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SECURITIES FRAUD Flashcards

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2
Q

Stock

A

an equity that represents a right of ownership in a corporation

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3
Q

Bond

A

a debt instrument, for example treasury bills, corporate bonds, municipal bonds, and “junk bonds

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4
Q

junk bonds

A

high-risk, below investment grade, commercial bonds

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5
Q

Certificates of Deposit

A

acknowledgement by a bank of the receipt of money with a promise to repay it with interest

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6
Q

Future

A

contract agreeing to buy or sell a specified quantity of something (such as foreign currency or commodities) at some future time at a price agreed upon now

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7
Q

Options

A

to buy (known as a “call”) or sell (known as a “put”) an asset (such as stocks, bonds, commodities, or real estate) on or before a future date at a price agreed upon now.

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8
Q

strike price

A

price at which the option may be exercised

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9
Q

option premium

A

The price paid for the option

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10
Q

plain-vanilla options

A

Standardised exchange-traded options contracts

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11
Q

call option

A

right but not the obligation to purchase the underlying security at the strike (exercise) price by the option’s expiration date

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12
Q

put option

A

right but not the obligation to sell the underlying security at the strike (exercise) price by the option’s expiration date

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13
Q

A call option is in the money

A

when the price of the underlying exceeds its strike price

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14
Q

a put option is in the money

A

when the price of the underlying is less than its strike price

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15
Q

Over-the-Counter (OTC) options

A

agreements made between private parties

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16
Q

Churning

A

excessive trading of a customer account for the purpose of generating commissions

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17
Q

Parking

A

practice of selling a security to one party with the understanding that the seller will repurchase the security later at an agreed-upon price.

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18
Q

Front running—Dual Trading

A

use for profit of the privileged knowledge of a customer’s order to buy or sell a large amount of a commodity, options, or security that, because of its size, is likely to move the market

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19
Q

Bucket shops

A

fraudulent enterprises that masquerade as licensed brokerage operations

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20
Q

Following are types of investments that frequently qualify as “investment contracts” and are,
therefore, considered securities

A 
PONZI SCHEMES
PYRAMID SCHEMES
WORM, RABBIT, AND OSTRICH FARMS
PRIME BANK FRAUD
PRECIOUS METAL SCHEMES
VIATICALS
PARTNERSHIPS
JOINT VENTURES
OIL, GAS, AND MINERAL INTERESTS 
PROMISSORY NOTES
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21
Q

A note is presumed to be a security unless it

A

bears a strong resemblance to a category of instruments that are not
securities.

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22
Q

With notes and other potential securities it is often helpful to apply the family resemblance test and look at three things:

A

MOTIVE AND EXPECTATION
What is the issuer’s primary motive? If it is to raise money for the general use of a business
enterprise then a security may be held to exist. What is the buyer’s primary motive? Is it
really a loan or an investment-type transaction? What is a reasonable investor thinking, what
are his expectations?

PLAN OF DISTRIBUTION
Is there some form of common trading? If so, a security probably exists.

REGULATION
Is there some other regulatory system that significantly reduces the risk of the transaction
thereby rendering the application of the securities laws unnecessary? If the transaction is
deemed appropriately regulated in ways other than through the application of the securities
laws, then it is less likely that securities laws will be brought to bear.

23
Q

initial margin

A

the amount of money per contract that must

be present in the account when the position is initiated

24
Q

maintenance (variation) margin

A

the minimum amount of money per contract that must be maintained in the account while
the position is open.

25
Q

Unsuitable Recommendations

A

Securities representatives are required to “know their customer.” They must take into account the financial profile and level of sophistication of the individual investor. Placing clients into unsuitable securities, for example recommending high-risk options to a senior citizen with limited assets, is prohibited.

26
Q

Failure to Supervise

A

Broker-dealer firms are responsible for oversight of their representatives to ensure adherence to Rules of Fair Practice and the laws.

