Question 1

ACAP and Gary Hume were fined and suspended by FINRA for allowing some con artists to keep accounts at their brokerage firm. They contended they should not be punished for actions of con artists. The appeals court held that:

Accepted Answer

FINRA followed its procedures properly, so the punishment would stand.

Question 2

Fact Pattern 21-1
In 2005, Bettina opened Bettina Brownies in a shopping mall. The brownies were a hit and soon Bettina was operating shops in several malls in Illinois. By 2012 she had expanded operations to Indiana and she decided that it was time to finance expansion through the equity markets. With an investment banker, she prepared for the initial offering of Bettina Brownies. She sold 50,000 shares of stock at $10 a share.
Expansion continued. Keebler determined that Bettina was a well-run company with an attractive financial position. It began secret negotiations with Bettina to buy her interest in the business. News of the negotiations leaked. Mr. Little, CEO of Keebler, denied that they were pursuing a deal with Bettina. A month later Bettina sold her share of the business to Keebler.
Shortly before Bettina sold her interest to Keebler, Joe Kelso, a carpet cleaner was working at Bettina office when he overheard discussion of the sale to Keebler. Joe bought a large number of shares in Bettina. After the Keebler sale was completed, Joe sold his stock for a substantial profit.
-Refer to Fact Pattern 21-1. Suppose Bettina took Rob's advice and called her offerings "brownie squares" rather than a stock. The SEC decided to sue Bettina for failure to follow federal securities laws. To prove that the "brownie squares" were securities for purposes of federal regulation, the SEC must show that:

Accepted Answer

The SEC must show that the investors expected to make a profit and that they actually invested money to prove that the "brownie squares" were securities for purposes of federal regulation. This aligns with the Howey Test, which defines a security as an investment of money in a common enterprise with an expectation of profit derived from the efforts of others.

Question 3

Fact Pattern 21-1
In 2005, Bettina opened Bettina Brownies in a shopping mall. The brownies were a hit and soon Bettina was operating shops in several malls in Illinois. By 2012 she had expanded operations to Indiana and she decided that it was time to finance expansion through the equity markets. With an investment banker, she prepared for the initial offering of Bettina Brownies. She sold 50,000 shares of stock at $10 a share.
Expansion continued. Keebler determined that Bettina was a well-run company with an attractive financial position. It began secret negotiations with Bettina to buy her interest in the business. News of the negotiations leaked. Mr. Little, CEO of Keebler, denied that they were pursuing a deal with Bettina. A month later Bettina sold her share of the business to Keebler.
Shortly before Bettina sold her interest to Keebler, Joe Kelso, a carpet cleaner was working at Bettina office when he overheard discussion of the sale to Keebler. Joe bought a large number of shares in Bettina. After the Keebler sale was completed, Joe sold his stock for a substantial profit.
-Refer to Fact Pattern 21-1. The SEC discovers that Joe Kelso made a lot of money on the sale of his stock in Bettina Brownies. Under what provision of the federal securities laws might Joe be prosecuted?

Accepted Answer

Joe Kelso may be prosecuted under Rule 10b-5, which prohibits fraudulent activities in connection with the purchase or sale of securities. Joe overheard confidential information about the sale of Bettina Brownies to Keebler, which he used to make a substantial profit. This could be considered insider trading, which is illegal under Rule 10b-5.

Question 4

Salman received information about stocks from Michael Kara, his future brother-in-law, who received inside information from Michael's brother, Maher Kara, who worked at Citigroup's investment banking group. Salman and Michael made numerous identical trades and earned significant income. Michael confessed to federal investigators. Salman was convicted of insider trading but contended that he was an innocent tippee who did not receive information directly from Maher who provided the tips and that Maher did not know he was receiving the information. The appeals court held that there was:

Accepted Answer

The appeals court likely found that the chain of information from Maher to Michael and then to Salman, along with their subsequent trades, constituted enough of a connection for insider trading liability, regardless of whether Maher knew Salman was using the information or whether Salman knew the information was insider. This scenario suggests that direct knowledge of the insider's intent or the final recipient of the information is not necessary for a conviction.

Question 5

Salman received information about stocks from Michael Kara, his future brother-in-law, who received inside information from Michael's brother, Maher Kara, who worked at Citigroup's investment banking group. Salman and Michael made numerous identical trades and earned significant income. Michael confessed to federal investigators. Salman was convicted of insider trading but contended that he was an innocent tippee who did not receive information directly from Maher who provided the tips and that Maher did not know he was receiving the information. The appeals court held that there was:

Accepted Answer

The appeals court held that there was evidence that Salman knew he received inside information, making him liable for insider trading. The key factor in insider trading cases is whether the person trading had knowledge that the information was obtained improperly, not necessarily the chain of how the information was passed.

