Question

What is tipper/tippee liability? What are the penalties for tippers and tippees?Were there allegations of tipper/tippee behavior in this case as well? Explain your answers and identify the parties involved. The Imclone Case

Answer 1

1. Tipper and Tippee Liability Meaning:

a. Tippee- Tippee is a term used to refer to an individual who acquires material non public information from some person in a fiduciary relationship with the company to which that information pertains. Tippee is an individual who receives an insider's tip on a stock and then trades on it illegally.

b. Tipper- The tipper is the person who has broken his or her fiduciary duty when he or she has consciously revealed inside information.

Both parties typically do so for a mutual monetary benefit, if the tippee does not use the information to trade, the tipper can still be liable for releasing it.

2. The penalties for Tipper and Tippee as a part of insider trading would be:

a. General. Violation of the prohibition on insider trading can result in a prison sentence and civil and criminal fines for the individuals who commit the violation, and civil and criminal fines for the entities that commit the violation.

b. Criminal Penalties. The maximum prison sentence for an insider trading violation is now 20 years. The maximum criminal fine for individuals is now $5,000,000, and the maximum fine for non-natural persons (such as an entity whose securities are publicly traded) is now $25,000,000.

c. Civil Sanctions. Persons who violate insider trading laws may become subject to an injunction and may be forced to disgorge any profits gained or losses avoided. The civil penalty for a violator may be an amount up to three times the profit gained or loss avoided as a result of the insider trading violation.

3. ImClone Case- This case was definitely a case of trading on insider information. ImClone's stock price dropped sharply at the end of 2001 when its drug Erbitux, an experimental monoclonal antibody, failed to get the expected Food and Drug Administration (FDA) approval. It was later revealed by the U.S. Securities and Exchange Commission that prior to the announcement of the FDA's decision, numerous executives sold their stock. ImClone's founder, Samuel D. Waksal, was arrested in 2002 on insider trading charges for instructing friends and family to sell their stock, and attempting to sell his own. He was thus the Tipper In this case.        

-Martha Stewart, the founder of Martha Stewart Living Omnimedia, also was involved in the scandal after it emerged that her broker, Peter Bacanovic, tipped her off that ImClone was about to drop. In response, Stewart sold about $230,000 in ImClone shares a day before the announcement of the FDA decision. The Broker here was the tipper and Martha was the Tippee.

-Founder Waksal pleaded guilty to various charges, including securities fraud, was sentenced to seven years and three months in prison.

-Martha was sentenced to five months in prison, five months of home confinement, and two years’ probation for lying about a stock sale, conspiracy, and obstruction of justice.