this, Joe tells me. I tell my brother Jim. Then Jim goes and buys lots of stock in this drug company. A week later, the world learns of the drug approval and the stock price increases by 200%. Jim is a millionaire from his trades. The SEC learns of this and investigates it. Who might be in legal trouble? How would we decide? Explain why.

Expert Solution

Lets first see what insider trading is. Insider trading is when someone, who has an information about the company which is not in public domain, trades shares based on that information. This gives him/her an advantage because they have information others dont have and hence can benefit out of it.

There are 3 players here- you, your friend Joe (who works at the company) and Jim. Lets examine one by one.

Jim for sure is in trouble. He clearly used insider information for his benefit. And as such, he is in legal trouble.

For Joe, he is in trouble for leaking confidential information, but him being in trouble for insider trading depends upon his intention. If he gave out the information without the thought of benefit, then he is not in trouble for insider trading (though he is still in trouble for leaking confidential information). But if he knew that it was going to benefit Jim, then he is also in trouble for insider trading.

The same goes for you. If the intention was benefit of Jim, then you are in trouble. If it was told just as matter of factly, without intention of benefit, then no trouble for you as you neigher leaked the information nor wanted to benefit from it.

Rahul Sunny answered 2 years ago

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