LEGL Chapter 17

Question 1

What is under the Howey Test?

Answer 1

-an investment of money
-in a common enterprise
-with a reasonable expectation of profit
-based on the efforts of others

Question 2

what happens if it meets all four requirements of the Howey test?

Answer 2

it is a security

Question 3

What is SEC v W.J. Howey Co. (1946) (investment contract) about?

Answer 3

W.J. Howey owned orange farms and planned to sell one acre lots and lease the people who own the one acre plots would lease it back to the W.J. Howey. the investments ended up not being profitable.

Question 4

why did people end up suing W.J. Howey?

Answer 4

because the investments were not profitable

Question 5

what applies to the initial sale of the security ?

Answer 5

securities act of 1933

Question 6

what documents are required under the securities act of 1933?

Answer 6

registration statement and prospectus

Question 7

what are the sanctions for violating the securities act of 1933?

Answer 7

criminal punishment or civil liability

Question 8

what is a registration statement?

Answer 8

detailed disclosure of financial information about the issuer filed with the SEC

Question 9

what is the pre-filing period?

Answer 9

issuer may only engage in preliminary negotiations and agreements with underwriters

Question 10

what is the waiting period?

Answer 10

issuer may only solicit buyers or receive offers to buy (but cannot accept)

Question 11

what is the post effective period (20 days after)?

Answer 11

issuer may sell securities

Question 12

what is prospectus?

Answer 12

contains key information contained in the company’s registration statement

Question 13

who is the prospectus provided to?

Answer 13

interested investor

Question 14

who are the regulated parties under the securities act of 1933?

Answer 14

issuer
underwriter
controlling person
seller

Question 15

what is an issuer?

Answer 15

individual or business offering a security for sale to the public

Question 16

what is an underwriter?

Answer 16

anyone who participates in the original distribution of securities by selling securities or guaranteeing their sale

Question 17

what’s an example of an underwriter?

Answer 17

investment bank

Question 18

who is the controlling person?

Answer 18

is one who controls or is controlled by the issuer

Question 19

who is the seller?

Answer 19

anyone who contracts with a purchaser or who is motivating influence that cause the purchase transaction to occur

Question 20

what is an example of a seller?

Answer 20

broker

Question 21

how is liability imposed?

Answer 21

criminal liability (section 24)
civil liability (section 11 & 12(A))
civil liability (section 17)

Question 22

what is willful violation of the act or fraud in the initial offer or sale of securities ?

Answer 22

criminal liability (section 24)

Question 23

criminal liability (section 24) is punishable by…

Answer 23

fines or imprisonment

Question 24

where are the actions of criminal liability (section 24) brought?

Answer 24

by Department of Justice

Question 25

what is civil liability (section 12(a)(1))?

Answer 25

liability for failure to file registration statement

Question 26

what is civil liability (section 11)?

Answer 26

liability for false or misleading registration statement

Question 27

what is civil liability (section 12(a)(2))?

Answer 27

liability for false or misleading prospectus or other interstate commerce communication (by mail, telephone, internet)

Question 28

what is civil liability (section 17)?

Answer 28

imposes civil liability for using any device, scheme, or artifice or fraud in the initial sale of security

Question 29

what section is the catchall for the fraud not picked up by the other sections?

Answer 29

section 17

Question 30

what does the securities exchange act of 1934 regulate?

Answer 30

regulates transfer or securities AFTER the initial sale (secondary distribution)

Question 31

what act created the Securities and Exchange Commission (SEC)?

Answer 31

Securities Exchange Act of 1934

Question 32

what is the primary anti fraud law and rule relating to the secondary distribution of securities ?

Answer 32

section 10(B) AND Rule 10B-5

Question 33

what law allows investors to sue?

Answer 33

Section 10(B) and Rule 10B-5

Question 34

who is liable under section 10(b) and rule 10b-5?

Answer 34

parties directly connected to the sale of securities are liable

Question 35

to win a case under section 10(b) and rule 10b-5, the plaintiff must prove...

Answer 35

material misrepresentation of omission by defendant scienter (intent) connection between misrepresentation/ omission and the transaction reliance on the misrepresentation/ omission economic loss loss causation

Question 36

what is materiality under 10(b) and rule 10b-5?

Answer 36

depends on the significance a reasonable investor would place on the withheld or misrepresented information

Question 37

what is the theory for insider trading =fraud under section 10b-5 ?

Answer 37

trading on insider information is deceptive because the insider abuses the relationship of trust

Question 38

what is insider trading?

Answer 38

the sale or purchase of securities by individuals privy to non-public material information based upon her special relationship with the corporation

Question 39

who is an insider?

Answer 39

include officers, directors, employees, and professionals in fiduciary relationships with the firm AND tippees

Question 40

what is a tippee?

Answer 40

a person who learns non public information from an insider

Question 41

what case is about the misappropriation theory?

Answer 41

US v O'Hagan

Question 42

what is the misappropriation theory?

Answer 42

a person commits fraud in connection with a securities transaction

Question 43

what did O'Hagan owe?

Answer 43

a duty of trust and confidence to his law firm and its clients

Question 44

who is an insider under section 16?

Answer 44

person who owns more than 10 percent of any security AND is a director or officer of the issuer of the security

Question 45

what does section 16 prohibit?

Answer 45

short-swing profits (profits made within a six month time period)

Question 46

what are blue sky laws?

Answer 46

state statutes designed to protect the public from the sale of fraudulent stocks and bonds

Question 47

what do state blue sky laws protect?

Answer 47

the potential investor from buying risky securities without financial and other information

Question 48

what act provides a model for blue sky laws?

Answer 48

uniform securities act of 1956

Question 49

what do state blue sky laws apply to?

Answer 49

to securities subject to federal laws and securities exempt from federal statutes

Question 50

what is the primary purpose of the Sarbanes Oxley Act of 2002?

Answer 50

to ensure accuracy and integrity in the financial reporting of public companies

Question 51

who does SOX apply to?

Answer 51

to all public companies in the US and international companies registered with the SEC

Question 52

what created the public company accounting oversight board?

Answer 52

SOX

Question 53

what does the PCAOB consist of?

Answer 53

five members appointed by SEC commissioners

Question 54

what does the PCAOB do?

Answer 54

monitors accounting rims that audit public companies

Question 55

what does section 302 of SOX require?

Answer 55

requires CEOs and CFOs to certify the accuracy of the quarterly and annual financial statements

Question 56

what does section 404 of SOX mandate?

Answer 56

mandates the certificate of internal financial controls

Question 57

what indicates the positive impact of SOX?

Answer 57

decline in restatements of financial reports

Question 58

what are the whistleblower protections under SOX?

Answer 58

encourages individuals to report corruption whistleblowers can recover civl damages improperly terminated employees can be reinstated

Question 59

what addressed many issues of financial reform?

Answer 59

Dodd frank Wall Street reform and consumer protection act of 2010

Question 60

what is required under the Dodd frank Wall Street reform and consumer protection act of 2010?

Answer 60

required safety and soundness measures (stress testing, liquidity requirements) for large financial institutions

Question 61

what did congress authorize to achieve goals of Dodd-frank act?

Answer 61

the creation of new administrative agencies