Insider trading



BABSON COLLEGE – FALL 2020 – LAW 1000 – 05 – WRITING ASSIGNMENT TWO

Newtech, Inc. (NT) is a Boston based FINTECH company. Below is a chronology of corporate events:

Late in 2017 NT tells Wall Street analysts that it expects 1st Quarter 2018 earnings to be somewhere in the range of .05 to .07 per share.

3/31/18 1st Quarter Ends.

4/3/18 NT, in fact, made .15 per share for the quarter. The Chief Financial Officer (CFO) drafts a press release announcing the “record earnings.” The draft includes a watermark stating, “CONFIDENTIAL” and a header stating, “DRAFT.” He does not provide the draft to anyone on this day.

4/6/18 NT holds a Board of Directors meeting, and NT’s CFO informs the Board of Directors (for the first time) of the actual 1st quarter earnings.

4/20/18 NT issues the actual press release, which is similar to the draft release and announces the “record earnings.”

Minutes after the press release becomes public that same day, NT’s shares rise from $8 per share to $12 per share, an increase of 50%. They trade at that amount, or higher, for the rest of the day.

The following events also take place:

· On 4/5/18, Ms. Douglas, an administrative assistant at NT is asked by her boss, NT’s CFO, to make copies of the draft press release announcing the surprising 1st quarter earnings. She reads the press release and immediately calls her broker and buys 5,000 NT shares at the market price of $8 per share. (total cost of $40,000).

· On the same day, Ms. Douglas is having trouble and some copies of the press release become caught in the copy machine. She calls the copy company and they send a repairman to repair the copier. Mr. Avarice, the copy repairman, arrives the same day and takes out the paper jam that is now in 2 pieces and glances at it. He puts the two pieces of the paper jam in his pocket. Later the same day, he puts the pieces of the press release together and reads it. He immediately calls his broker, and he buys 10,000 NT shares at the market price of $8 per share (total cost of $80,000).

· On 4/5/18, NT’s CFO calls Mr. Glutton, an attorney at NT’s outside corporate law firm. The CFO reads the press release to Mr. Glutton just to make sure it sounds right and does not raise any legal issues. The CFO tells Mr. Glutton that the company intends to issue the press release to the public and the press on, or shortly after, 4/20/18. Mr. Glutton immediately calls his broker and buys 20,000 NT shares at the market price of $8 per share (total cost of $160,000). The law firm has a long relationship with NT. Mr. Glutton has signed a non-disclosure and confidentiality agreement with his law firm. He has agreed not to use any confidential information he learns while at the firm for his own benefit.

· On 4/6/18, the Board of Director’s meeting takes place, and the CFO distributes the draft press release. Ms. Williams, an outside director, reads the draft press release. NT’s CFO tells the Board that the company expects to issue the press release on, or shortly after, 4/20/18. Ms. Williams owes Mr. Walters, her bookie $10,000, as she owes him a gambling debt. She is still strapped for cash and thinks that if she texts him the news, maybe he will forgive the debt. She snapchats him the good news, and in her text, she states, “This surprising news should really make NT stock ‘pop’.” After reading the text that same day, he calls his broker and buys 2,500 NT shares at the market price of $8 per share (total cost of $20,000).

· On 4/20/18, after the press release is issued and NT’s stock price rises, Ms. Douglas sells all the NT shares she acquired, as does Mr. Avarice, Mr. Glutton and Mr. Walters. They each sell at $12 per share.

Describe any insider trading liability for Ms. Douglas, Mr. Avarice, Mr. Glutton, Ms. Williams and Mr. Walters, and explain what insider trading theory applies for each person. Be sure to use the three theories of insider trading liability you learned. You should be able to do this in 4-5 pages. Assume your reader has NO KNOWLEDGE of insider trading law.

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