Deck 23: Securities Fraud and insider trading

Question 1

The misappropriation theory widens the class of persons who can be found liable for insider trading.

Answer 1

True

Question 2

Remote tippees may never be found to have violated securities laws by the use of insider information they obtained.

Answer 2

False

Question 3

Temporary insiders are persons not directly employed by the corporation,but who acquire confidential information through the performance of professional services.

Answer 3

True

Question 4

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.

Question 5

Section 10(b)of the 1934 Act regulates only the purchase and sale of registered securities.

Question 6

If an insider resigns before trading,he or she cannot be held liable for improper insider trading.

Question 7

Under the London Stock Exchange rules,if a listed company's share price moves significantly on the basis of rumor and the rumor is true,the company must disclose the existence of the rumored event.

Question 8

More suits are brought under Section 16(b)of the 1934 Act than under any other provision of that statute.

Question 9

Rule 10b-5 does not result in any private rights of action.

Question 10

Accountants have to sign a written consent before their audited report can be included in a registration statement.

Question 11

A prediction about the future cannot be a misstatement for purposes of the 1933 Act,even if the person making the prediction does not believe it at the time.

Question 12

Secondary actors (such as an accountant,lawyer,or bank)can be held liable in private suits alleging violations of Section 10(b)if their conduct satisfies the requirements for primary liability.

Question 13

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.

Question 14

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

Question 15

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

Question 16

Scienter requires more than mere negligence or lack of due care.

Question 17

The safe harbor provision applies to forward-looking statements in connection with an initial public offering.

Question 18

A controlling shareholder is traditionally considered an insider.

Question 19

The U.S.Supreme Court has adopted a bright-line rule for determining whether a statement is material.

Question 20

All instances of trading on inside information constitute a securities act violation.

Question 21

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

A)the purchase.
B)the sale.
C)both the purchase and the sale.
D)either the purchase or the sale.

Question 22

The requirement that the defendant in a 10b-5 action have used interstate commerce,the mails,or a national securities exchange gives Congress the power to regulate the defendant's conduct under ________.

A)the due process clause of the U.S.Constitution
B)the Commerce Clause of the U.S.Constitution
C)the fifth amendment to the U.S.Constitution
D)executive order 90210

Question 23

Insider trading rules apply to

A)remote tippees.
B)traditional insiders.
C)temporary insiders.
D)all of the responses are correct

Question 24

Section 16(b)of the 1934 Act governs ________ by officers,directors,and greater-than-10% shareholders of equity securities of a public company.

A)fraud
B)deceptive practices
C)short-swing profits
D)unorthodox transactions

Question 25

Which of the following is not considered a traditional insider?

A)officers
B)directors
C)attorneys
D)the corporation itself

Question 26

Before signing a written consent allowing their audited report to be included in a registration statement,accountants should do a(n)________.

A)audit review
B)S-1 review
C)A-1 review
D)B-G review

Question 27

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.

A)strict
B)individual
C)joint and several
D)criminal

Question 28

There is a split in the circuits as to whether ________ qualifies as scienter.

A)special facts
B)recklessness
C)negligence
D)lack of due care

Question 29

The U.S.Supreme Court has made it clear that only persons who actually ________ can sue under Rule 10b-5.

A)purchase or sell securities
B)use a national stock exchange
C)invest in the market regularly
D)registered the securities

Question 30

Under the ________ theory,a person who lacks a fiduciary duty to a company may nonetheless violate Rule 10b-5 by trading on nonpublic information in the company's stock.

A)short-swing-profit
B)deceptive-practices
C)misappropriation
D)insider-trading

Question 31

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

A)If it knew or recklessly disregarded information that would indicate insider trading activities on the part of its employees.
B)Whenever an employee is found guilty of insider trading.
C)If it was negligent in failing to discover insider trading.
D)A brokerage house may not be fined under the Act.

Question 32

The materiality of a misstatement or omission under Rule 10b-5 is judged at the time

A)the statement is made.
B)of the stock purchase.
C)of the injury.
D)of the lawsuit.

Question 33

________ occurs when issuers of publicly traded securities disclose material nonpublic information to securities analysts or selected institutional investors before making full disclosure of the same information to the general public.

A)insider disclosure
B)prohibited disclosure
C)selective disclosure
D)preferential disclosure

Question 34

In the case of a(n)________,the U.S.Supreme Court has ruled that the reliance will be presumed under Rule 10b-5 if the fact was material.

A)public statement
B)misstatement
C)omission
D)tip

Question 35

When can a securities fraud claim be used as a predicate act in a civil case under the Racketeer Influenced and Corrupt Organizations Act (RICO)?

A)When the defendant has been arrested in connection with the fraud.
B)When a conspiracy can be proven.
C)When the defendant has been criminally convicted in connection with the fraud.
D)When the defendant has been held liable for other civil damages in connection with the fraud.

Question 36

Under the bespeaks caution doctrine,a court may determine that the inclusion of sufficient ________ in a document renders immaterial any misrepresentation or omission contained therein.

A)facts
B)cautionary statements
C)expert opinions
D)information

Question 37

Lawsuits under Section 10(b)must be brought within ________ of the date the plaintiff discovered or should have discovered the fraud or within ________ of the date of the violation,whichever is earlier.

A)two years,five years
B)six months,one year
C)two years,three years
D)one year,two years

Question 38

How are criminal prosecutions of illegal insider trades brought?

A)Through the U.S.Attorney's Office.
B)By the Department of Justice through the U.S.Attorney's Office.
C)By the Federal Attorney General.
D)By the Office of Secured Trading.

