Ridley is an officer of Sun Watts, Inc. Ridley knows that a Sun Watts engi­neer

Question

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? Also respond to another student's post.

Explanation / Answer

Yes, here the claim of Taylor that this is a violation of the federal law is correct. Here Ridley is buying stock with insider information which the general public are not preview to. Hence Ridley has undue advantage to him. This is because of information asymmetry and the principal-agent problem in finance.

Here, Ridley representing the principal has some more information about the company which will affect stock prices and which are not know to the agent (the retail investor). So Ridley wants to buy this stock at a low price which full knowledge that the stock prices will move up and then sell it at a huge undue profit. This information asymmetry among investor is not fair in stock trading and hence Ridley is in violation of federal law.

"USA enacted a federal ‘lemon law’ (the MagnusonMoss Warranty Act) that protects citizens of all states. Different states have also enacted legislation on similar lines. These specific laws provide consumers with rights exceeding the warranties expressed in purchase contracts. The federal law also provides that the warrantor may be obligated to pay your attorney fees if you prevail in a lemon law suit". (Source: US Fed Laws)

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