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BUSINESS ASSOCIATIONS > Securities Laws > Flashcards

Securities Laws Flashcards

1
Q

What kind of legislation is Rule 10b-5?

A

Rule 10b-5 is probably the most important piece of Anti-fraud securities legislation. (Acing 157)

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2
Q

Who might the use Rule 10b-5?

A

The SEC and private individuals can use Rule 10b-5. (Acing 157)

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3
Q

In a 10b private action for damages, the plaintiff must prove what 4 things?

A
  1. Defendant made a material misrepresentation
  2. Reliance
  3. Scienter, and
  4. Causation
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4
Q

Gifting and Securities Fraud

A

The Government disagrees and argues that a gift of confidential information to anyone, not just a ‘trading relative or friend’, is enough to prove securities fraud.

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5
Q

Words to know in relation to Rule 10b-5?

A

Corporate insider / deceptive device / relationship of trust and confidence/ duty to disclosure / abstain from trading / prevent unfair advantage / uninformed stockholders.

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6
Q

What is the Misappropriation Theory?

A

The “misappropriation theory’ holds that a person commits fraud ‘in connection with’ a securities transaction, and thereby violates Section 10b and Rule 10b-5, when he misappropriates confidential information for securities tracking purposes, in breach of a Duty owed to the Source of that information. (Klein494)

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7
Q

A fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities + In Breach of a duty of loyalty and confidentiality =

A

Defrauds the principal of the exclusive use of that information.

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8
Q

The Misappropriation Theory is designed to….

A

Target “outsiders’ in breach of their duty to the source of the information.

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9
Q

A misappropriation deals in….

A

…in deception. (Klein496)

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10
Q

Misappropriators

A

Deal in deception. A fiduciary who pretends loyalty to the principal while secretly converting the principal’s information for personal gain. (Klein496)

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11
Q

For Misappropriation, Full disclosure…

A

…forecloses liability under the Misappropriation Theory. (Klein497)

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12
Q

Is there ‘deceptive device’ if the fiduciary discloses to the source that he plans to trade on the non public information?

A

There is NO deceptive device if the fiduciary discloses to the source that he plans to trade on the non public information and this no 10b violation - although the fiduciary-turned trader may remain liable under state law for breach of a duty of loyalty. (Klien497)

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13
Q

When does deceptive use of the information occur?

A

It occurs not when he gains the confidential information, but when he Uses the information to purchase or sell securities. (Klein497)

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14
Q

What is Deceptive Device?

A

Trading by a corporate insider in the securities of his corporation on the basis of material, non public information qualifies as a ‘deceptive device’ under 10(b). (Klein495)

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15
Q

Who is an Insider

A

An insider is a director, officer, shareholder, employee or any other holder of material, nonpublic corporate information. Temporary holders too, like accountants and attorneys. (Bk37)

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16
Q

Tippee

A

A tippee are those receiving insider information and are liable only if the Tipper breached a fiduciary duty, the Tippee knew (scienter) the duty had been breached, and the Tipper personally benefitted. (Bk37)

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17
Q

One classified as an Insider has what duty?

A

Duty to disclose the material, nonpublic information or refrain from trading. (Bk37)

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18
Q

Tipper

A

A tipper is those providing insider information and they are liable if the information was shared for the improper purposes of personal gain. (Bk36)

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19
Q

What 4 Ways May 10b-5 be violated?

A
  1. Direct trading by insider
  2. Tippers
  3. Tippers
  4. Misappropriators. (Bk37)
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20
Q

16(b)

A

No short-swing profits

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21
Q

Section 10b-5 disallows what?…and provides what?

A

Section 10b-5 disallows insider trading and provides liability for any person who employs fraud or deception in connection with the purchase or sale of any security by means of any instrumentality of interstate commerce.
-Trading based on Nonpublic corporate information. (Bk)

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22
Q

10b-5 Fact Triggers `

A

-Officers give a misleading press conference or statement.
-Remark overheard in public, intentionally or not intentionally.
-Officer gives inside information to lawyer who then trades or tips.
-*Look for a professional responsibility crossover.

