Question

Louie is president and a director of Gold Strike, Inc. a publicly traded gold exploration company. On June first he gets a confidential report from his engineers that they have discovered a very rich vein of gold ore that they project to be worth over a billion dollars. Without telling anyone of the discovery begins buying shares of Gold Strike. A rumor starts that Gold Strike has made a huge discovery and Louie denies that they have made a discovery. He continues to buy stock throughout the month of June. Then on July fifth Louie publicly announces the discovery and the stock price triples making Louie a very rich man. Shareholders discover that Louie withheld the information and profited by his silence and subsequent denial. They want to sue him to get back his profits and for damages for being denied the right to take advantage of the information. May they do this? If so, how?

Answer 1

The given scenario is case of Insider Trading. It refers to the trading of a company's stocks by individual with access to confidential or non-public information about the company. Taking advantage of this privileged access is considered a breach of the individual's fiduciary duty. Such activities are required to be reported to the Securities and Exchange Commission (SEC) or be publicly disclosed.

Section 16 of the Securities and Exchange Act of 1934 provides that when an insider buys a company's stock and sells it within 6 months, all of the profits must go to the company. The shareholders need to prove that Louie had a fiduciary duty to the company and intended to personally gain from buying shares based upon the insider information.

How to report such matter

1. The shareholders should report the matter to an internal process or any other such function which monitors and prevents instances of insider trading.

2. Reporting the same to media.

3. Reporting to a regulatory body, i.e. Securities and Exchange Commission (SEC)