The summary of United States v. Newman
Ken Hastings is hosting a backyard cookout for some of his neighbors. One of the invitees is Steve Chen, whose wife, Judith Chen, is the CEO of New World Industries. During the cookout, Steve received a call from his wife, who is out of town on business.
Upon returning to the barbecue after the call, Steve’s demeanor has clearly changed and he seems unusually happy. Ken and Tim Daniels listen to what Steve reports. Steve tells his neighbors that Judith was out of town working on a very important settlement, and that her efforts have paid off.
Assume Ken Hastings (cookout host) and Tim Daniels (Ken’s tennis partner) both bought stock in New World Industries as soon as the market opened on Monday and all profited 30% after the press announcement by Mrs. Chen. Pursuant to their agreement, Tim Daniels paid Ken Hasting 5% of the profit he made on the transaction.
With regard to Judith Chen, Steve Chen, Ken Hastings and Tim Daniels, which of these parties could be considered an “insider” under rule 10(b)(5) of the Securities Act of 1934? Explain why or why not.
Which of these parties could have tipper or tippee liability in this case?
Did Judith Chen’s actions in telling her husband about the settlement breach her fiduciary duty?
Who actually obtained a personal benefit from the tip and how?
Sample Solution
1. Judith Chen could be considered an insider under rule 10(b)(5) of the Securities Act of 1934 because she is the CEO of New World Industries, which gives her access to material non-public information about the company.
As such, she has a fiduciary duty to not use or disclose any confidential information for personal gain or benefit.
2. Steve Chen and Ken Hastings could have tipper liability because they both knew about the settlement before it was publicly announced and used that knowledge to purchase stock in New World Industries before its value shot up due to news of the settlement. Tim Daniels may have tippee liability as well since he acted on a tip from Ken Hastings and then profited from his purchase.
3. Yes, Judith Chen’s actions in telling her husband about the settlement would breach her fiduciary duty because she was using non-public information for personal gain or benefit by tipping off someone who could profit from trading on such information prior to public disclosure.
4. Both Steve Chen and Ken Hastings obtained a personal benefit from this tip because they used their knowledge of the upcoming settlement announcement to buy stock in New World Industries prior to public disclosure, thereby increasing their profits when its value increased upon public announcement of said settlement agreement.