Fact Pattern 22-1 Trudy Was Hired by Food Corporation to Handle a Products

question 53

Multiple Choice

Fact Pattern 22-1
Trudy was hired by Food Corporation to handle a products liability lawsuit brought against it alleging that it distributed dangerous dog biscuits. Trudy's investigation brought to light facts establishing that the biscuits were not defective and that the problem actually involved improper retention policies on the part of retailers. Trudy is aware that this information will result in the stock of Food Corporation increasing dramatically. Trudy immediately buys shares of Food Corporation and tells her fiancé, Frank, about the expected increase as well. Trudy tells Frank because she wants to borrow money from him for the trade and also because she believes that his investment will enable them to take a nicer honeymoon. Frank initially resists because of his training in business law and his concern that trading on the information would violate federal law, but he ends up going along with Trudy because he too wants a nice honeymoon. Trudy's suspicions come true. The lawsuit is dismissed, the stock increases dramatically, and she and Frank go on a great honeymoon. The day after they return, an investigator from U.S. Attorney's Office interviews her regarding her trades and those of Frank.
-Refer to fact pattern 22-1. Is there a basis upon which to hold Frank liable for a securities violation based upon his receipt and use of the information?

• A) No because he had no duty toward Food Corporation.
• B) Yes, he could be held liable as a tipper.
• C) Yes, he could be held liable as a tippee.
• D) Yes, he could be held liable as a remote tippee.

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Definitions:

S Corporation

A special type of corporation in the United States that meets specific Internal Revenue Service criteria and elects to be taxed as a pass-through entity, avoiding double taxation on corporate income.

Shareholders

Individuals or entities that own shares in a corporation, giving them partial ownership and a stake in the company's profits and decision-making.

Limited Partnership

A business partnership where at least one partner has unlimited liability and one or more partners have limited liability, only responsible for the money they have invested.

Legal Entity

An organization or structure that is recognized by law as having rights and responsibilities, such as a corporation, partnership, or trust.