Ridley is an officer of Sun Watts, Inc Ridley knows that a Sun Watts engineer recently developed a new, inexpensive method for collecting, storing, and converting solar power into fuel. Ridley takes advantage of this information to buy Sun Watts stock
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?
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 1934 extends liability to officers and di-rectors in their personal transactions for taking advantage of inside information when they know it is unavailable to the persons with whom they are dealing.
In this problem, Ridley used the undisclosed information about the new collection, storage, and conversion method to buy Sun Watts stock from Taylor, who apparently was not aware of the development 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.
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