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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. DAn investment banker who learned of an unannounced acquisition through her role on the deal team purchases call options on the target company's stock through her spouse's brokerage account✓ Correct answer
Explanation

Why D — An investment banker who learned of an unannounced acquisition through her role on the deal team purchases call options on the target company's stock through her spouse's brokerage account

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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