Securities Fraud II Flashcards
Drugs, Inc. (“Drugs”) was registered in Delaware and publicly traded on NASDAQ. Drugs was in the business of developing medications to cure diseases. Drugs’ scientists tested a new medicine on rats with liver cancer; 23 of the 25 rats were completely cured. There were not yet any tests on human subjects, but if Drugs could develop an effective cure for liver cancer, its profits would likely double. As rumors of this test began to spread, Drugs issued several public statements denying that there was any material new information about the company. When news about the test was finally released, Drugs’ stock price rose by 40%. Former shareholders who had sold their stock in Drugs after Drugs denied that anything material had occurred but before news of the test was released sued Drugs under 10b-5. None of the plaintiffs claimed they knew about the company’s denial that there was any material information. Their suit is likely to:
A. Fail, because the information about the test would not be material unless and until there were human trials.
B. Fail, because they had not relied on the company’s false statements.
C. Fail, because the company’s false statements had not caused them damages.
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D. Perhaps succeed, because plaintiffs are likely to be able to establish reliance.
D. Perhaps succeed, because plaintiffs are likely to be able to establish reliance.
Corporation Inc., which was registered in Delaware and traded on the New York Stock Exchange, hired Accounting Firm to perform a comprehensive audit of its financial statements. Accounting Firm failed to discover that Corporation’s Chief Financial Officer (“CFO”) was overvaluing millions of dollars’ worth of the company’s assets. Any accounting firm exercising ordinary care would have discovered this. Six months later, the CFO suddenly quit, leading to the discovery of his valuation errors. When news of the errors was publicly announced, the company’s stock price dropped 25%. Shareholders of Corporation, Inc. who bought their shares before disclosure of the errors sued Accounting Firm under 10b-5. Their suit is likely to:
A. Fail, because the public shareholders did not rely on Accounting Firm’s audit.
B. Fail, because there is no aiding or abetting liability under 10b-5.
C. Fail, because Accounting Firm, while negligent, did not purposefully or recklessly harm Corporation, Inc.
D. Succeed.
C. Fail, because Accounting Firm, while negligent, did not purposefully or recklessly harm Corporation, Inc.
Corporation, a publicly traded company, made a false and misleading material statement on January 10th. At the close of trading that day, Corporation's stock was trading at $15/share, $5/share more than its price before the misrepresentation. On March 10th, Corporation revealed the truth. On March 11th, Corporation's stock was trading at $8/share. During the 90-day period following March 11th, Corporation's stock traded for an average of $13/share. The broader stock market index rose 50% during that same period. What is the MOST a plaintiff who bought Corporation's stock on January 11th for $15/share could collect from Corporation in a Rule 10b-5 suit? check A. $2/share. B. $5/share. C. $6/share. D. $7/share.
A. $2/share.
Liar, Inc. (“Liar”) was registered in Delaware and publicly traded on NASDAQ. Liar’s board issued a false, material statement about its compliance with environmental laws. During the week after an investigative journalist discovered and then published the truth, Liar’s stock price dropped 10%. Some of Liar’s shareholders then launched a class action under 10b-5 against the board. The defendant directors now want to argue that the shareholders have not met their reliance requirement under the fraud on the market theory. The argument that is LEAST likely to be an effective attack on the shareholders’ reliance is:
A. Liar’s stock is thinly traded, so the market in Liar’s stock is not efficient.
B. The misrepresentation did not distort the price of Liar’s stock.
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C. Liar’s directors did not know their statement was false at the time they made it.
D. The shareholders would have traded even if they had known the statement was false.
C. Liar’s directors did not know their statement was false at the time they made it.
Shareholders of a Delaware corporation passed a shareholder resolution that required the board to include up to three candidates nominated by shareholders who owned at least 1% of the company’s outstanding shares on the company’s proxy form (the “proxy resolution”). They also passed a separate shareholder resolution that required the board to reimburse any shareholder for expenses that shareholder incurred in connection with the successful election of a director who was not on the board’s slate of nominees (the “expenses resolution”). Both resolutions purport to be binding, not precatory. Which of these resolutions is valid under Delaware law?
A. Both are valid.
B. The proxy resolution, but not the expenses resolution.
C. The expenses resolution, but not the proxy resolution.
D. Neither is valid.
A. Both are valid.
