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← Series 79: Section 4
Series 79 practice questionmediumMNPI and Insider Trading

Under SEC Rule 10b-5, which of the following scenarios would most likely constitute insider trading?

  1. AA portfolio manager purchases shares of a company based on a thorough analysis of publicly available financial statements and industry reports
  2. BA retail investor sells shares after reading a negative analyst report that was published and widely distributed to the public
  3. CA trader executes a block trade based on a client's instructions without knowledge of why the client wants to trade
  4. DA deal-team banker buys target call options through a spouse before announcement✓ Correct answer
Explanation

Why D — A deal-team banker buys target call options through a spouse before announcement

Rule 10b-5 prohibits trading securities on the basis of material nonpublic information in breach of a duty of trust or confidence. The investment banker has a clear duty to keep deal information confidential, and purchasing options on the target through a spouse's account is a classic attempt to disguise insider trading. Using another person's account does not shield the trader from liability. The SEC regularly pursues cases involving family member accounts used to circumvent detection.

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