Insider Trading Quiz Test your knowledge of the law on insider trading with the following quiz. What would you do in each of the following situations?' Which ones involve a fiduciary relationship? 1. You have recently taken a job as an investment banker in New York, through which you often receive information from your corporate clients regarding their contemplated takeover activity. An acquaintance, who is a securities trader and manager of over-the-counter trading for a nearby brokerage, has suggested that if you were willing to keep her posted on upcoming transactions, she could forward the information to certain individuals in Europe who could make stock purchases in the target companies and, through various bank and trust accounts and brokers, make sales once the takeovers were announced, sharing the profits with you. 2. Your friend from college - now a psychotherapist and licensed social worker - has proposed that you open a brokerage account together and that you purchase short-term, out-of-the-money call options* in a company headed by a patient he is treating. During a recent therapy session, the patient talked about the company's soon-to-be-announced merger. While sunning yourself on the bleachers at your daughter's track meet, you overhear an acquaintance, who is a director of an oil and gas company, describe to his wife a recent business trip, including details relating to a possible disposition or liquidation of the company or its assets. Among other things, your acquaintance mentioned to his wife that there were several bidders, and that an announcement might occur the following week. You are considering whether to call your broker to buy stock in the company, and whether to relay the information to close friends. 4. Your wife has learned from her mother that your wife's uncle, the president and controlling shareholder of a supermarket chain, has decided to sell the family business. Her uncle had informed his three children (all employees), telling them to keep silent until the public announcement. He had also told his nephew and his sister (your wife's mother), offering to tender their shares at the same time, but telling them to keep quiet about it. Your wife, however, learned about the sale from her mother, who told her that she could tell you, but no one else. Your wife told you not to tell anyone because "it could possibly ruin the sale." You are mulling whether to call your broker to purchase the company's stock. 5. As an investment officer for a major life insurance company, you are evaluating the potential purchase of certain corporate debt instruments, currently held by a set of investment funds, for approximately 94% of their par value. Your insurance company employer is a shareholder in the corporation that issued the debt, two of your employer's nominees sit on the corporation's board of directors, and as you are aware - but unbeknownst to the potential seller or the general public - the corporation's prospects are looking up, it is appointing a new and well-known chief executive, and the corporation is considering refinancing the debt at its full par value. 6. A friend who is a human resources consultant has just told you about a lunch meeting she had with the president of a pharmaceuticals company. The company president, who was an acquaintance and former subordinate of your friend (at an unrelated business), had previously told your friend that her consultancy might be retained to negotiate a new employment contract for the company's CEO, in connection with a contemplated transaction. For months there had been speculation in the press that this company was a potential takeover target. In their meeting, which your friend viewed "as having business potential," the company president told your friend that the company "was definitely involved in serious talks" with potential acquirers or merger candidates, though no specifics were given. You yourself had previously thought that this company might be a takeover target, and are trying to decide whether to purchase their stock and call options in light of what your friend has told you. 7. You have recently taken a senior position with a large bank based in Milan, Italy, which has participated in a "committee of lead banks" overseeing a "rescue plan" (on behalf of a larger pool of banks) relating to a troubled company listed on the Italian Stock Exchange. Essentially the banks have subscribed for 78% of the company's capital, while investors have subscribed for the rest. The company's board has informed the lead banks that the plan has not worked, and that without further capital, the company would fail. You know that further capital will not be forthcoming from the banks, and are trying to decide whether your bank can start selling off its equity stake in light of this information. (During your orientation to your new position, you learned that Italian law defines insider trading to include when "someone, having privileged information because of his /her participation in a company's capital, or because of his/her role, profession or office, ... purchases, sells or effects transactions . in respect of securities, exploiting such information.' The term "privileged information'" means "specific information, that is not available to the public, concerning securities or their issuing entities that, if disclosed, could influence the price of the securities on the market.")