Federal Securities Law

Question 1

Six Requirements for 10B-5 Liability

Answer 1

1. Use of an Instrumentality of Interstate Commerce
2. “Security”
3. “In Connection With” Security
4. Materiality
5. Fraud
6. Scienter

Question 2

Types of Securities Covered

Answer 2

1. Orthodox Securities [stocks and bonds]

2. Unorthodox Securities [money in; money out]

Question 3

“Materiality” is defined as:

Answer 3

1. A substantial likelihood
2. that a reasonable investor
3. would consider the information important in deciding whether to buy or sell.

Question 4

“Fraud” is defined as:

Answer 4

1. a misleading statement; or

2. a material nondisclosure if the Dfd has a duty to disclose

Question 5

“In connection with” sale of securities means:

Answer 5

Conduct “affects” securities trades by others. (Whether Defendant sold, or made a misleading press release, etc.)

Question 6

Scienter means

Answer 6

Intent to defraud
Includes recklnessness (for civil) but not negligence.

Question 7

Aiding and abetting liability under 10b-5?

Answer 7

No civil liability for lawyers, accountants, etc.

But the SEC can bring charges

Question 8

Private 10b-5 Cause of Action requirements

Answer 8

1. Standing (Purchaser or Seller of Securities)
2. Reliance (fraud on the market
3. Stricter Scienter requirement (must be cogent and compelling pleading)

Question 9

Affirmative Defense to insider information trading

Answer 9

Adopt a written plan for trading your company’s securities prior to insider information

Question 10

Requirements of 16(b) liability

Answer 10

1. Profitable purchase & sale
2. w/in six months
3. by insider (director, officer, or 10%+ shareholder)
4. of sec. 12 corp

Question 11

Liability for sale of control premium when:

Answer 11

1. Fraud, or Reason to believe buyer will loot corp.
2. Usurpation of Corporate opportunity
3. sale of non-lame-duck directors

Question 12

Tippees (receipt of tips) may be liable under 10b-5 if

Answer 12

They knew, or should have known, that the tipper was breaching a duty