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23
Q

Section 16(b) Requirements

A

-Corporation must be listed on National Exchange or ($10M in assets + 2,000 shareholders)
-Corporate insider that own more than 10% equity stock in the corporation.
-Trading is making a profitable purchase and sale is within a 6-month period.

**REMEDY = Insider must disgorge profits back to the corporation.

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24
Q

Section 16(b) - Short-Swing Profits

A

Any short-swing trading profits received within 6 month period by a corporate insider must be disgorged to the corporation. (Bk35)

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25
Q

Securities Laws
Securities Act of 1933
Securties Exchange Act of 1934

A

Primary Effort = of these securities laws is to promote full disclosure and prevent Fraud.
** A ‘security’ must be involved**

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26
Q

What is a Security?

A

A Stock +
- An instrument from which an investor expects to profit.
- Generally is an evidence of indebtedness or Investment Contracts.

(stock / notes / bonds / debentures / options / voting trust certificates)

27
Q

Registration of Security

A

In order to be sold Public…
- Must be registered ( or have an exemption)
- Now described as “Publicly Traded”

Possibility through of some class of stocks traded and maybe another class is not.

28
Q

Issuer and Registration

A

If you are the issuer, you have: Strict liability for anything misleading (whether because of an omission or misstatement) in the registration statement.
- Others are held to a negligence standard.

29
Q

Federal Securities Law primarily consists of what two statutes?

A
  • Securities Act of 1933
  • Securities Exchange Act of 1934 (Smith1071)
30
Q

What are 3 SEC powers?

A
  • Civil injunctions
  • Recommendation to Justice Dept for criminal prosecution
  • Issue orders suspending or expelling broker-dealers. (Smith1071)
31
Q

/what are Blue Sky Laws?

A

States own laws regulating securities sales. (Smith1071)

32
Q

What does the 1934 Act do?

A

Extends protection for investors to trading in securities that are already issued and outstanding.

-Imposes disclosure requirements on publicly held corporations and regulates Tender Offers and proxy solicitations. (Smith1071)

33
Q

What are the objectives of the 1933 Act?

A
  1. Provide investors with material information concerning securities offered for sale to the public.
  2. To prohibit misrepresentation, deceit, and other fraudulent acts and practices in the sale of securities - whether or not they are required to be registered. (Smith1071)
34
Q

Primary purpose of Federal Securities

A
  • To prevent fraudulent practices in the sale of securities and thereby maintain public confidence in the securities market. (Smith1071)
35
Q

Features of Rule 10b-5

A
  • Interstate commerce or Nat’l Securities Exchange
  • Activity involves a security
  • Involve a purchase or sale of securities. (Ace159)
36
Q

With 10b-5…How connected does the fraud have to be with the purchase or sale?

A

The fraud need only ‘touch and concern’. (Ace159)

37
Q

Crowdfunding Exemption

A
  • In 1933 Act
  • Allowing entrepreneurs and small businesses to raise up to $1M for a larger number of investors, even if those accreditors are not ‘accredited’.
38
Q

What is a critical aspect of Rule 10b-5

A

It creates liability for anyone who makes a misleading representation or omission that is connected to the purchase or sale of a security.

  • This is different from Insider Trading! (Ace157)
39
Q

Under 10b-5, does one have to buy from the one who made the misleading statement for there to be liability?

A

No. Liability is found even if someone does not buy it from, or sell it to, the person who makes the misleading statement. (Ace157)

40
Q

Section 10(b) provides…

A

That it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange; any manipulative or deceptive device or contrivance…in contravention of such rules and regulations.

41
Q

Rule 10b-5 says…

A
  • It is unlawful to employ any device or scheme to defraud;
  • To make any untrue statement of material fact or omission;
  • Engage in any act, practice that would operate as a fraud or deceit upon any person…purchase or sale of any security. (Ace158)
42
Q

Section 16(b) - Short Swing Profits

A

Any short-swing trading profits received within a 6-month period by a corporate insider must be disgorged to the corporation.

43
Q

Requirements of 16(b)

A

Corporation must be listed on the national exchange or have $10M in assets and 2,000 shareholders.

