How does insider trading liability interact with tipping and misusing information?

• A. Only tippees are liable.
• B. Tippers are liable only if they trade on information.
• C. Tipping or trading on material nonpublic information learned through misuse of duties is liable; both tipper and tippee may be liable.
• D. Liability applies only to corporate insiders, not to tipped individuals.

Answer: (C)

Insider trading liability hinges on how material nonpublic information is obtained and used. When someone with a duty to keep information confidential shares that MNPI with another person, the act of tipping can itself breach a fiduciary duty. If the tipper breaches that duty and the tippee trades on the information, liability can attach to the tipper. The tippee is liable for trading on MNPI if they know or should know that the information was disclosed in breach or obtained through misuse.

There’s also the misappropriation theory, which extends liability to someone who uses information learned through improper means or breaches of duty to profit, and to the person who trades on it. So, you can have liability for tipping or for trading on the information, and either or both parties (the tipper and the tippee) may be liable.

That makes the best answer the one that says tipping or trading on material nonpublic information learned through misuse of duties is liable, and that both tipper and tippee may be liable. The other options are incomplete because tippers can be liable even without trading, tipping itself can violate duties, and liability isn’t limited only to corporate insiders.