Example 1 (Acting on Nonpublic Information):
CFAI Example 1 for Standard 2- material information-
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I do not understand this.Why only Staples is in violation? Sister tells her daughter- isn’t it a violation? She tells her husband-isn’t that also a violation?
Let me first state a disclaimer: I had to go outside of the CFA curriculum to find some sort of answer to this, so I can’t guarantee the answer I provide would be the answer expected of you on exam day.
That said, it appears in this case that this is a “family” company, implying that all members of the family who share a blood relation are also employees of the company. That would include Frank, his sister, and his sister’s daughter, but not his sister’s daughter’s husband, Staple.
According to the SEC vs. Obus, which is the last case which attempted to clarify the standards for tipper and tippee liability (another case, Newman, followed Obus but took up an issue that is not relevant in this fact pattern), the elements to prove tipper liability are:
- “Tipper liability requires that (1) the tipper had a duty to keep material non-public information confidential; (2) the tipper breached that duty by intentionally or recklessly relaying the information to a tippee who could use the information in connection with securities trading; and (3) the tipper received a personal benefit from the tip.”
Note that Frank did have a duty (1), but that he likely didn’t breach it by relaying the information to his own treasurer and that he didn’t receive any personal benefit. Likewise, assuming his sister’s daughter also worked for the company, it may not have been unreasonable for his sister to have relayed the information to her daughter. However, when it comes to Staple, as someone who didn’t work for the company, he’d know the information he received was likely not to be meant for him and he was particularly reckless in disclosing this information to someone whose very occupation it is to engage in securities trading. While it’s less obvious that he received a personal benefit, the court has interpreted this broadly to include not only pecuniary benefit but also “any reputational benefit” or “the benefit one would obtain from simply making a gift of confidentional information to a trading relative or friend.” Note that had Staple purchased the stock for himself or had his broker purchase the stock for him, that probably would have made Frank’s sister’s daughter liable as a tipper, but as the facts stand, the only one to receive “personal benefit” in this case was Staple. The elements to prove tippee liability are:
- “Tippee liability requires that (1) the tipper breached a duty by tipping confidential information; (2) the tippee knew or had reason to know that the tippee improperly obtained the information (i.e., that the information was obtained through the tipper’s breach); and (3) the tippee, while in knowing possession of the material non-public information, used the information by trading or by tipping for his own benefit.”
As for tippee liability, it’s easy to see why Halsey is in violation, so no further discussion is necessary.
Thanks for going an extra mile for me. I appreciate it. Thanks