Federal Security Laws

Question 1

Rule 10b-5

Answer 1

Prohibits FRAUD or MISREPRESENTATION in CONNECTION with the PURCHASE or sale of any of any security (debt or equity)

Encompasses misrepresentations and insider trading

NOTE: P’s are limited to the SEC and private individuals who BOUGHT OR SOLD

Question 2

Insider Trading Misappropriation Theory

Answer 2

Person who owes a DUTY OF TRUST AND CONFIDENCE to the source of info has a duty to abstain or disclose

NOTE: can be liable if source is a third party and you owe a duty to that party

Question 3

Materiality

Answer 3

Materiality is a SUBSTANTIAL LIKELIHOOD that a REASONABLE INVESTOR would consider it important when making an investment decision

Question 4

Tipping

Answer 4

If insider gives a tip of inside info to someone else who then trades on the info, TIPPER can be liable if he got ANY BENEFIT.

Tippee liable only if tipper breached a duty and TIPPEE knew that tipper was breaching a duty

Question 5

Elements of 10b-5 misrepresentation claims

Answer 5

(1) Fraudulent conduct (materiality and scienter);
(2) in connection with the purchase or sale of a security by P (note D does not need to buy or sell);
(3) In interstate commerce (telephone or mail will suffice);
(4) reliance (generally presumed if material); AND
(5) Damages

Question 6

Scienter

Answer 6

D must have had INTENT to deceive, manipulate, or defraud

Recklessness is also probably sufficient

NOTE: NEGLIGENCE IS NOT SUFFICIENT

Question 7

Reliance

Answer 7

requirement is PRESUMED in public misrepresentation and nondisclosure cases

Question 8

Damages

Answer 8

Limited to the difference between the price paid (or received) and the average share price in the 90 day period after corrective info is disseminated

Question 9

Section 16(b)

Answer 9

Requires recovery by the CORP of profits realized by any DIRECTOR, OFFICER, OR CONTROLLING SH from the purchase and sale, or sale and purchase, of any security within a six-month period

Applies only to Reporting corporations

STRICT LIABILITY. no scienter required

Question 10

Reporting Company

Answer 10

publicly held corp with more than $10M in assets AND (1) whose shares are traded on a national exchange; OR (2) at least 2K Sh (or 500 nonaccredited)

Question 11

Accredited Investor

Answer 11

high income or net worth individuals that can handle the risk

Question 12

Controlling SH

Answer 12

one who owns 10% at time of purchase AND sale

Question 13

Damages in 16(b) violations

Answer 13

Recoverable profit is measured by matching the HIGHEST SALES PRICE against the LOWEST PURCHASE PRICE during the xis month period

Question 14

Public Company Audit Committees

Answer 14

SOX requires 1934 Act reporting companies to establish an AUDIT COMMITTEE comprised of board members

Committee oversees the work performed by the external public accounting firm and establishes INTERNAL PROCEDURES for receiving and handling complaints

Question 15

Formalities required under SOX

Answer 15

1934 Reporting companies must have their CEO or similar person certify in each report that: (1) officer has REVIEWED the report; (2) based on the officer’s knowledge, report is TRUE and does not contain MATERIAL OMISSIONS; and (3) the signing officer is RESPONSIBLE For establishing internal controls and has evaluated the controls within 90 days prior to the report

Question 16

Damages in insider trading cases

Answer 16

Civil suit for damages of up to 3X GAIN (applies to tippers an tippees)

Criminal proceedings may be fined up to $1M and jailed for up to 10 YEARS (applies to tippers and tippees)