Question

You are a chief compliance officer at a large manufacturing company. You learn that Brittany Jones, a long-time manager, told Louis, a friend of hers, about the planned construction of a new facility, which is being built in order to take advantage of newly-acquired and lucrative production contracts. This information is confidential. Brittany told Louis to keep the information to himself, but instead Louis told his friend, James. James traded on this information and profited. Evaluate whether Brittany, James, or Louis could be liable for insider trading. Also consider what business policies would help prevent insider trading in the future.

Answer 1

Answer: You are a chief compliance officer at a large manufacturing company. You learn that Brittany Jones, a long-time manager, told Louis, a friend of hers, about the planned construction of a new facility, which is being built in order to take advantage of newly-acquired and lucrative production contracts. This information is confidential. Brittany told Louis to keep the information to himself, but instead Louis told his friend, James. James traded on this information and profited. Brittany, James, and Louis could be liable for insider trading.

Explanation:

Privileged information is the quotation of shares of a public company or other securities by persons with access to non-public information about it. Transactions based on insider information are illegal. This is because it is seen as unfair to other investors who do not have access to information that the investor with insider information could potentially turn into much greater profits than a typical investor.

The rules around privileged information are complex and vary significantly from one country to another. The definition of privileged information can be broad and not only cover the people who get the information, but also anyone who can associate with them, such as stockbrokers and even family members. Any person who is aware of having non-public information and trades on the stock market can be guilty in the eyes of some jurisdictions.

To prevent the misuse of this type of information, safety rules, conduct duties and prohibitions can be established as regulations.Regulators also prevent and detect the misuse of privileged information through people with information or complainants.

Some companies have periods of blocking when officials, directors and other designated persons cannot buy the company's securities, usually around profit announcements. A company may also require officials, directors and others to settle their purchases or sales of the company's securities with its legal director to avoid any conflict of interest or violations of securities laws.