45. What is “insider trading” under Section 14 of the 1934 Act?
Rule 10(b)(5) is not the only securities law to target trading of securities by individuals with inside information. Rule 14(e)(3) is an insider tradition provision that applies specifically to corporate buyouts or takeovers. This provision prohibits anyone from trading on insider information if the trader knows that the information was obtained from either party to the proposed buyout. The information is effectively misappropriated from the companies. No fiduciary duty is required as in 10(b)(5) actions.
• Discussion: Why do you think the securities laws provide for a special cause of action for insider trading based upon information obtained about a corporate takeover or buyout?
• Practice Question: ABC Corp is in the midst of dealing with a proposed corporate buyout of ABC Corp by 123 Corp. Earl is a news reporter who learns from a low-level employee at ABC Corp that there are likely merger-acquisition talks happening. Earl seizes the opportunity to purchase a large block of ABC Corp and 123 Corp stock. The merger is likely to push up the share price of both entities. Is early potentially liable under the securities laws?