Drew is an officer of Energy Fuel, Inc. Drew knows that an Energy engineer recently developed a new, inexpensive method for converting hydrogen into fuel. Drew takes advantage of this information to buy Energy stock from Gert and, after the discovery is announced, to sell the stock to Holly at a profit. Gert claims that this is a violation of federal law. Is Gert correct? If so, what federal law has Drew violated, and what are its possible penalties?

Question

What will be an ideal response?

Answer 1

Yes, assuming that Gert did not know about the engineer's invention before it became public knowledge, Gert is correct. Drew has violated the Securities Exchange Act of 1934. This federal law extends liability to officers and directors 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, Drew used the undisclosed information about the new hydrogen conversion method to buy Energy stock from Gert, who apparently was not aware of the development at the time of the deal with Drew, and then sell it at a profit to Holly 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.