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Question 1

What is involved in the element of making an untrue statement with regard to insider trading that calls for connection?

Answer 1

There must be some connection between what motivated the sale or purchase and the statement. This is not causation and the statement or omission doesn’t have to have been directed at the investor.

Question 2

If someone makes a misleading statement to potential buyers of stock to drive up sales of a corporation’s product that ends up motivating investors to buy securities, is that enough of a connection for insider trading?

Answer 2

Yes

Question 3

If someone is at an electronics show and an officer of a corporation makes misleading statements to retailers in order to build excitement about the corporation’s product, and an investor watches the news of those statements and buys shares in the corporation, would that be enough to be a connection for insider trading?

Answer 3

Yes, because the officer’s statements were in connection with the investor’s purchase because he bought stock after learning about those statements. It doesn’t matter who the officer was addressing or how the investor learned about the statements.

Question 4

What are the two different types of causation with regard to insider trading?

Answer 4

• transaction causation

– loss causation

Question 5

What is transaction causation for insider trading?

Answer 5

Actual or but-for causation. The plaintiff has to show that but for the misleading statement or omission, the plaintiff would’ve never bought or sold the securities. He must’ve relied on the defendant’s misleading statement or omission. Or this could involve fraud on the market

Question 6

What is fraud on the market as an element of transaction causation for insider trading?

Answer 6

Making misleading statements or omissions that have such an impact on the market as a whole that they defraud investors without direct reliance.

Question 7

What is involved in loss causation as a type of causation for insider trading?

Answer 7

The loss that was suffered by the plaintiff must have been caused by that transaction. This requires a direct, causal link between the loss and the misleading statement or omission. This is essentially proximate cause

Question 8

What is required for damages for insider trading?

Answer 8

The plaintiff must’ve suffered an actual loss that can be reduced to a specific dollar figure

Question 9

What are the two main types of liability with regard to insider trading?

Answer 9

– primary liability

– secondary liability

Question 10

What is primary liability with regard to insider trading?

Answer 10

This is primary participants or people that directly make a material statement, omission, or a manipulative act.

Question 11

What are the two different approaches to a material misrepresentation for insider trading?

Answer 11

• substantial factor approach

– bright line approach

Question 12

If you are determining if someone has made a material misrepresentation for insider trading, is it better to use a substantial factor approach or the bright line approach?

Answer 12

Discuss both on an essay because courts are not settled on which one to use

Question 13

What is the substantial factor approach in order to determine if the material misrepresentation has occurred for insider trading?

Answer 13

This asks if the defendant was a substantial participant in making the material statement or omission. Includes: the primary author or drafter of the statement and anyone that edits or reviews it.

Question 14

If a CFO prepares a statement for investors with material misrepresentations in it, and a freelance editor edits it for grammar and punctuation, who are the substantial participants in making that material misrepresentation for insider trading?

Answer 14

Under the substantial factor test, both of them would be because it includes the primary drafter and anyone to edit a reviews the document. Under the bright line approach the editor would not be liable because the statement wasn’t made by him

Question 15

What is involved in the bright line approach to a material misrepresentation for insider trading?

Answer 15

This requires a but-for standard, which means that the statement or omission must be attributed to or have been made by the defendant. Editors would not be primarily liable

Question 16

What is involved in secondary liability for insider trading?

Answer 16

• aiders and abettors

– control persons

Question 17

What is an aider and abettor with regard to secondary liability for insider trading?

Answer 17

Anyone that’s involved in the creation, distribution, or publication of a statement or omission that violates 10b-5. Civil actions can’t be brought against aiders and abettors for 10b-5 violations, but the SEC and the DOJ can bring charges or suit.

Question 18

Who would be considered an aider and abettor with regard to liability for insider trading?

Answer 18

Any freelance editors that edited a CFO statement that made material misrepresentations, a secretary of the CFO that reviews or edits a corporate disclosure document, etc.

Question 19

Who are considered to be control persons with regard to secondary liability for insider trading?

Answer 19

People that actually exercised general control over the activities or operations of a primary participant and had the power or ability to control specific transactions or activities that lead to violations regardless of whether they actually exercised that power or not. Includes: CEOs, officers that supervisor/manage primary participants, lower level managers that do similar functions, director-supervisors of employees, directors, etc.

Question 20

Would an outside director on a corporation’s audit committee that determines the accounting practises of the corporation and the effectiveness of the practises adopted be considered a control person for secondary liability for insider trading?

Answer 20

Yes

Question 21

What is the level of culpability for control persons for insider trading?

Answer 21

They are equally as liable as primary participants

Question 22

What is the affirmative defence that a control person could bring up as an exception to their secondary liability for insider trading?

Answer 22

If they acted in good faith and didn’t directly or indirectly induce the act or violation.

Question 23

What is the disclose or abstain rule for insider trading?

Answer 23

If an insider has material nonpublic information, he must either:
– disclose it publicly before trading in that stock, or
– abstain from trading in that stock

Question 24

Who does the disclose or abstain rule apply to for insider trading?

Answer 24

Only insiders, which means officers and directors

Question 25

What is a way to avoid liability for insider trading but still be able to trade?

Answer 25

If you have an established investment pattern like a dollar cost averaging with such transactions that happen every month, as long as a pattern can be shown, then the person wasn’t acting on the basis of special information

Question 26

What is the controlling influence doctrine?

Answer 26

Self-dealing by a controlling shareholder that dominates a board, even though he doesn’t actually own the corporation, his influence is able to drive the actions of the board, so he is treated as if he had actual ownership because he’s essentially a de facto owner due to his control

Question 27

If an officer of a corporation is with his wife while he’s talking on his cell phone about non-public information regarding the corporation’s financial situation, and he sees his wife write down the information and then tell a coworker on the phone to trade on it, what must the officer do?

Answer 27

Promptly disclose the information publicly through any reasonable means