The president of a publicly held supermarket chain negotiated the sale of the company to a larger competitor at a substantial premium. The president told his spouse and cautioned her against revealing the information to the public. The information was passed through several family members and eventually to Loeb, who was the husband of the president’s niece. Loeb informed his stockbroker, Chestman, that he had information about a certain stock that would be profitable for his company’s investors. Chestman purchased the stock for himself and for several clients who had given him general authorization to trade on their behalf.

When the SEC charged Chestman with insider trading, he defended on the basis that Loeb had not breached any fiduciary duty and thus no violation of 10b-5 had occurred.

CASE QUESTIONS

1. Who prevails and why?

2. Should the rules for insider trading among family members be different? Why or why not?