FACT PATTERN SIX: Federal Securities Law

Question 1

RULE 10b-5

Answer 1

Rule 10b-5 makes it illegal for any person, directly or indirectly, by the use of any means of interstate commerce to, in connection with the purchase or sale of any security:

(i) Employ any device or scheme to defraud,

(ii) Make an untrue statement of material fact (or omit a material fact), or

(iii) Engage in any practice that operates as a fraud in connection with the purchase or sale of any security.

[GO TO PRIMA FACIE CASE]

Question 2

Prima facie case for breach of Rule 10b-5

Answer 2

A prima facie case for breach of rule 10b-5 requires proof of:

(1) Fraudulent conduct,
- Requires some intent to deceive
- Fact will be material if a reasonable investor would consider it important in making decisions

(2) in connection with the purchase or sale of securities,

(3) use of a means of interstate commerce, and (in some cases),

(4) reliance, and (5) damages.

A fact will be considered material under rule 10b-5 if a reasonable investor would consider it important when making an investment decision.

Conduct will be considered fraudulent only on proof of scienter (i.e., intent to deceive)

Question 3

Rule 10b-5: Insider Trading

Answer 3

Rule 10b-5 prohibits trading securities on the basis of material inside information (i.e., information not disclosed to the public that an investor would think is important when deciding whether or not to invest in a security)

Typical securities insiders, such as directors, officer, controlling shareholders, and employees of the issuer, are deemed to owe a duty of trust and confidence to their corporation that is breached by trading on inside information.

Question 4

Section 16(b)

Answer 4

Section 16(b) provides that:
(i) any profit realized by a director, officer, or shareholder owning more than 10% of the outstanding shares of the corporation

(ii) from any purchase and/or sale of any equity securities of their corporation

(iii) within a period of less than six months

Must be returned to the corporation.

This section applies only to publicly held corporations whose shares are traded on a national exchange, or that have (i) at least 2,000 shareholders, and (ii) more than $10 million in assets.

Section 16(b) imposes strict liability for covered transactions whether or not there is any material fact that should or could have been disclosed. No proof of inside information is required.