VI. Federal Securities Law

Question 1

Debt Securities

Answer 1

• Investor lends capital to corp, to be repaied (usually with interest) as specificed in the agreement
  
  • is a creditor-not an owner
  • BOND: Secured by corporate assets
  • DEBENTURE: unsecured

Question 2

Equity Securties

Answer 2

• Investor buys stock from corp, which generates business capital
• She is a owner, not a creditor

Question 3

Rule10b-5

Answer 3

Aims at deceit

Prohibits fraud or misrepresentation (or nondisclosure) in connection with the pruchase or sale of any security

Question 4

10b-5 Elements

Answer 4

1. At some point, deal must use an INSTRUMENTALITY OF INTERSTATE COMMERCE–mail phone or trade on national exchnage
2. Be the TYPE OF TRANSACTION
   
   1. Misrepresentation of material information
   2. INsider Trading
   3. Tipping
3. Must be Material–must concern a material fact–one resaonable investor would consider important in making an investment decision

Question 5

Insider Trading

Answer 5

• trading securities on the basis of material inside information
• only a problem for someone who is high enough in the business heirarchy that she has a duty to abstain or disclose
  
  • one w/ a relationship of trust & confided with shareholder
• Insiders cannot trade on secrets–duty to abstain or ensure disclosre so eveyrone is one same footing

Question 6

Tipping

Answer 6

Insider passes along material inside information for a wrongful purpose

Tipper must 1) pass along material inside information in breach of a duty; and 2) benefited from it

Tipee 1) traded on tip and 2) knew or should have known information was improperly passed

No tipper, no tippee (overhearing conversation and trading on it does not make you a tipee)

Question 7

10b-5 Possible Plaintiffs

Answer 7

• SEC
• Private action for damages by a buyer or seller of securties

Question 8

Possible Defendants

Answer 8

Any person, including entities

• Company that issues a misleading press release
• Buyer or seller of securities who misrepresents material information
• buyer or seller of securites who trades on material inside information (when there is a duty to disclose–again, comes from relatinoship of trust and confidence with shareholders of the corp)
• Tipper or Tipee
• Scienter–Intent to deceive, manipulate or defraud–recklessness may suffice
• Reliance–said to be a seprate elemtn as in fruad cases but is presumed in public mis rep and nondisclosure

Question 9

Section 16B

Answer 9

Aimed at speculation by directors, officers and ten percent shareholdrs

STRICT LIABILITY

Provides for recovery BY THE CORP of profits gained by certain insiders from buying and selling company stock. Theory is that it is bad for mkt confidence to have them buying sleling own stock

Could be deriviative suit

Question 10

When does 16-b apply?

Answer 10

1. Reporting Corporation: 1) listed on a national exchange or 2) at least 500 shareholders and $10 mill in assets
2. TYPES OF DEFENDANTS:
   
   1. Director (either bought or sold)
   2. Officer (either bought or sold)
   3. Shareholder who owns >10% (both when she bought and sold)
3. TYPE OF TRANSACTION: buying and sellign stock within a single six moth period (short swing trading). No fraud or inside infor need

Question 11

Result of 16b

Answer 11

• All profits from short swing tading recoverable by corp
  
  • (e.g. within si months, before or after any sale, there was purchase at lower price, profit
  • Order of buying and selling is irrelevant