Federal Securities Law

Question 1

Debt securities

Answer 1

Investor lends capital to corporation, to be repaid (usually with interest) as specified in the agreement. Debt holder is creditor not an owner of corporation

• Bond: secured by corporate assets
• Debenture: unsecured

Question 2

Equity securities

Answer 2

Investor buys stock from corporation, which generates capital for business. Owner, not a creditor

Question 3

Rule 10b-5

Answer 3

Federal law prohibiting fraud or misrepresentation or nondisclosure in connection with the purchase or sale of any security (debt or equity)

(1) Deal must use “instrumentality of interstate commerce” (mail, telephone, or trade on national exchange)
(2) Type transactions
(3) Materiality (reasonable investor would consider important in making an investment decision)
(4) Possible P (SEC and private action for damages by buyer or seller of securities who was defrauded)
(5) Possible D (Any person including entities: company issuing misleading press release, buyer or seller of securities who misrepresents material info, buyer or seller who trades o n material inside info when duty t disclose, tipper or tippee,
(6) Scienter (D intent to deceive, manipulate, defraud -recklessness may suffice)
(7) Reliance (presumed in public misrepresentation and nondisclosure cases)

Question 4

Type Transactions

Answer 4

(1) Misrepresetnation of material information
(2) Insider trading: trading securities on the basis of material inside information (someone whose job gives access to secrets, with relationship of trust and confidence with shareholders)
(3) Tipping (“insider” passes along material inside information for a wrongful purpose)

Question 5

Tipper

Answer 5

Someone who (1) passed along material inside info in breach of duty to corp, and (2) benefited

Question 6

Section 16(b)

Answer 6

Strict Liability. Fed law providing for recovery by corp of “profits” gained by certain insiders form buying and selling company’s stock within single 6 month period. Theory is that it is badd for market confidence to have insiders buying and selling company’s own stock

• Claim by Corp
• All profits recoverable by corporation (6 months before or after sale)

Question 7

Types of Section 16(b) Defendants

Answer 7

(1) Director (either when bought or sold)
(2) Officer (either when bought or sold)
(3) Shareholder owning over 10% (both when bought and sold)