would completely prevent diaper rashes L a w

would completely prevent diaper rashes L a w

Adair Products Inc., a publicly traded company, is a baby care products company based on Seattle, Washington. The company has an active research and development department. in June 2011, Walter, one of the company’s R&D scientists, conducted preliminary tests on a synthetic material that could potentially be used to manufacture baby diapers that would completely prevent diaper rashes. If the tests results are confirmed, it would be a huge breakthrough with enormous commercial potential.

Walter reports the preliminary results of the tests to Skylar, Adair’s CEO. He also informs her that he expects to have more advanced test results by November 2011, and that he is optimistic that the advanced test results will confirm his preliminary findings. On July 1, 2011, Skylar sends an intraoffice memo to all employees of the company requesting complete secrecy as to the tests.

On July 15, 2011, Adair’s Board of Directors grants 10,000 shares of the company’s restricted stock to Skylar. At the time Skylar accepts the shares, the Board of Directors does not yet know about Walter’s test results.

As Walter predicted, on November 15, 2011, the preliminary test results are confirmed. After the results are confirmed, but before public disclosure of the breakthrough, Walter tells his friend Hank (who works for another baby care products company) about the tests one night while they were out for dinner at their favorite restaurant. Walter shared this information with Hank in the hopes that Hank would one day share with Walter similar market-sensitive information about his company. The next day, Hank contacts his stockbroker and purchases shares of Adair’s stock. Months go by, and Hank never reciprocates – he does not share any information with Walter about his company’s products or developments.

Discuss whether Skylar, Walter or Hank have any liability under Rule 10b-5. Explain your answer citing appropriate rules and caselaw.

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