Securities Law

Question 1

What are the three primary purposes of federal securities laws?

Answer 1

(1) Regulate issuance and sale of securities
(2) Require public disclosures by companies issuing securities
(3) Govern certain aspects of company operations

Question 2

Is an ownership interest in a partnership or LLC a “security?”

Answer 2

ONLY IF:
the holder invests money and expects to receive profits solely from the efforts of others.

(Ex: Gen Partner that participates does not hold a security)

Question 3

Are debt instruments “securities?”

Answer 3

Likely yes IF:

it is part of a group of such instruments sold to a large number of investors

Question 4

What does Rule 10b-5 do?

Answer 4

Outlaws KNOWING fraud or material nondisclosures in connection with the sale or purchase of securities.

Negligence ≠ violation

Question 5

What counts as a “material” misrepresentation or omission?

Answer 5

Material =

reasonable investor would consider it important in deciding whether to buy or sell

Question 6

In order to bring a Rule 10b-5 private action, what must a plaintiff show?

Answer 6

Elements of claim:

(1) Plaintiff actually bought/sold during relevant period
(2) Plaintiff relied on false statement/omission
(3) Causation
(4) Damages

Question 7

What are the remedies for a plaintiff in a 10b-5 private action?

Answer 7

Rescission and damages (force ∆ to hand over profits)

Question 8

Besides private civil actions, what are the consequences of a 10b-5 violation?

Answer 8

(1) Securities fraud is a felony

(2) SEC can impose Civil Penalties

Question 9

What is the definition of “insider trading”

Answer 9

Persons with a relationship of trust or confidence with the owners of the issuer trading on nonpublic material information.

Question 10

What companies does the Short Swing Profits rule apply to?

Answer 10

Applies to:

(1) Companies listed on national exchange, or
(2) at least 500 owners and $10M in assets

Question 11

What is the Short Swing Profits rule?

Answer 11

Strict Liability IF:
(1) Insiders profit from buying then selling, or selling then buying, w/in six months.

They must hand profits over to the company.

Question 12

Who counts as an “insider” for purposes of the Short Swing Profits rule?

Answer 12

(1) Directors or equivalent (@ time of buy/sell)
(2) Officers or equivalent (@ time of buy/sell)
AND
(3) OWNERS OF 10%+ OF ANY CLASS OF SHARES (immediately before security purchase AND immediately before sold)

Question 13

What companies are subject to Sarbanes-Oxley? (SOX)

Answer 13

Reporting companies

Question 14

What does Sarbanes-Oxley do?

Answer 14

Imposes duties on entities and managers concerning reporting and ethics:

(1) CEO or CFO must PERSONALLY certify the accuracy of periodic financial statements filed with the SEC
(2) Audit committee of independent directors required
(3) Outside auditors can have NO other business with the company

Question 15

What if there are misstatements in periodic financial statements that a CEO or CFO has certified under SOX?

Answer 15

CEO AND CFO must disgorge bonuses and profits on company stock during that reporting period.

Question 16

Who counts as an “independent director” for purposes of forming an Audit Committee under SOX?

Answer 16

Can’t be:

(1) employee, or
(2) paid consultant

Question 17

Under SOX, what happens if a whistleblower is retaliated against?

Answer 17

Retaliator will be:

(1) Liable to whistleblower, and
(2) guilty of a felony

Question 18

What duties do attorneys have under Sarbanes-Oxley? What if they fail to follow through with those duties?

Answer 18

(1) Any evidence of material securities violations must be reported to CEO or Chief Legal Counselor
(2) If they do nothing, must tell Audit Comittee or Board

Consequences for failure:

(1) Civil Penalty
(2) Potentially disbarred