Exam 22: Securities Fraud and Insider Trading.

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.Can Trudy be considered an insider of Food Corporation?

According to Rule 10b-5,a company's silence or "no comment" to a rumor will make it liable,but only if the company has not previously spoken on the subject and insiders are not trading or tipping.

Under the Sarbanes-Oxley Act of 2002,it is a misdemeanor to knowingly execute a scheme to defraud any person in connection with any security of a publicly traded company.

Which of the following is true regarding the state of mind needed in order to find a violation of Section 16(b)involving short-swing trading?

Under the efficient market hypothesis,in an open and developed securities market,the market price of a company's stock equals its true value.

There is no provision in the security laws for the payment of bounties to individuals whose tips result in insider trading prosecutions.

Under the Securities Fraud Enforcement Act,when may a brokerage house be fined?

InMatrixx Initiatives v.Siracusano case referenced in the text,the U.S.Supreme Court analyzed the question of whether an issuer must disclose known information about possible side effects of a drug that could affect the drug's stock price even though no proven statistical link exists between use of the drug and the adverse effect.The Court held: