For the last seven or eight years, employees of Good News Gas Co have been prospecting for natural gas deposits in north central Wyoming's Powder River basin They drill a test well on one of their leases The well comes in gang busters, sending a strong signal that the Good News may be the largest natural gas field ever discovered in North America The employees quickly cap the well and remove the drilling rig Knowing also that natural gas prices are approaching an all time high, two employees, Cal Twitty and Jack Owens, drive to a nearby roadhouse with a pay telephone (cellular calls can be traced) They telephone several stockbrokers each, placing large (but not overly large and therefore suspicious) orders both for Good News common shares and for call options to purchase such shares Cal and Jack then call Good News headquarters in Denver They report to Vice President for Development, Marty Robbins, who tells Cal and Jack to keep it under their hat for a few days He then buys up shares and options on shares Finally, the good news is announced at a press conference Director Ferlin Husky, who is in attendance, whips out his cell phone He purchases Good News shares, as does his broker Within a month the share price has gone from $14 to $40 Who is liable and for what They all are liable for the profit made and, in addition, for a civil penalty for up to three times the profit made (or the loss forgone, in cases of insiders selling on negative news) (Insider Trading Sanctions Act of 1984) and possible criminal penalties Ferlin would not be liable He did not trade (or tip his broker to trade) until after the information was disclosed Only Marty Robbins is liable He is a corporate officer Cal and Jack are just petroleum engineers, rank and file employees who owe no one fiduciary or similar duties None of them are liable This kind of trading keeps share markets efficient, moving share prices in the right direction and is also the very type of incentive based compensation we wish to encourage

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Posted on Jul 02, 2024

For the last seven or eight years, employees of Good News Gas Co. have been prospecting for natural gas deposits in north central Wyoming's Powder

For the last seven or eight years, employees of Good News Gas Co. have been prospecting for natural gas deposits in north central Wyoming's Powder River basin. They drill a test well on one of their leases. The well comes in "gang busters," sending a strong signal that the Good News may be the largest natural gas field ever discovered in North America. The employees quickly cap the well and remove the drilling rig. Knowing also that natural gas prices are approaching an all time high, two employees, Cal Twitty and Jack Owens, drive to a nearby roadhouse with a pay telephone (cellular calls can be traced). They telephone several stockbrokers each, placing large (but not overly large and therefore suspicious) orders both for Good News common shares and for call options to purchase such shares. Cal and Jack then call Good News headquarters in Denver. They report to Vice President for Development, Marty Robbins, who tells Cal and Jack to keep it under their hat for a few days. He then buys up shares and options on shares. Finally, the "good news" is announced at a press conference. Director Ferlin Husky, who is in attendance, whips out his cell phone. He purchases Good News shares, as does his broker. Within a month the share price has gone from $14 to $40. Who is liable and for what?
1. They all are liable for the profit made and, in addition, for a civil penalty for up to three times the profit made (or the loss forgone, in cases of insiders selling on negative news) (Insider Trading Sanctions Act of 1984) and possible criminal penalties.
2. Ferlin would not be liable. He did not trade (or "tip" his broker to trade) until after the information was disclosed.
3. Only Marty Robbins is liable. He is a corporate officer. Cal and Jack are just petroleum engineers, rank-and-file employees who owe no one fiduciary or similar duties.
4. None of them are liable. This kind of trading keeps share markets efficient, moving share prices in the right direction and is also the very type of incentive based compensation we wish to encourage.