A client informs his financial advisor that his brother-in-law let slip that FDA approval of a highly anticipated oncological drug is imminent. The client states that he does not know the source of the information, but that his brother-in-law has a sister who is a research scientist at US-based Pharmaceutical Company, which is developing the oncological drug. The client requests that his advisor purchase Pharmaceutical Company’s stock as soon as possible.
- Neither the client nor financial advisor should trade on the tip.
- A trader is liable for insider trading if the trade was made while in possession of material, non-public information that was disclosed in breach of a duty of trust or confidence in exchange for a personal benefit.
- Tippee liability is derivative of the liability of the “tipper.” Here, the sister who works at Pharmaceutical Company will be found to have received a “benefit” by tipping her brother on non-public information that she had access to by virtue of her position at the company. The brother-in-law will also be found to have received a “benefit” by tipping the client, his brother-in-law, with whom he has a (presumably) close relationship.
- Interactions with family members are considered meaningfully close relationships, and if a family member has access to material, non-public information, a trade based on information (s)he discloses will lead to investigation and most likely prosecution.
- Trades should never be based on information that the trader suspects to be material, non-public, and disclosed in breach of a duty. Though the client does not know, based on these facts that the brother-in-law’s sister was the tipper, the client could still be found liable on the theory of conscious avoidance.
- Trading on information obtained through interactions with family members who have access to material, non-public information presents a high risk of prosecution, particularly since advanced software deployed by the SEC will invariably detect suspicious trading by related individuals.