Which one of the following constitutes the illegal use of material nonpublic information? A) Trading based on your analytical review of the firm’s future prospects. B) Trading on information your sister, the firm’s attorney, told you over dinner. C) Trading immediately after attending the firm’s annual shareholders’ meeting. D) Trading on overheard remarks made by an unreliable source at a cocktail party. I marked answer D. Answer given is: The correct answer was B) Trading on information your sister, the firm’s attorney, told you over dinner. Members may not trade on material nonpublic information; therefore, the information conveyed by the firm’s attorney may not be used by a member for trading purposes. Given that both B and D choices involved Trading - only in one case it was the firm’s attorney (who also was my sister) and in another case was an unreliable source -how does Attorney make it more believable? A and C I ruled out because A – is like the mosaic theory C – information is disclosed in the shareholder meeting. Please help me understand this. Thanks CP
because she is that firm’s attorney and she more or less should be knowning what’s going on in the company. - Dinesh S
Wording of D (unreliable) indicates source is an outsider; wouldn’t have access to mnpi.
I thought this one was straightforward, no? On second thought, even B requires some qualification. The information your sister told you must be material. Otherwise, there is nothing wrong with trading based on that. Dreary
information has to be reliable in order to be classified as material
The key to eliminating D is 'unreliable source". There are wild speculations going on all the time, these could be just rumors. The attorney, however, is an insider and she has access to real info about the company - be it coming M&A deals, potential lawsuits, new products, etc. I think the sister part doesn’t really matter - she shouldn’t tip off anyone.
So if your sister told you that the CEO appeared to be in a good mood early that morning, or better yet she told you the company won a frivilous $1 lawsuit, and you decided to buy the shares that same morning, would that be material? You may very well be right about the definition of material being reliable, but I was hoping there would be a better defiiton of “material”. Caution: I haven’t yet hit Ethics hard! Dreary