Insider Trading in the Gallop Inc Case
1) Gallop Inc. predicted third quarter earnings of 45cents per share.
2) A likely material litigation of $10m was made against Gallop Inc concerning personal injury on a 9years old boy who was allegedly injured while using Gallop Inc. most popular product.
3) A press release was to be made. But before it was released, the VP Marketing, a director and an outside counsel sold their Gallop shares at the prevailing market price.
4) A copy of the soon to be publicly disclosed press release on this claim fell into the hands of the Collin, who runs the copy machines for Gallop.
5) He contacted his broker, Brown and told her about the press release and told her to sell his shares of Gallop stock.
6) Brown, contacted ...view middle of the document...
VP Marketing Officers have a fiduciary obligation of loyalty and care to the corporate shareholders. VP is an insider
Director Directors have a fiduciary obligation of loyalty and care to the corporate shareholders. Director is an insider
Outside Counsel Are also considered insiders with a duty to the company.
Collin As agents or servants of a corporation, employees have a duty of loyalty. Collin is an insider.
Brown Brown has a duty to Collin not to divulge the information he has just received which Brown knows is confidential. Brown is more or less an outside counsel. Brown is an insider.
Calloway Calloway was not told the non-public information. In addition, Calloway had to duty to Brown. Usually brokers are usually able to analyze the market better than private individual investors. Since Calloway was not told the private information, Calloway can argue that the reason why he agreed to trade was because of advice from a more knowledgeable person on financial situations. There is no added information which suggests that Calloway knew that they will be trading on non-public information. Unless it can be proven that Brown said something like “ We should trade, but I cannot say why”, then Calloway is not liable.
The Supreme Court has held that a trade based on material nonpublic information is illegal only if there is a breach of duty by the person trading; or if the person trading is the recipient of a tip—a piece of inside information—there must be a breach of duty by the person who gave the tip.
Based on the above analysis, it is quite clear that all except Calloway are definitely liable for carrying out insider trading especially because they have a duty to the company. In Calloway’s defense, his trade is not necessarily based on the tip from Collin, but from a market analysis from his broker.