Exam 22: Securities Fraud and Insider Trading.

List the seven elements of a Rule 10b-5 cause of action.

InStoneridge Investment Partners,LLC v.Scientific-Atlanta,Inc.referenced inthetext,the U.S Supreme Court analyzed the question ofwhether customer / supplier companies that agreed to arrangements allowing an issuer to mislead its auditor are liable in a private action under section 10(b)of the 1934 Act.The Court ruled:

What is the duty of an independent public accountant if,in the course of an audit,the accountant detects information indicating that an illegal act has or may have occurred?

May private plaintiffs,the SEC,or both bring aider and abettor actions under Rule 10(b)? What must be proven? What type of relief may be sought?

Fact Pattern 22-1 Trudy was hired by Food Corporation to handle a products liability lawsuit brought against it alleging that it distributed dangerous dog biscuits. Trudy's investigation brought to light facts establishing that the biscuits were not defective and that the problem actually involved improper retention policies on the part of retailers. Trudy is aware that this information will result in the stock of Food Corporation increasing dramatically. Trudy immediately buys shares of Food Corporation and tells her fiancé, Frank, about the expected increase as well. Trudy tells Frank because she wants to borrow money from him for the trade and also because she believes that his investment will enable them to take a nicer honeymoon. Frank initially resists because of his training in business law and his concern that trading on the information would violate federal law, but he ends up going along with Trudy because he too wants a nice honeymoon. Trudy's suspicions come true. The lawsuit is dismissed, the stock increases dramatically, and she and Frank go on a great honeymoon. The day after they return, an investigator from U.S. Attorney's Office interviews her regarding her trades and those of Frank. -Refer to Fact Pattern 22-1.Is there a basis upon which to hold Frank liable for a securities violation based upon his receipt and use of the information?

Section 20(a)imposes __________ liability on every person who,directly or indirectly,controls any person liable under the 1934 Act,unless the controlling person acted in good faith and did not directly or indirectly induce the acts constituting the violation.

CASE 22.3SEC v.Contorinis(2014)dealt with a question of whether the defendant was required to disgorge the profits even though he had made the insider trades on behalf of a third party,and did not realize the profits personally.

A violation of Rule 10b-5 does not give investors a private right of action.

Under what circumstances will reliance be presumed for purposes of establishing liability under Rule 10b-5?

Research shows that because of the severe penalties involved,insider trading in China is very rare.

A person may be liable under Section 16(b)of the 1934 Act if he or she was an officer or director at the time of:

Sampson,an accountant and auditor with ABC Accounting,was auditing XYZ Company.Delilah,the president of XYZ Company,told Sampson that she really needed to keep her job and that if the true condition of the company were exposed,she would certainly be fired.She tells Sampson that she is sure she can turn things around if he will only look help her out in the audit report.Sampson,who was infatuated with Delilah,agreed to include inaccurate numbers in the company's audit report knowing that the opinion would be included in the company's annual report on Form10-K filed with the SEC.Unfortunately,Delilah was not able to turn the company's performance around,and it went into bankruptcy later that year.Sampson becomes aware that an investigation is being conducted.Which of the following is true regarding his potential liability?

If a purchase or sale by an officer,director,or greater-than-10 percent shareholder that would otherwise result in recoverable short-swing profits was involuntary and did not involve the payment of cash and if there was no possibility of speculative abuse of inside information,than a court may hold that it was a(n)__________ to which no liability will attach.

Which of the following is NOT true regarding the misappropriation theory of insider trading?

A(n)__________ period is any period longer than three business days during which _____ of the participants in a retirement plan are prevented from trading.

A company is not liable for hyperlinks to third-party information that the company has explicitly or implicitly endorsed or approved.

Susan,an accountant,prepared an audit report for a company that wanted to include the report in a registration statement.What must Susan do before the company can do so? What step should she perform in relation to events occurring subsequent to the date of the certified balance sheet in the registration statement?

A right of action under section 10(b)may expire before a plaintiff discovers he has been wronged or even before damages have been suffered at all.

Drug Company X reports the introduction of a new pill that is guaranteed to cause weight loss with no side effects.The information was advertised in connection with a public offering of stock of the company's stock.Later,it becomes apparent through additional testing that unfortunately the new pill also results in premature hair loss,a material issue.Monika is the president of Company X and is very pleased with sales of the drug.She recognizes that she can no longer advertise the drug as having no side effects,but she does not believe she has made any misrepresentations because she was not aware of the hair loss side effect when previous statements were made.She decides to do nothing.Has she made the correct decision as far as Rule 10b-5 is concerned?

Under Rule 10b-5,any use of the mails is sufficient to satisfy the interstate commerce condition even if the mail does not leave the state.