27
Q

Excessive Markups

A

Excessive markups involve selling at a marked-up price or buying at a marked-down price not reasonably related to the prevailing market price

28
Q

Misuse or Misappropriation of Customer’s Securities

A

This scheme may involve outright theft or using the securities in improper ways, for example, as collateral for loans or to conduct other securities transactions (e.g., margin trading)

29
Q

Unauthorised Trading

A

Unless otherwise agreed to in writing, only the customer named on the trading account can
authorise trades. Any losses accruing to the customer account because of an unauthorised
trade, whether made by mistake or intentionally, are the responsibility of the brokerage firm
and must be reimbursed to the customer. Gains from unauthorised trades also belong to the
customer. This prevents brokers from executing unauthorised trades, claiming error, and
taking any profits that may occur. The only entries to the brokerage company error account
should be losses; profits in an error account should be investigated. Customers must report
unauthorised trades to the management of the brokerage firm as soon as detected. Silence
would imply ratification of the transaction.

30
Q

Systematically Trading Accounts Against Each Other

A

The scheme involves someone with trading authority simultaneously establishing opposite
market positions in two separate investment pools that he controls.

31
Q

Market Manipulation

A

Market manipulation consists of a series of transactions designed to artificially raise/lower
price or to give appearance of trading activity for the purpose of inducing others to buy or
sell

32
Q

Penny stocks

A

low-
priced (usually less than $5), speculative securities that are registered but do not meet the
listing requirements of an exchange

33
Q

Micro-cap

A

stocks of companies with very

small market capitalisation

34
Q

Insider Trading

A

Under the legal theory of misappropriation, the use of non-public information to profit from
purchase or sale of securities may violate the insiders’ fiduciary duty to their company or
shareholders

35
Q

Disclosures (Misrepresentations and Omissions)

A

Securities laws require that the investor receive full and fair disclosure of all material
information. Giving the investor or prospective investor false or misleading information is
clearly a misrepresentation. An omission occurs when the issuer, in connection with the
offer or sale of securities, omits to state a material fact necessary in order to make the
statements made not misleading. Making misrepresentations to the investor or failing to
inform the investor of certain facts (omissions) is a violation of law only if the
misrepresentation or omission is material.

36
Q

Backdating Stock Options

A

a company alters the
date of the grant to a time when the stock was trading at a lower price in the interest of
making the option instantly valuable and further increasing the employee’s gain if the stock
price continues to rise

37
Q

The IOSCO’s main objective is to assist its members to:

A

• Cooperate to promote high standards of regulation in order to maintain just, efficient,
and sound markets.
• Exchange information on their respective experiences in order to promote the
development of domestic markets.
• Unite their efforts to establish standards and an effective surveillance of international
securities transactions.
• Provide mutual assistance to promote the integrity of the markets by a rigorous
application of the standards and by effective enforcement against offences.

38
Q

The IOSCO Principles are based on the following three objectives:

A
  • The protection of investors
  • Ensuring that markets are fair, efficient, and transparent
  • The reduction of systemic risk
39
Q

_____is the most important means

for ensuring investor protection.

A

Full disclosure of information material to investors’ decisions

40
Q

___ helps to ensure fair markets.

A

The regulator’s approval of exchange and trading system operators and of trading rules

41
Q

In an efficient market, ____

A

the dissemination of relevant information is timely and widespread
and is reflected in the price formation process

42
Q

Transparency may be defined as

A

he degree to which information about trading (both for

pre-trade and post-trade information) is made publicly available on a real-time basis

43
Q

A. Principles Relating to the Regulator

A
  1. The responsibilities of the regulator should be clear and objectively stated.
  2. The regulator should be operationally independent and accountable in the exercise of it
    functions and powers.
  3. The regulator should have adequate powers, proper resources, and the capacity to
    perform its functions and exercise its powers.
  4. The regulator should adopt clear and consistent regulatory processes.
  5. The staff of the regulator should observe the highest professional standards including
    appropriate standards of confidentiality.
44
Q

B. Principles for Self-Regulation

A
  1. The regulatory regime should make appropriate use of Self-Regulatory Organisations
    (SROs) that exercise some direct oversight responsibility for their respective areas of
    competence, to the extent appropriate to the size and complexity of the markets.
  2. SROs should be subject to the oversight of the regulator and should observe standards
    of fairness and confidentiality when exercising powers and delegated responsibilities.
45
Q

