Problems also exist with regard to insiders “tipping” friends about non-public information that may influence the company’s publicly-traded stock price. Because friends do not satisfy the definition of an insider, a problem arose regarding how to prosecute these individuals. Today, a friend who receives such a tip becomes imputed with the same duty as the insider. In other words, a friend must not make a trade based upon that privileged information. Failure to abide by the duty constitutes insider trading and creates grounds for prosecution. The person receiving the tip, however, must have known or should have known that the information was company property to be convicted.
Dirks v. SEC proved a pivotal U.S. Supreme Court decision regarding this type of insider trading. In Dirks, the Court held that a prosecutor could charge tip recipients with insider trading liability if the recipient had reason to believe that the information’s disclosure violated another’s fiduciary duty and if the recipient personally gained from acting upon the information. 463 U.S. 646 (1983). Dirks also created the constructive insider rule, which treats individuals working with a corporation on a professional basis as insiders if they come into contact with non-public information. Id.
As defined by the courts, insider trading refers to purchasing or selling a security while in possession of material, non-public information concerning that security, where the information is obtained from a breach of fiduciary duty, or a duty arising from a relationship of trust or confidence.
Being told by an insider (a member of the board) or tipped off about a specific time-frame to expect material news qualifies as the passing of insider information, given that the company has not stated that it will only release news about the mice trials after transferring to the NASDAQ exchange. These are anti-competitive practices that give Bart a material advantage in trading SBFM securities.
Bart has alleged that a SBFM board of director tipped him off & gave Bart insider information—information that is material & not available to the public.