Question 39

In order to be actionable under Rule 10b-5,the misstatements or omissions must be made with

A)negligence.
B)without due care.
C)scienter.
D)facts.

Question 40

Which of the following is true regarding bounties in insider trading prosecutions?

A)There are no bounties in insider trading prosecutions.
B)They may be as high as 5 percent of any revenues recovered from a defendant through penalties or settlement.
C)They may be as high as 10 percent of any revenues recovered from a defendant through penalties or settlement.
D)They may be as high as 15 percent of any revenues recovered from a defendant through penalties or settlement.

Question 41

Under Section 16(b)pertaining to short-swing profits,a person will be considered a(n)________ of any securities held by his or her immediate family or any other relative living in his or her household.

A)family owner
B)beneficial owner
C)actual owner
D)imputed owner

Question 42

Section 16(a)of the 1934 Act requires that officers,directors,and greater-than-10 percent shareholders of companies that have registered any class of equity securities under the 1934 Act file ________ reports with the SEC.

A)actual ownership
B)beneficial ownership
C)insider ownership
D)listed stock

Question 43

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.

A)innocent transaction
B)approved negotiation
C)unorthodox transaction
D)designated sale

Question 44

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

Question 45

Fact pattern 23-1
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 has brought to light facts establishing that the biscuits were not defective and that the problem actually law with improper retention policies 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.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 23-1.Is there a basis upon which to hold Trudy liable for a securities violation for disclosure of the information regarding the likely dismissal of the lawsuit?

A)Not unless she had signed a confidentiality agreement with Food Corporation.
B)Yes,she could be held liable as a tipper.
C)Yes,she could be held liable as a tippee.
D)Yes,she could be held liable as a remote tippee.

Question 46

Who can bring a suit for aiding and abetting under Section 10(b)? What must be proven?

Question 47

Which of the following is not a requirement for a Rule 10b-5 violation?

A)The defendant either used the mails,an instrumentality of interstate commerce,or a facility of a national securities exchange.
B)The defendant made a statement that either misrepresented or omitted a fact.
C)The misrepresentation or omission was made with scienter.
D)The statement was made in connection with a public offering.

Question 48

Susan,an accountant,prepared an audit report for a company that wishes to include the report in a registration statement.What must Susan do before the company can do so? What should Susan do to help protect herself against liability?

Question 49

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?

Question 50

A prediction will not be treated as a misstatement under Rule 10b-5 when

A)the person making the prediction does not believe it at the time.
B)there is no reasonable basis for a prediction.
C)the prediction is offered as a guarantee.
D)the facts do not develop as predicted.

Question 51

Fact pattern 23-1
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 has brought to light facts establishing that the biscuits were not defective and that the problem actually law with improper retention policies 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.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 23-1.Can Trudy be considered an insider of Food Corporation?

A)No
B)Yes,as a derivative insider.
C)Yes,as a temporary insider.
D)Yes,as a remote insider.

Question 52

A misstatement under Rule 10b-5 is defined as a misrepresentation of

A)opinion.
B)fact.
C)forward looking statements.
D)all of the responses are correct

Question 53

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?

A)Liability is imposed under Section 16(b)regardless of the insider's state of mind.
B)Intent to violate the securities laws must be found in order for there to be a violation of Section 16(b).
C)A trader must at least act without caution in order to be found liable for violating Section 16(b).
D)A trader must at least act negligently in order to be found liable for violating Section 16(b).

Question 54

Which of the following is not a part of the safe harbor provision for forward-looking statements under the 1934 Act?

A)A statement containing a projection of revenues,income,or other financial items.
B)A statement of the plans and objectives of management for future operations.
C)A statement of future economic performance.
D)A statement in a financial statement prepared in accordance with generally accepted accounting principles.

Question 55

Sampson works as an accountant for ABC Accounting and 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 Barry that she is sure she can turn things around if he will only look help her our in the audit report.Sampson,who was infatuated with Delilah,agreed to include inaccurate umbers in the company's audit report which 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?

A)Because he is a secondary actor,he cannot be found liable for the violation of any laws involving securities although he was aware of how the audit opinion would be used.
B)Because he is a secondary actor,he can be found liable for the violation of some laws involving securities,but not Section 10(b).
C)Because he is a primary actor,he can be found liable for the violation of Rule 10(b)(6)because he participated in the making of a false statement.
D)As a secondary actor,he can be found liable for the violation of Section 10(b)since he was aware of how the audit opinion would be used.

Question 56

Fact pattern 23-1
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 has brought to light facts establishing that the biscuits were not defective and that the problem actually law with improper retention policies 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.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 23-1.Is there a basis upon which to hold Frank liable for a securities violation based upon his receipt of the information?

A)No because he had not duty toward Food Corporation.
B)Yes,he could be held liable as a tipper.
C)Yes,he could be held liable as a tippee.
D)Yes,he could be held liable as a remote tippee.

Question 57

Drug Company X reports the introduction of a new pill that is guaranteed to cause weight loss with no side effects.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?

A)Yes,because she has no duty to disclose later test results.
B)Yes,because she has no duty to disclose later test results that involve only cosmetic issues.
C)Yes,because she has no duty to disclose later test results that involve issues that are not life threatening.
D)No,she made the wrong decision because she has an obligation to disclose the results.

Question 58

Which of the following statements,if reasonably calculated to influence the investing public,could result in liability under Rule 10b-5?

A)a press release
B)a letter to shareholders
C)a speech to a trade association
D)all of the responses are correct