Federal Securities Law Flashcards
Debt Securities
The investor lends capital to the corp, to be repaid (usually with interest) as specified in the agreement. Creditor, not an owner
Equity Securities
Investor buys stock from the corp, which generates capital for the business. Owner, not a creditor.
Rule 10b-5
Aimed at deceit. The federal law prohibits fraud or misrepresentation in connection with the purchase or sale of any security (debt or equity).
Elements of Rule 10b-5
1) Deal must use an “instrumentality of interstate commerce (mail, telephone, or trade on a national exchange)
2) Type transactions (misrepresentation of material info, insider trading, tipping)
3) Materiality (misrepresentation/omission must concern a material fact - one a reasonable investor would consider important in making an investment decision)
4) Scienter (D must have an intent to deceive, manipulate, or defraud)
5) Reliance (presumed in public misrepresentation and nondisclosure cases)
Insider Trading
Trading securities on the basis of material inside information. Only a problem for someone whose job gives access to secrets. Such a person has a duty to either abstain from trading or to ensure disclosure so everybody’s on the same footing.
Tipping
An insider passes along material inside information for a wrongful purpose
Possible Plaintiffs for Rule 10b-5
1) Securities and Exchange Commission (SEC)
2) Private action for damages by buyer or seller of securities (defrauded)
Possible Defendants for Rule 10b-5
1) Company that issues a misleading press release
2) Buyer or seller of securities who misrepresents material info
3) Buyer or seller of securities who trades on material inside info
4) Tipper or tippee
Section 16(b)
Aimed at speculation by directors, officers, and ten percent SHs –> STRICT LIABILITY
The federal law provides for recovery by the corp of “profits” gained by certain insiders from buying and selling the company’s stock. Theory is that is is bad for market confidence to have these insiders buying and selling their own company’s stock
Who’s claim falls under Section 16(b)?
The corporation
1) applies only to “reporting” corporations: listed on the national exchange OR at least 500 SHs and $10 million in assets
Possible Defendants to a Section 16(b) claim
1) Director - (either when he bought or sold), OR
2) Officer (either when he bought or sold), OR
3) Shareholder owning over 10 percent (BOTH when she bought AND sold)
When Section 16(b) apply?
Only to buying and selling stock within a six month period. No fraud or inside info needed
What happens when Section 16(b) applies?
All profits from such “short-swing trading” are recoverable by the corp. If, within 6 months before or after any sale, there was a purchase at a lower price, there is a profit
The ORDER of buy and sell is irrelevant