C. Principles for the Enforcement of Securities Regulation

A
  1. The regulator should have comprehensive inspection, investigation, and surveillance
    powers.
  2. The regulator should have comprehensive enforcement powers.
  3. The regulatory system should ensure an effective and credible use of inspection,
    investigation, surveillance, and enforcement powers and implementation of an effective
    compliance program.
46
Q

D. Principles for Cooperation in Regulation

A
  1. The regulator should have authority to share both public and non-public information
    with domestic and foreign counterparts.
  2. Regulators should establish information sharing mechanisms that set out when and how
    they will share both public and non-public information with their domestic and foreign
    counterparts.
  3. The regulatory system should allow for assistance to be provided to foreign regulators
    who need to make inquiries in the discharge of their functions and exercise of their
    powers.
47
Q

E. Principles for Issuers

A
  1. There should be full, timely, and accurate disclosure of financial results and other
    information that is material to investors’ decisions.
  2. Holders of securities in a company should be treated in a fair and equitable manner.
  3. Accounting and auditing standards should be of a high and internationally acceptable
    quality.
48
Q

F. Principles for Collective Investment Schemes

A
  1. The regulatory system should set standards for the eligibility and the regulation of those
    who wish to market or operate a collective investment scheme.
  2. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
  3. Regulation should require disclosure, as set forth under the principles for issuers, which
    is necessary to evaluate the suitability of a collective investment scheme for a particular
    investor and the value of the investor’s interest in the scheme.
  4. Regulation should ensure that there is a proper and disclosed basis for asset valuation
    and the pricing and the redemption of units in a collective investment scheme.
49
Q

G. Principles for Market Intermediaries

A
  1. Regulation should provide for minimum entry standards for market intermediaries.
  2. There should be initial and ongoing capital and other prudential requirements for market
    intermediaries that reflect the risks that the intermediaries undertake.
  3. Market intermediaries should be required to comply with standards for internal
    organisation and operational conduct that aim to protect the interests of clients, ensure
    proper management of risk, and under which management of the intermediary accepts
    primary responsibility for these matters.
  4. There should be procedures for dealing with the failure of a market intermediary in order
    to minimise damage and loss to investors and to contain systemic risk.
50
Q

H. Principles for the Secondary Market

A
  1. The establishment of trading systems including securities exchanges should be subject to
    regulatory authorisation and oversight.
  2. There should be ongoing regulatory supervision of exchanges and trading systems which
    should aim to ensure that the integrity of trading is maintained through fair and equitable
    rules that strike an appropriate balance between the demands of different market
    participants.
  3. Regulation should promote transparency of trading.
  4. Regulation should be designed to detect and deter manipulation and other unfair trading
    practices.
  5. Regulation should aim to ensure the proper management of large exposures, default risk,
    and market disruption.
  6. Systems for clearing and settlement of securities transactions should be subject to
    regulatory oversight, and designed to ensure that they are fair, effective and efficient and
    that they reduce systemic risk.
51
Q

report Strengthening Capital
Markets Against Financial Fraud (the Fraud Report) in February 2005. This report identifies
seven separate areas that have figured prominently in many high-profile financial scandals:

A
  1. Corporate governance, including the role of independent directors on an issuer’s corporate
    board, the protection of minority shareholders, the importance of independent auditor
    oversight committees, and mechanisms to protect against conflicts of interest presented
    by related-party transactions
  2. Auditors and audit standards, including auditor independence, the effectiveness of audit
    standards and auditor oversight, and issues related to mandatory auditor rotation
  3. Issuer disclosure requirements, including management’s discussion and analysis of material
    events and factors likely to have an impact on the issuer
  4. Bond market regulation and transparency, including the types of financial disclosures required
    of bond issuers and the transparency of bond market price-setting mechanisms
  5. The role and obligations of market intermediaries, whether they contributed to recent financial
    scandals, and how these entities can mitigate reputational, legal, and operational risk
    through adequate controls and procedures, and ensure that material non-public
    information they acquire about an issuer is not misused
  6. The use of complex corporate structures and special purpose entities, and the circumstances where
    they may pose particular regulatory issues
  7. The role of private-sector information analysts, and the ways in which such individuals and
    entities can protect their analytical integrity and independence

Law (10 decks)

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