Does liability exist when an employee gives material, non-public information to a stranger?

Hypothetical:  

FDA Employee knows that a new drug is about to be approved.  FDA Employee sits next to a complete stranger on the subway and decides she wants to help the stranger out.  FDA Employee informs the stranger of the new drug, suggesting “someone could make a lot of money by trading on this.”

Key Considerations:

  • A “tippee” (the stranger) can be liable for trading on confidential information when he or she knows or should know that the “tipper” (the employee) breached a duty by disclosing the information.
  • The test for whether the tipper’s duty is breached is whether the tipper personally will benefit, directly or indirectly, from the disclosure.
  • A personal benefit need not be pecuniary; a personal benefit can be a quid pro quo or that the tipper intended to benefit the tippee.
  • Even if the tipper and tippee have no meaningful personal relationship, evidence that the tipper intended to benefit the tippee – for example, saying “someone could make a lot of money by trading on this” – can establish insider trading liability.  

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