Securities Regulation (Rule 10b-5) Flashcards
Rule 10b-5
The SEC may investigate and prosecute violations of 10b-5 and a private person may file suit to redress
a violation if the person was a buyer or seller of stock affected by the alleged illegal activity
Fraud elements and burden of proof
A plaintiff must show by a preponderance of the evidence that:
- The defendant knowingly or recklessly;
- Made a false statement or omission of material fact in connection with the purchase or sale of securities (i.e., something a reasonable investor would want to know);
- Using an instrumentality of interstate commerce (e.g., the mail or telephone);
- The plaintiff justifiably relied on the defendant’s false statement or omission in buying or selling securities; and
- The misrepresentation or omission caused the plaintiff to suffer damages
Insider trading elements
To be liable for insider trading, the defendant must (1) possess material information that is not public knowledge and (2) trade securities on the basis of that knowledge
Who can be liable for insider trading?
Insiders, tippers, tippees, and persons with duties of trust or confidence (misappropriation theory)
Insiders
Directors, officers, attorneys, accountants, or other employees of the corporation who trade for personal gain
Tippers
An insider who shares nonpublic information. Tippers are liable if they share the information for an improper purpose and the person who receives the information (the tippee)
trades securities on the basis of it
Tippees
An individual who receives information from an insider (the tipper). Tippees are liable if they knew or should have known that the tipper was breaching the tipper’s fiduciary
duty to the company and shareholders
Persons with duties of trust or confidence (misappropriation theory)
Individuals who obtain nonpublic information from a source to whom they owe a duty of confidentiality. Such persons are liable if they use the confidential information to trade securities