Question 6

Fact Pattern 21-1
In 2005, Bettina opened Bettina Brownies in a shopping mall. The brownies were a hit and soon Bettina was operating shops in several malls in Illinois. By 2012 she had expanded operations to Indiana and she decided that it was time to finance expansion through the equity markets. With an investment banker, she prepared for the initial offering of Bettina Brownies. She sold 50,000 shares of stock at $10 a share.
Expansion continued. Keebler determined that Bettina was a well-run company with an attractive financial position. It began secret negotiations with Bettina to buy her interest in the business. News of the negotiations leaked. Mr. Little, CEO of Keebler, denied that they were pursuing a deal with Bettina. A month later Bettina sold her share of the business to Keebler.
Shortly before Bettina sold her interest to Keebler, Joe Kelso, a carpet cleaner was working at Bettina office when he overheard discussion of the sale to Keebler. Joe bought a large number of shares in Bettina. After the Keebler sale was completed, Joe sold his stock for a substantial profit.
-Refer to Fact Pattern 21-1. If Joe is prosecuted for insider trading, the SEC will need to prove that he had a fiduciary duty to not use the information he heard at Bettina offices. Which case will Joe be most likely to rely upon to prove that he was simply a lucky outsider who did not have a fiduciary duty to not use the information he acquired?

Accepted Answer

Joe will most likely rely upon the case of Chiarella v. United States, which established that a duty to disclose or abstain from trading on inside information exists only when the person owes a fiduciary duty to the source of the information (in this case, Bettina). Joe was not an employee, officer, or director of Bettina and did not owe any fiduciary duty to the company, so he may argue that he was simply a lucky outsider who did not have a duty to refrain from trading on the information he heard.

Question 7

ACAP and Gary Hume were fined and suspended by FINRA for allowing some con artists to keep accounts at their brokerage firm. They contended they should not be punished for actions of con artists. The appeals court held that:

Accepted Answer

The information provided does not specify the outcome of the appeals court decision regarding the punishment of ACAP and Gary Hume by FINRA, making it impossible to determine the correctness of options A, B, C, or D without additional context.

Question 8

Fact Pattern 21-1
In 2005, Bettina opened Bettina Brownies in a shopping mall. The brownies were a hit and soon Bettina was operating shops in several malls in Illinois. By 2012 she had expanded operations to Indiana and she decided that it was time to finance expansion through the equity markets. With an investment banker, she prepared for the initial offering of Bettina Brownies. She sold 50,000 shares of stock at $10 a share.
Expansion continued. Keebler determined that Bettina was a well-run company with an attractive financial position. It began secret negotiations with Bettina to buy her interest in the business. News of the negotiations leaked. Mr. Little, CEO of Keebler, denied that they were pursuing a deal with Bettina. A month later Bettina sold her share of the business to Keebler.
Shortly before Bettina sold her interest to Keebler, Joe Kelso, a carpet cleaner was working at Bettina office when he overheard discussion of the sale to Keebler. Joe bought a large number of shares in Bettina. After the Keebler sale was completed, Joe sold his stock for a substantial profit.
-Refer to Fact Pattern 21-1. Rob DuMase, Bettina's investment banker, told her it costs a lot to comply with the federal securities laws. Rob suggested Bettina might avoid these requirements by calling the shares in her company something other than a "stock," for example "brownie squares," since they are not mentioned in the securities law. If Bettina took Rob's advice, what would the consequences be?

Accepted Answer

Even if Bettina calls her shares "brownie squares," if they meet the definition of an "investment contract" under the Howey test, they are still considered securities and Bettina would still be subject to the federal securities laws. The Howey test focuses on the economic reality of the transaction and whether investors expect to profit from the efforts of others. Therefore, it is not about the label or name of the security but rather the substance of the transaction. If Bettina's shares meet the Howey test, they are subject to the securities laws regardless of how they are referred to.

Question 9

Fact Pattern 21-1
In 2005, Bettina opened Bettina Brownies in a shopping mall. The brownies were a hit and soon Bettina was operating shops in several malls in Illinois. By 2012 she had expanded operations to Indiana and she decided that it was time to finance expansion through the equity markets. With an investment banker, she prepared for the initial offering of Bettina Brownies. She sold 50,000 shares of stock at $10 a share.
Expansion continued. Keebler determined that Bettina was a well-run company with an attractive financial position. It began secret negotiations with Bettina to buy her interest in the business. News of the negotiations leaked. Mr. Little, CEO of Keebler, denied that they were pursuing a deal with Bettina. A month later Bettina sold her share of the business to Keebler.
Shortly before Bettina sold her interest to Keebler, Joe Kelso, a carpet cleaner was working at Bettina office when he overheard discussion of the sale to Keebler. Joe bought a large number of shares in Bettina. After the Keebler sale was completed, Joe sold his stock for a substantial profit.
-Refer to Fact Pattern 21-1. Bettina decides that Rob's advice is not very good and opts to offer stock for sale. What must Bettina do in order to insure that her offering is legal?

Accepted Answer

Bettina must fully disclose all material information concerning her company and the stock she is selling in order to comply with securities laws. Additionally, she must prepare a prospectus as part of her registration statement, which is required by the Securities and Exchange Commission. A contingency plan is not explicitly required by securities laws, although it may be advisable for Bettina to consider preparing one.

Quiz 18: Securities Regulation

ACAP and Gary Hume were fined and suspended by FINRA for allowing some con artists to keep accounts at their brokerage firm. They contended they should not be punished for actions of con artists. The appeals court held that:

ACAP and Gary Hume were fined and suspended by FINRA for allowing some con artists to keep accounts at their brokerage firm. They contended they should not be punished for actions of con artists. The appeals court held that: