Question 1

Bluegrass,Incorporated does ninety-five percent of its business in the state of Kentucky,and substantially all of its assets are located in Kentucky.Bluegrass plans to issue $5,000,000 in new stock,and use the proceeds exclusively in Kentucky.Bluegrass has ten accredited potential investors,nine of whom live in Kentucky,and one who lives in Ohio.Can Bluegrass qualify for a "private placement" exemption or an "intrastate offering" exemption under the Securities Act of 1933?

Accepted Answer

The answer of Bluegrass,Incorporated does ninety-five percent of its business...

Question 2

John operates a sailboat charter service in the United States Virgin Islands.He currently has a fleet of ten boats and would like to have a larger fleet,but he would have to obtain additional investors in order to do so,which he opposes.John is considering having investors buy sailboats,which he would maintain and operate as part of his charter fleet.He would enter into a contract that would sell the boat to an investor,obligate the investor to pay John a monthly fee for the maintenance of the boat,and share profits between John and the investor.Discuss whether this investment is a security under the Securities Act of 1933.

Accepted Answer

The answer of John operates a sailboat charter service in...

Question 3

Is there a private right of action under Section 10b-5 of the Securities Exchange act of 1934?

Accepted Answer

While there is no express private right of action under Section 10b-5 of the Securities Exchange Act of 1934, courts have implied one through their interpretation of the Act. This has been established through case law, most notably in the Supreme Court case of Blue Chip Stamps v. Manor Drug Stores.

Question 4

Smith and Company,certified public accountants,performed the audit work for a large corporation in connection with its registration statement.Smith and Company performed the work according to all appropriate professional standards,but the corporation had cleverly made the inventory look much greater than it actually was.Because the company did not have as much inventory as was indicated on the financial statements,the company was worth much less than it appeared to be.Smith and Company has been named in a lawsuit under Section 11 of the Securities Act of 1933.Even though Smith and Company properly performed the audit,and the fraud on the part of the corporation was such that it would not be uncovered by an audit,Smith and Company cannot prove any of this in court,since all of its audit working papers and computer documentation were accidentally shredded.Discuss Smith and Company's legal situation,what must be proven to establish a violation of Section 11,and any defenses available to the company and its accountants.

Accepted Answer

The answer of Smith and Company,certified public accountants,performed the audit...

Question 5

What are securities laws passed by states typically called?

Accepted Answer

Securities laws passed by states are typically called "blue-sky" laws. This term originates from a comment made by a Supreme Court Justice that such laws were intended to prevent "speculative schemes which have no more basis than so many feet of 'blue sky.'" Blue-sky laws vary by state but generally require securities issuers to register with state regulatory agencies and disclose certain information about their offerings to potential investors.

Question 6

For an investment contract,why is one of the requirements for the contract to be classified as a security that the arrangement be one where the profits are made through the efforts of others?

Accepted Answer

The answer of For an investment contract,why is one of...

Question 7

Short-swing profits are profits made through the buying and selling of a security by a statutory insider occurring within ________.

Accepted Answer

Short-swing profits refer to profits made by statutory insiders from buying and selling a company's stock within a six-month period, as regulated by the SEC under Section 16(b) of the Securities Exchange Act of 1934.

Question 8

Best,Inc.wishes to issue new stock to raise capital.Best is incorporated,and does all of its business in Indiana.Best intends to offer and sell its new stock only to residents of Indiana,and to restrict sales to individuals from other states for the proper time.Which of the following best describes the status of Best's new stock?

Accepted Answer

Best's new stock offering meets the criteria for an intrastate offering exemption because it is offering and selling securities only to residents of Indiana and is restricting sales to individuals from other states for the proper time. As a result, it is exempt from registration under federal securities laws.

Question 9

Karl is the vice president of a medium-size corporation that operates retail sporting goods stores in seven states.Karl has considerable stock that he purchased and received over the years while working there.Karl has purchased no stock for the last three years,because all his excess funds have gone for college expenses for his oldest son.Karl's daughter will begin college in the fall,and Karl needs to sell some stock.Karl knows that one of the retail locations where the corporation owns the real estate was once used as a toxic dump.The corporation is legally obligated to clean up this site,and the costs will have a material effect on the corporation's net income for several years.This information is not yet public.Karl can:

Accepted Answer

Karl has insider information about the corporation's legal obligation to clean up the toxic dump, which is not yet public. Selling his stock without disclosing this information to the purchaser would be considered insider trading and illegal. Option B is the best choice because Karl can sell his stock, but only if he tells the purchaser about the liability for cleaning up the toxic waste. This would ensure that the purchaser has all the relevant information before making a decision to buy the stock.

Question 10

Are the rules on "short-swing" profits under Section 16(b)of the Securities Exchange Act of 1934 too restrictive,or not restrictive enough? Merely because one is a statutory insider,is it proper to limit his or her ability to make a profit on the company's stock? Alternatively,should the six-month period be longer? What is the theory behind making the short-swing profits belong to the corporation?

Accepted Answer

The answer of Are the rules on "short-swing" profits under...

Question 11

Which of the following is true about Rule 16(a)of the Securities Exchange Act of 1934 regarding short-swing profits?

Accepted Answer

Rule 16(a) of the Securities Exchange Act of 1934 requires that any profits made by statutory insiders (such as officers, directors, and large shareholders) from buying and selling their company's stock within a six-month period must be returned to the corporation, regardless of whether insider information was used.

Question 12

Which of the following individuals would not be considered an officer regarding Rule 16 enforcement?

Accepted Answer

According to Rule 16, officers are defined as "a president, vice-president in charge of a principal business unit, division or function, or any other officer who performs a policy-making function." Therefore, an executive officer who does not participate in policy-making functions would not be considered an officer for the purpose of enforcing Rule 16. The other options listed all meet the definition of an officer.

Question 13

What is the general reason for restrictions against insider trading under the Securities Exchange Act of 1934?

Accepted Answer

The general reason for restrictions against insider trading under the Securities Exchange Act of 1934 is that it goes against the principle of fair market practices and allows some participants in the market to have an unfair advantage over others. Using inside information for trading purposes is considered unethical and can harm the integrity of the market.

Question 14

Derek,Alex and Jorge each own stock in Roundball,Inc.Derek is the chief executive officer,Alex is a fifteen-percent shareholder,and Jorge owns one hundred shares,which is less than one percent of the company's outstanding stock.During the first quarter of 2008,each of the three have bought and sold various numbers of shares in Roundball,and each has realized a significant profit.None of the three have used insider information when making any of their transactions.Has a violation of the 1934 Securities Exchange Act occurred,and if so,by whom?

Accepted Answer

The answer of Derek,Alex and Jorge each own stock in...

Question 15

Zelda is a certified public accountant for Kite Company,a company that makes designer kites.An audit discloses the Kite Company's profits have doubled since the previous year,and Zelda rightfully discloses that fact to Rhonda,Kite Company's chief financial officer.The information regarding the profits is material and nonpublic until the corporation announces its earnings in ten days.Both Zelda and Rhonda buy stock in Kite Company.After the earnings information is made public,the price of the stock increases.Are Zelda and Rhonda liable for any violations of federal securities laws?

Accepted Answer

Both Zelda and Rhonda have committed violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Zelda had material nonpublic information about the company's profits before buying stock, and Rhonda was also aware of this information when buying stock. By trading on this nonpublic information, they have engaged in insider trading, which is prohibited by federal securities laws. The fact that the stock price increased after the public announcement of the earnings does not change the fact that they violated securities laws by trading on material nonpublic information.

Question 16

The Insider Trading Sanctions Act:

Accepted Answer

The Insider Trading Sanctions Act permits the Securities and Exchange Commission to obtain a civil penalty of up to three times the illegal profits, gains, or losses avoided on insider trading. It does not allow a private party to obtain such a penalty, nor does it address criminal prosecution or state courts.

Question 17

Fred is an officer at Hill Corporation.Fred,with no inside information,buys four hundred shares of Hill stock in May at $40 per share,and in July,sells two hundred fifty shares at $60 per share.Is Fred liable for short-swing profits?

Accepted Answer

The answer of Fred is an officer at Hill Corporation.Fred,with...

Question 18

Mary is an assembly line worker at a computer company.Mary becomes aware that an improvement is being made to the company's primary computer that will significantly increase profits.Mary tells a friend to buy stock in the company,but instructs her not to tell anyone else.The friend buys stock,but tells two other persons to do the same.The company's profits increase greatly,and all three who purchased stock sell at a tremendous profit.Discuss this situation.

Accepted Answer

The answer of Mary is an assembly line worker at...

Question 19

When an insider discloses material insider information to a non-insider tippee,the tipper is liable for:

Accepted Answer

When an insider discloses material insider information to a non-insider tippee, the tipper is liable for the profits made by the immediate tippee, as well as the profits made by any remote tippees. This is known as the "classical theory" of insider trading liability, which holds the tipper liable for the profits of all downstream traders who traded on the basis of the original tip. In addition to being liable for profits, the tipper may also be subject to civil and criminal penalties for insider trading.

Quiz 32: Investor Protection,E-Securities Transactions,and Wall Street Reform