Chapter 28 - Securities Law: Secondary Markets

Question 1

Securities Act of 1934

Answer 1

• Governs trading of securities after the initial issuance (IPO)

Question 2

Rule 10b-5

Answer 2

-If involved in the selling of securities, you can’t mislead, omit any material fact, be deceptive, etc.

Question 3

Insider Trading

Answer 3

• INSIDER - someone who is a member of the board of directors, executive officers, and some stockholders - who know info about a company that is not public info.

Question 4

SEC v. Texas Gulf Sulphur

Answer 4

• Engineer sampling sulphur and you found other minerals so started to buy some shares in the company.
• Upper management told those who knew to keep it quiet.
• A few individuals were charged for insider trading.
• Manipulated the value of stock based upon the information not public.
• SEC won.

Question 5

Short-Swing Profits

Answer 5

Occurs if an insider purchases or sells stock of the company within a six month period. If made a profit, it goes to the company.

Question 6

Outsiders - Misappropriation

Answer 6

• Lawyers, Accountants, etc.

- May come across company information because of their role - they need to be careful.

Question 7

Tipper-Tippee

Answer 7

• Friends of insiders can be in violation if given a “tip”

- Ex. I was told something so I go trade. I am the tippee and could get in trouble.

Question 8

Pump and Dump Schemes

Answer 8

• Get on the internet and buy stock for 5 cents a share. I go on blog and say everyone should hurry and buy stock saying it will increase (pump it up even if not true) and then you sell/dump it.

Question 9

Violations of the 1934 Act

Answer 9

• Criminal Penalties (time in jail)
• Civil Penalties
• Must have state of mind/intent to deceive = SCIENTER