44
Q

Corporate Insider Defined

A

Are officers, directors and shareholders that own more than 10% equity in the corporation.

45
Q

What are debt securities?

A

Most state corporation statues authorize corporations to borrow money, incur liabilities and issue bonds. Most of these actions do not need shareholder approval. The funds generated by this borrowing must be used only for corporate purposes. Debt securities evidence a debt of the corporation and become corporate liabilities. (Whit566)

46
Q

What is a Debenture?

A

Are unsecured corporate obligations backed by the general credit of the corporation and its assets. (Whit566)

47
Q

Sometimes ‘Reliance’ is referred to as what?

A

Transactional causation. (Ace162)

48
Q

Elements of 10b-5 = USMRC

A

Untrue Stmt or Omission
Scienter (intent)
Materiality
Reliance
Causation

49
Q

What is the Question under Rule 10b-5?

A

The question under a Rule 10b-5 claim is not whether a wrong has been committed, it is whether a wrong has been committed which Satisfies the elements of the 10b-5 statute. [Ace167]

50
Q

Rule 10b-5 is Not about what??

A

Correcting every wrong. It is about Full Disclosure
-Once a full and fair disclosure is made, the fairness of the transaction is not an issue under federal law. An appropriate remedy therefore, must be sought under state law. [Ace166]

51
Q

Rule 10b-5 - When does liability arise?

A

Liability when someone buys or sells a security, even if they do not buy it from or sell it to the person who makes the Misleading statement.

-Creates liability for anyone who makes a Misleading representation or Omission that is connected to the purchase or sale of a security. [Ace157]

52
Q

Private Placement

A

The process of raising money for the corporation, if a transaction is Exempt.
*Still subject to 10b-5
-Must meet Blue Sky/state laws. [Ace156]

53
Q

5 Elements of 10b-5
(USMRc)

A
  1. Untrue Stmt
  2. Scienter
  3. Materiality
  4. Reliance
    5.Causation
54
Q

Insider Trading

A

Is the buying and selling of securities by individuals based on nonpublic information information where the provider of such information (tipper) has a fiduciary relationship to the issuing corporation and makes a profit on trading in the securities.
(Whit 578)

55
Q

By what other name is the Securities Act of 1933 known?

A

Also called “The Truth in Securities Act”
(Smith 1071)

56
Q

What is the primary purpose of the Federal securities regulation?

A

Prevent fraudulent practices in the sale of securities and thereby maintain public confidence in the securities market.
(Smith 1071)

57
Q

What power does the SEC have?

A
  1. Seek civil injunctions against violations of the Acts;
  2. Recommend that the Justice Dept bring criminal prosecution’
  3. Issue orders suspending or expelling broker-dealers.
    (Smith 1071)
58
Q

What are the 2 basic objectives of the 1933 Act?

A
  1. Provide investors with material information concerning securities offered for sale to the public and;
  2. Prohibit misrepresentations, deceit, and other fraudulent acts and practices in the sale of securities ***Whether or not they are required to be registered. (Smith 1071)
59
Q

The 1934 Act extends protection for…

A

Investors to trading in securities that are already issued and outstanding. (Smith 1071)

*Also imposes disclosure requirements on publicly held corporations and regulates tender offers and proxy solicitations.

60
Q

Blue Sky Laws

A

States having their own laws regulating securities sales.
(Smith 1071)

61
Q

Does the SEC prohibit the offer and sale of unregistered, non-exempt securities?

A

The Securities Act prohibits the offer as well as the sale of unregistered, non-exempt securities. (Smith 1074)

62
Q

When does a Duty to Disclose arise?

A

A duty to disclose arises in one of three circumstances: [1] where the parties are in a fiduciary relationship; [2] under the ‘special facts doctrine,’ where one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge . . . [3] or where a party has made a partial or ambiguous statement, whose full meaning will only be made clear after complete disclosure. (case cite)

63
Q

Insider Trading

A

As a general matter, there is nothing esoteric about insider trading. It is a form of cheating, of using purloined or embezzled information to gain [**2] an unfair trading advantage. (US v Peyton)

BUSINESS ASSOCIATIONS (7 decks)

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