Can you think of an example in which the SEC might not be able to prove that an insider actually used the inside information he possessed? Consider the following examples from a newspaper article on insider trading. Do your students agree with the newspaper’s answers?
1. You are a taxi driver who overhears a well-dressed passenger, clearly a corporate bigwig, ebulliently describe how his employer is about to receive approval for a new blockbuster cure for cancer. You tell your broker to buy 1,000 shares of the stock.
2. You are the chauffeur for that same executive—he hired you with the understanding that everything you overhear stays in the car—and he talks of the impending approval.
3. Your broker tells you to sell stock in a company because he just received a call from that company’s chief executive, who instructed him to dump all his holdings. You sell the stock.
4. The same broker advises you to sell but does not say why. He says only that he has a strong belief that you should do it.
5. A friend tells you that he is depressed because his wife has learned that she will probably be laid off next week from her job as a top executive. Her company has discovered deep financial problems, he says, and will disclose them soon. You reassure him, but when he leaves, you call your broker and execute an order to sell short 5,000 shares of the company’s stock.
6. At your country club, you play golf with a new member who talks about a great new product his company is about to introduce. He implies that the stock will rise sharply. The next day, you buy some of the stock.
7. You play golf with that same new member, who talks about the new product but gives no hint that he is associated with the company or where he received the information. You buy.
8. At a party, you overhear an executive—whom you recognize but do not know—tell another guest that his company’s outlook has taken a turn for the worse that has not been reported. You call your broker and sell your interest in that company.