Ridley is an officer of Sun Watts, Inc Ridley knows that a Sun Watts engi¬neer recently developed a new, inexpensive method for collecting, storing, and converting solarpower into fuel. Ridley takes advantage of this information to buy Sun Wattsstock

Question

from Taylor and, after the discovery is announced, to sell the stock to Ulrich at a profit. Taylor claims that this is a violation of federal law. Is Taylor correct? If so, what federal law has Ridley violated, and what are its possible penalties?

Answer 1

Yes, assuming that Taylor did not know about the new method before it became public knowledge, Taylor is correct. Ridley has violated the Securities Exchange Act of 1934.
The Securities Exchange Act of 1934ex¬tends li¬ability to officers and di-rectors in their per¬sonal transactions for tak¬ing advantage of inside informa-tion when they know it is unavail¬able to the persons with whom they are dealing.
In this problem, Ridley used the un¬disclosed information about the new collection, storage, and conversion method to buy Sun Wattsstock from Taylor, who apparently was not aware of the devel¬op¬ment at the time of the deal with Ridley, and then sell it at a profit to Ulrich when the method was revealed to the public.
There are both criminal and civil penalties for violations of this act. Criminal punishment includes fines up to $5 million, imprisonment up to twenty-five years, or both. Civil sanctions include triple the profits gained or the loss avoided, and rescission of the contract to buy securities.