Securities Fraud

Question 1

The secondary market is when __

Answer 1

investors trade securities with one another

Question 2

The secondary market indirectly impacts the primary market by ___

Answer 2

providing liquidity to investors

Question 3

A liquid secondary market supports the accumulation of ___

Answer 3

large minority blocks by activist SHs without significant price imapct

Question 4

Liquidity helps overcome __

Answer 4

collective action problems

Question 5

How does liquidity impact company’s own stock holdings

Answer 5

If file with SEC can sell additional stock OR buy back

Question 6

Stock and options are used as performance pay for executives because ___

Answer 6

value tracks stock prices

Question 7

When one party has more info than another it reduces ___

Answer 7

liquidity

Question 8

What is the Efficient Capital Market Hypothesis (ECMH)?

Answer 8

liquid market security prices reflect their fundamental value based on publicly available info

Question 9

Disclosure enforcement from companies is handled mostly ___

Answer 9

by SEC

Question 10

SEA designates the SEC to _____

Answer 10

• issue additional rules
• enforce act and rules it issues

Question 11

Two options when corporations don’t disclose truthfully

Answer 11

• SEC brings enforcement action
• Specialized plaintiff lawsuit files securities fraud action

Question 12

Questions to determine if party has a private right of action

Answer 12

• class of persons statute designed to protect
• clear intent to create or deny private remedy
• private remedy consistent with statutory purpose?
• rights traditionally relegated to state law

Question 13

____ prohibits fraud in purchase of sales of securities

Answer 13

10b5

Question 14

10b5 is a catch all provision in that it ___

Answer 14

applies to all securities (registered or not) but it must catch fraud

Question 15

10b5 (about material facts) makes it unlawful to make ___ or omit __

Answer 15

untrue statement of material fact, omit necessary material fact

Question 16

Securities fraud cases focus on whether ___

Answer 16

info misleading and material

Question 17

Insider trading cases focus on whether D ___

Answer 17

had access to inside info and improperly used it

Question 18

Elements of a 10b5 claim

Answer 18

• false/misleading statement
• about material fact in connection with purchase/sale of stock
• made with scienter
• reasonable reliance by the plaintiff
• causing injury to plaintiff

Question 19

10b5 is not explicit about ___

Answer 19

• intent
• reliance
  -harm
  -duty to disclose

Question 20

What are fraud on the market cases?

Answer 20

class actions that address misrepresentations made to the market as a whole

Question 21

Basic reliance requires that you ___

Answer 21

bought or sold shares (can’t say would’ve sold had you knew)

Question 22

Common law fraud elements

Answer 22

• misrepresentation
• reliance
• action
• causation
• harm

Question 23

Fraud on the market says that ____ are sufficient to establish reliance

Answer 23

changes in share price

Question 24

Fraud on the market presumes that __

Answer 24

share prices reflect fundamental value

Question 25

10b5 and common law fraud have __

Answer 25

similar elements with special meaning in context of 10b5

Question 26

Basic doesn’t require plaintiffs to show they ___ to establish reliance

Answer 26

listened to/read misleading info

Question 27

Basic elements for securities fraud

Answer 27

• alleged misrepresentations publicly known
• were material
• stock traded in an efficient market
• plaintiff traded stock between time misrepresentations made and when truth revealed

Question 28

Basic company had made 3 public statements ___

Answer 28

denying it was engaged in any merger negotiations

Question 29

Basic directors had had conversation about ___

Answer 29

possible merger

Question 30

Basic held that company statements about ____ can be material under 10b5

Answer 30

preliminary merger negotiations (can be, not must be)

Question 31

Basic held that based on fraud on the market there is a ________ that individual members of the class relied on false statements

Answer 31

rebuttable presumption

Question 32

What does Basic offer for if company hadn’t said anything at all?

Answer 32

Depends on whether amounts to an omission (fact-specific)

Question 33

Basic says materiality of statements depends on ____

Answer 33

probability that event will occur + magnitude of event

Question 34

Basic says that requiring each individual plaintiff to prove actual reliance would ___

Answer 34

place unnecessary burden

Question 35

Basic dissent says that stocks don’t have ___

Answer 35

fundamental value

Question 36

Basic dissent says that investors don’t ___

Answer 36

rely on integrity of market price (may trade because believes inaccurately reflects)

Question 37

Halliburton held that Basic’s presumption ___

Answer 37

can be rebutted to kill the class (not overruling Basic)

Question 38

Halliburton company made series of misrepresentations about __

Answer 38

liability in asbestos litigation + anticipated merger benefits

Question 39

Halliburton held that defendants can show evidence that __

Answer 39

misrepresentation did not actually affect the market price to rebut reliance

Question 40

Halliburton rebuts reliance by saying that ____

Answer 40

other things than asbestos litigation happened to affect the stock price

Question 41

Halliburton is in part a reflection on ___

Answer 41

vitality of ECMH