With this subtitle, you’re probably going, huh? "Tippers and Tippees," what’s that? Well, now that you have a basic understanding about insider trading and misappropriation, and the differences between the two, let’s put this all together in a situation where someone is ""tipped off" about inside information.
What does it mean to be "tipped off?" It means that one person tells another person about inside information. It can happen in different ways and through a chain a people – where one person tells another person and that person tells another person, etc. With that said, keep in mind that every person in the "chain" is either a tipper or tippee, or both. Let’s take a look at tippers and tippees.
- Tipper – individual who has received material corporate information and passes it on to a tippee
- A tipper can be liable for the acts of a tippee
- Tippee – individual who receives material corporation information by a tipper
- A tippee is only liable for the acts/omissions that he or she takes as a result of the information learned from the tipper
If Billy buys stock based on the inside information he heard at the meeting, he would be liable for insider trading because he’s an insider (e.g. he’s a director). Now, assume Billy tells his wife about the inside information and she acts on that inside information (e.g. buys or sells stocks). Here, Billy's wife would be liable for misappropriation. That’s because Billy’s wife is not an insider.
Billy is a "tipper" in this example because he told his wife about the inside information. Billy’s wife is "tippee" because she acted on the inside information.
Now, assume that Billy's wife tells her friend Allison, and Allison also act on the inside information and buys some stock. Here, Billy's wife would be both a tipper and tippee. That’s because Billy’s wife received information from Billy as a tippee and gave inside information to her friend Allison as a tipper. And Alllison is only a tippee. That’s because Allison only received inside information and she didn’t tell anyone else.
Okay, so that’s probably a mouth full! Now, you can probably imagine how a law school exam on this stuff might go… But if you followed everything (or mostly everything) in this article you now know more than the vast majority of people on how "tipping" works in insider trading situations. And if there’s anything to learn from all this – it pays not to gossip!
Finally, let’s wrap up this article with some key points to keep in mind.