John owns 1000 shares of ABC company stock. John learns that the ABC Company, wh

Question

John owns 1000 shares of ABC company stock. John learns that the ABC Company, whose stock is now trading at $1000 share, is about to file for bankruptcy. John learned the information because he inadvertently opened an envelope which had been mistakenly placed in his mailbox. He failed to notice it was not addressed to him to his next door neighbor, an attorney for the ABC company. If John sold his shares before the bankruptcy became public, would he violate any securities laws? Identify the law, explain what it allows and prohibits, and then apply it to this scenario.

Explanation / Answer

Yes, John would violate the Federal Securities Laws, particularly because it amounts to Insider Trading. John is in possession of material nonpublic information, which is in violation of a duty to withhold such information and as a consequence refrain from trading.

This law of Insider Trading prohibits fraudulent activities related with the purchase or sale of securities, while in possession of important nonpublic information.

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