Federal Securities Law

Question 1

What happens with a debt security?

Answer 1

Investor lends capital to the corp, to be repaid (with interest) as specified in the agreement.

Question 2

What is the debt holder’s relations with the corporation in a debt security?

Answer 2

Creditor (not owner)

Question 3

With a debt security, when the debt is secured by corporate assets its called a _____. When unsecured, it’s called a ______

Answer 3

BOND

Debenture

Question 4

What happens with an equity security?

Answer 4

Investor buys stock from the corp, which generates capital for the business.

Question 5

What is the equity holder’s relationship to the corp?

Answer 5

Owner, NOT creditor.

Question 6

Rule 10b-5 prohibits ____ or ______ in connection with the purchase or sale of any security (debt or equity).

Answer 6

Fraud

Misrep

Question 7

To be actionable, a claim under 10b-5 must, at some point, use an instrumentality . . .

Answer 7

Of interstate commerce.

Question 8

What types of transactions are covered under 10b-5? (3)

Answer 8

Misrep of material info (fraud)

Insider trading

Tipping

Question 9

What is insider trading?

Who can be held liable?

Answer 9

Trading securities on the basis on material inside information.

Only those whose job gives them access to secrets can be liable

Question 10

A person with information to business secrets has what duty? To either abstain from this or to ensure this

Answer 10

Abstain from trading; or

ensure disclosure so everybody is on the same footing

Question 11

What is tipping?

Answer 11

An insider passes along material information for a wrongful purpose

Question 12

In addition to requiring the use of interstate commerce and a certain type of impropriety (fraud, insider trading, tipping), what other 3 elements for a 10b-5 claim require?

Answer 12

Materiality. The misrep or omission MUST concern something a reasonable investor would consider important in making an investment decision.

Scienter (intent to deceive, manipulate, or defraud. Reckless ok, Negligence will not suffice)

Reliance.

Question 13

Who are two possible plaintiffs in a 10b-5 case?

Answer 13

SEC

Buyer or seller who was defrauded.

Question 14

In order for a private buyer or seller to bring a claim under 10b-5, what must be true?

Answer 14

They must have bought or sold securities based on D’s fraudulent behavior.

Question 15

Insider learns in his corporate capacity that Corp will be fined. Before news is made public, Insider sellers his stock at $20/share. After the news goes public, the stock price falls to $8/share. Who may sue and for what?

Answer 15

Those who bought his stock can sue for $12/share.

Question 16

Widget Inc issues a press release that Buffett has expressed an interest in acquiring a major block of stock. The release fails to mention that it is Jimmy, not Warren, who is interested. Because of this press release, Becky does NOT sell her Widget stock. Does Becky has a 10b-5 claim? Explain.

Answer 16

NO. She did not buy or sell based on D’s behavior.

Question 17

Possible Ds to a 10b-5 claim?

Any person, including entities. This includes. . . (3)

Answer 17

Company that issues a misleading press release.

Buyer or seller of securities who misrepresents material info

Buyer or seller of securities who trades on material inside info (when there is a duty to disclose–comes from relationship of trust and confidence with SHers)

Question 18

L, a lawyer for X Co., learns that X Co. is planning to merge with Y Co. She telephones her son-in-law Joe, and urges him to buy X Co. Acting on this tip, Joe buys X Co. L is a what? Why?

Joe is a what? Why?

Answer 18

L is a tipper, because she (1) passed along material inside info in breach of a duty to X, and (2) she benefitted (gifts are benefits).

Joe is a tippee because he (1) traded on the tip, and (2) knew or should have known that the info was improperly passed.

Question 19

A 10b-5 claim for tipping requires both a ___ and ____

Answer 19

Tipper and tippee

Question 20

If some third party overhears a would be tipper, is he considered a tippee? Explain

Answer 20

No. There is no intent to deceive here. No Scienter

Question 21

Section 16(b) is aimed at speculation by which three parties:

Answer 21

Directors

Officers

10% SHers

Question 22

16(b) claims are ____ liability

Answer 22

Strict

Question 23

16(b) provides for the recovery of “profits” gained by certain insider from buying and selling the company’s stock. The theory is that it is . . .

Answer 23

Bad for market confidence to have these insiders buying and selling their own company stock.

Question 24

Who is the plaintiff in a 16(b) action?

Answer 24

The corp.

Question 25

Under 16(b), the corp can sue for what?

Answer 25

The profit made by insiders.

Question 26

16(b) only applies to which type of corporations?

Answer 26

Reporting.

Question 27

What does it mean for a corp to be a “reporting” corp for purposes of 16(b)? 3 elements

Answer 27

Listed on a national exchange

At least 500 SHers

At least $10m in assets

Question 28

Types of Ds in a 16(b) claim? 3

Answer 28

Director (when she bought or sold)

Officer (when she bought or sold)

SHer who owns over (10%) when she bought and sold)

Question 29

16(b) applies to buying AND selling stock within a ___ month period

Answer 29

6

Question 30

All profits from short-swing trading (6 months) are recoverable by the corp under 16(b). If, within 6 months, before OR after any sale, there was a purchase at a lower price then there is a profit. Thus, the _____ of buying and selling is _____

Answer 30

ORDER

IRRELEVANT

Question 31

**In the real world, we have a profit when we BUY low and then SELL later at a higher price.

Under 16(b), we have a profit even if we SELL first and, within ___ months after that BUY at a ____ price. This is the way BEs love to raise this issue

Answer 31

6 months

Lower

Question 32

D is a director of Acme, which is a reporting corp. In 2011, D bought 700 shares of Acme stock for $10/share. In January of 2015, D sold 700 shares for $6/share.

In March 2015, D bought 200 Acme shares for $1/share. What result? How is that calculated?

Answer 32

Doesn’t look like profit in real-world terms, but under 16(b), D owes the corp $1000 in “profits” he just made.

Question 33

Key to applying 16(b)? Focus on the ____

Answer 33

Sale.

Question 34

In a 16(b) question, focus on the sale. Then ask two questions. If either is YES then there has been a profit which must be paid back.

Answer 34

Did she buy at less than the sale price six months before? or

Did she buy at less than the sale price six months after

Question 35

D is a director of Acme, which is a reporting corp. In 2011, D bought 700 shares of Acme stock for $10/share. In January of 2015, D sold 700 shares for $6/share.

In March 2015, D bought 200 Acme shares for $1/share. D is a director of Acme, which is a reporting corp. In 2011, D bought 700 shares of Acme stock for $10/share. In January of 2015, D sold 700 shares for $6/share.
In March 2015, D bought 200 Acme shares for $1/share.

Doesn’t look like profit in real-word terms, but under 16(b), D owes the corp $1000 in “profits” he just made.

How is that calculated?

Answer 35

There was a “profit” of $5/share. Within six months, D bought 700 shares and sold 200.

We use the number 200 as our multiplier, because this is the largest number of shares she both bought AND sold in the 6 months.

Thus, 200 shares times $5/share gets us to our answer of $1000 in profits.