Federal Securities Law

Question 1

Rule 10b-5: Aimed at Deceit

Answer 1

Under 10b-5, its unlawful for any person (directly or indirectly), in connection with a security transaction to:
1. employ device to defraud,
2. make any untrue statement/omission of material fact, or
3. engage in any fraudulent practice.

Prima Facie Case requires:
1. fraudulent conduct (materiality + scienter/intent to deceive)
2. in connection with security purchase/sale
3. use of a means of interstate commerce, and in some cases
4. reliance, and
5. damages

Question 2

Insiders

Answer 2

those who have relationship of trust and confidence with issuer, SHs, or source of nonpublic info.

Question 3

Misappropriation

Answer 3

person who owes duty of trust and confidence to source of the info has duty to abstain or disclose.
Ex: lawyer who discovers confidential info about client engaging in merger

Question 4

Tippers and Tippees

Answer 4

Insider passes along material inside info to someone else who trades based on it.
- Tipper can be liable if tip was made for any improper purpose
- Tippee liable only if tipper breached duty and tippee knew or should have known

Question 5

10b-5 Requirements

Answer 5

1. Materiality: material if there’s substantial likelihood that reaosnable investor would consider it important
2. Scienter: conduct undertaken by D with intent to deceive, manipulate, or defraud (also recklessness)
3. Reliance: P must prove they relied on D’s fraud.
4. Damages: P must show D’s fraud caused damages

Question 6

Section 16(b): Aimed at Speculation

Answer 6

Recovery by corp of profits gained by certain insiders from buying/selling company stock.
- Requires surrender to corp of any profit realized by D/O, or SH with 10%+ for sale/purchase of any equity security within 6 month period
- Recoverable profit determined by matching highest sales price against lowest pruchase price during period (order of buy/sell does not matter)