Bus Org II Flashcards
33 Act and 34 Act
(start of every essay)
The purpose of security regulation is to protect investors from abuses by company insiders and professionals. Section 33: focuses on primary transactions involving initial issuers (IPOs) offering to sell securities to an investor. Section 34: focuses on secondary transactions, protects investors and force companies to disclose information that investors find important.
RULE 10b-5 (anti-fraud provision)
It shall be unlawful for any person to directly or indirectly, by the use of interstate commerce, mails, or national securities exchange to commit fraud by any untrue statement of material fact or omission of material fact in connection with the purchase or sale of any security.
Elements to RULE 10b-5
(1) Material misrepresentation of or omission by the defendant
(2) In connection with the purchase or sale of the security.
(3) Scienter (intent to deceive, defraud, or manipulate the market)
(4) Reliance
(5) Economic Loss; and
(6) Loss Causation
Conduct and Instrumentality must be shown also.
Breakdown of Elements to RULE 10b-5
Conduct - plaintiff must show there was deceptive or manipulation conduct. Deceptive conduct occurs when there is misstatement of material fact or an omission when the omitted fact would fix a prior misstatement or incomplete statement
Instrumentality - the fraudulent conduct must have used a means of interstate conduct, such as email, phone, or mail, or the security must be traded on the national security exchange.
Materiality - a statement is material if there is a substantial likelihood that a reasonable investor would find the information important when determining whether to invest or not based on the total mix of available information
In Connection with the Purchase or Sale of the Security - the fraudulent conduct must have been in connection with the purchase or sale of the security
Scienter - the plaintiff must state with particularity that the defendant had a bad motive, or the intent to deceive, defraud, or manipulate the market. The plaintiff may also claim there was a reckless disregard for the truth or falsity of the statement
Reliance - a plaintiff would have to show they relied on the misstatement. The plaintiff must show the “but for” the material misstatement or omission, the plaintiff would not have entered into the transaction or would have entered under different terms. When there is an omission, this is rebuttably presumed as reliance
Economic Loss - the plaintiff must show they suffered an economic loss
Loss Causation - causal relationship between the defendant’s material misstatement of facts and the damages suffered by the plaintiff (or omission of material fact satisfies this element)
RULE 10b-5 (provision against insider trading)
Insider trading occurs when an officer, director, or other person who has a fiduciary relationship with the corporation buys or sells the company’s securities while in possession of material nonpublic information
Theories to RULE 10b-5 (provision against insider trading)
Classical Theory - a corporate insider is liable for insider trading when they trade on the corporation’s securities while in possession of material nonpublic information. An insider can be an executive, director, employee, or shareholder with material information about the company.
Misappropriation Theory - occurs when an outsider is given material non-public information, regarding a corporation, and trades on that corporation’s shares, while the outsider has a duty of confidentiality towards the source of information
Tipper Tippee Liability - a tipper is a person with a fiduciary duty towards the corporation, who breaches this duty for a personal benefit, by disclosing material nonpublic information to a third party known as a tippee, who subsequently trades. A personal benefit may be pecuniary, a gift, or reputational.
Remedies to RULE 10b-5 (provision against insider trading)
the inside trader is disgorged of the profits from the insider information used to trade
Eavesdropping and Duty of Confidentiality
Eavesdroppers unintentionally accessing confidential information are generally not liable unless they exploit a known duty.
SECTION 16(B)
Section 16(b), commonly referred to as Short-Swing Profit under the Securities Exchange Act of 1934, prohibits specific individuals from profiting by purchasing company stock within a 6-month period.
A director, officer, or more than 10% shareholder must return to the corporation any profit realized from any “purchase and sale” or any “sale and purchase” of the corporation’s stock within six months.
Remedies to Section 16(b)
Disgorgement of profits. To determine the amount due to the corporation, match the lowest purchase price against the highest sale price.
