Pg 49

Question 1

What is the section of the securities exchange act that applies to insider trading?

Answer 1

10b-5 of the securities exchange act of 1934

Question 2

What are all of the things that are prohibited by insider trading?

Answer 2

This catches it all:

• any deceptive or manipulative act in connection with the sale or purchase of a security
• any untrue statement of a material fact or omission of a material fact that is necessary in connection with a purchase or sale of a security

Question 3

What specifically is insider trading?

Answer 3

It is unlawful for anyone to use interstate commerce, the mails, or any facility of any national security exchange to:
– defraud
– make any untrue statement of a material fact or omit a material fact that is necessary, or
– engage in any acts or course of business that operates as fraud or deceit on any person

Question 4

What is the reasoning behind the rule against insider trading?

Answer 4

Directors and officers have a duty to be attentive and sufficiently well-informed and to have a rational basis for their decisions. So if an insider communicates with someone outside of a corporation, and that impacts stock transactions, and that is a big problem

Question 5

What is the specific case that insider trading came from?

Answer 5

A corporate insider was buying up stock from outside shareholders at a low price knowing that the price would soon rise

Question 6

Do penny stocks count for insider trading?

Answer 6

Yes because they are traded on the national security even though they are not listed as stocks

Question 7

If a stockholder lives in another state and uses the mail to defraud someone, does insider trading apply?

Answer 7

Yes, because it was a false statement that used interstate commerce, the mails, or any facility of a national security exchange.

Question 8

If you use a cell phone, can insider trading apply?

Answer 8

Yes, because it was a false statement that used interstate commerce, the mails, or any facility of a national security exchange.

Question 9

Is it insider trading if an insider trades after the market has had a chance to react to the information?

Answer 9

No, as long as you give time for a market reaction

Question 10

If a reporter at a press conference hears information, runs to the phone and trades on it before reporting on it, is that insider trading?

Answer 10

Yes, because even though members of the general public were present, there was no opportunity for the market to react first

Question 11

What are the two major prohibitions on communications of insiders to those outside of a corporation?

Answer 11

• fraud, misrepresentation, and deceptive actions

– untrue statements

Question 12

What is involved in the untrue statements portion of insider trading?

Answer 12

Both affirmative untrue statements and omissions of required disclosures

Question 13

What are the different elements for an untrue statement to be actionable as insider trading?

Answer 13

- materiality
– scienter
– standing
- connection
– causation
– damages

Question 14

What is involved in the materiality element of insider trading?

Answer 14

If you make an untrue statement or omission it must be about something that a reasonable investor would consider significant to make an investment decision.

Question 15

If the CEO projects continuing decline in sales for the future, but the corporation sells some real estate and shows profit for that quarter because of that sale, what needs to happen to avoid insider trading?

Answer 15

The company must release information that the profit was from the sale and not because business is better

Question 16

What is involved in scienter with regard to an untrue statement for insider trading?

Answer 16

– statements or omissions made by someone that is aware they are untrue and likely to influence investor behavior
– reckless statements or omissions
– intentional or wilful conduct meant to deceive or defraud investors

Question 17

Is it necessary that there be an intent to profit in order to be liable for insider trading?

Answer 17

No

Question 18

What organizations always have standing to bring suit for insider trading?

Answer 18

• the SEC has standing to bring civil actions

- the DOJ has standing to bring criminal charges

Question 19

What is the rule for being able to bring charges against someone with regard to insider trading for standing?

Answer 19

The Birnbaum rule for private causes of action says that only purchasers and sellers of securities that are impacted by the statement or omission can bring suit

Question 20

If you plan to make a trade that you don’t execute or your stock options are devalued by a statement or omission of someone but not actually exercised, do you have standing for insider trading?

Answer 20

No, that is not enough because there must be actual harm suffered by the investors, not speculation about harm that could’ve been caused

Question 21

Is it possible to be liable for insider trading even though you’re not a purchaser or a seller of securities?

Answer 21

Yes, if you influence the market through a false press release or you prepare a prospectus with false statements

Question 22

What are the different ways that charges or suit can be brought for insider trading?

Answer 22

• SEC: can bring civil enforcement actions with no SOL.
  – DOJ: can bring criminal charges with no SOL
  – Private COAs: can be brought if:
• brought within two years after the violation is discovered, but not more than five years after it was committed
• the private party bought and sold securities and suffered an actual loss that is not speculative
• there was more than negligence involved (reckless or intentional)
• some level of scienter (knowledge/awareness)
• deception
• materiality