Deck 22: Securities Fraud And Insider Trading

Question 1

A person considered an insider of the company whose securities were traded is liable under Rule 10b-5 if the trade was made on the basis of material nonpublic information about the company.

Answer 1

True

Question 2

According to Rule 10b-5,a company's silence or "no comment" to a rumor will make it liable,but only if the company has not previously spoken on the subject and insiders are not trading or tipping.

Answer 2

False

Question 3

A prediction about the future can be a misstatement under Rule 10b-5,but only if the person making the prediction does not believe it at the time.

Answer 3

True

Question 4

The Sarbanes-Oxley Act of 2002 makes it a crime to knowingly defraud any person in connection with any security of an issuer that has a class of securities registered under section 12 of the 1934 Act.

Question 5

To prevail on a securities fraud claim,a plaintiff must prove "loss causation," that the defendant's misstatement caused the plaintiff to suffer economic loss.

Question 6

Under Rule 10b-5 a company may not have a "no comment" policy,and must act to dispel untrue rumors.

Question 7

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

Question 8

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

Question 9

Research shows that because of the severe penalties involved,insider trading in China is very rare.

Question 10

The SEC and the U.S.Attorney's offices may use section 17(a)to prosecute securities fraud,but private parties may not sue based on it.

Question 11

A company is not liable for hyperlinks to third-party information that the company has explicitly or implicitly endorsed or approved.

Question 12

A securities fraud claim can be used as a predicate act in a civil case under the Racketeer Influenced and Corrupt Organizations Act regardless of whether the defendant has been criminally convicted in connection with the fraud.

Question 13

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

Question 14

The Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act)provides that "political intelligence" firms,but not Congressional staff,can be liable for trading based on material nonpublic information derived from the officials' positions.​

Question 15

In Morrison v.National Australia Bank Ltd.,the U.S Supreme Court held that Section 10(b)of the 1934 Act applies to any company that trades on the New York Stock Exchange.

Question 16

CASE 22.3 Halliburton Co.v.Erica P.John Fund,Inc.(2014)dealt with a question of whether the defendant could present direct evidence concerning price impact to defeat the Basic presumption of reliance at the class certification stage.

Question 17

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

Question 18

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 19

Rule 10b-5 applies to registered but not to unregistered securities.

Question 20

The SEC itself has criminal enforcement power.

Question 21

Security laws contain no provision for the payment of bounties to individuals whose tips result in insider trading prosecutions.

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

Which of the following represents the general duty under Rule 10b-5 in regard to the duty of a company to reveal corporate developments?

A) A company has no general duty under Rule 10b-5 to reveal corporate developments unless the company or its insiders (1)trade in securities,or (2)recommend trading to someone else.
B) A company has no general duty under Rule 10b-5 to reveal corporate developments unless the company or its insiders (1)trade in securities,(2)recommend trading to someone else,or (3)disclose the information as a tip while withholding it from the general public.
C) A company has a general duty under Rule 10b-5 to reveal corporate developments that are material.
D) A company had a general duty under Rule 10b-5 to reveal corporate developments if it appears (1)that developments are material,and (2)that the material developments will have a negative effect on the company's financial reports.

Question 24

Which of the following is true regarding who can sue under Rule 10b-5?

A) Only those who purchased the securities at issue may sue.
B) Only those who sold the securities at issue may sue.
C) Only those who have actually purchased or sold the securities at issue may sue.
D) Anyone who either actually purchased or sold the securities at issue,and also anyone who can prove that he or she would have purchased or sold the securities at issue had they known the true facts may sue.

Question 25

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

A) negligence.
B) lack of due care.
C) scienter.
D) recklessness.

Question 26

In Stoneridge Investment Partners,LLC v.Scientific-Atlanta,Inc.,the U.S Supreme Court analyzed the question of whether customer-supplier companies that agreed to arrangements allowing an issuer to mislead its auditor are liable in a private action under section 10(b)of the 1934 Act.The Court ruled that:

A) based on "scheme liability," the customer-supplier companies could be held liable although no public statement was made.
B) based on "transaction causation" the plaintiffs could establish reliance and that the plaintiffs were,therefore,entitled to proceed.
C) plaintiff investors had no private right of action because they did not rely upon the statements or representations at issue.
D) the plaintiff investors had no private right of action because the defendants were not aiders and abettors and,instead,acted primarily on their own behalf outside the realm of securities regulation.

Question 27

In a suit for aiding and abetting as per section 20(e)of the 1934 Act,to hold a person liable as an aider and abettor,the government must show all of the following EXCEPT:

A) the existence of a violation of section 10(b)or Rule 10b-5 by the primary party.
B) the defendant's knowledge of that primary violation of Rule 10b-5.
C) that the suit's plaintiff is a private individual.
D) "substantial assistance" of the violation by the defendant.

Question 28

An employee who trades or tips using confidential information belonging to the employer can be liable under the Mail and Wire Fraud Acts.

Question 29

A right of action under section 10(b)may expire before any plaintiffs discover they have been wronged or even before damages have been suffered at all.

Question 30

In determining materiality,a court will consider several factors,including all of the following EXCEPT:

A) an increase in the stock price after public announcement of a merger.
B) whether the information comes from an insider.
C) whether the information was sent through the mail.
D) whether information concerning a potential acquisition is accompanied by implied certainty.

Question 31

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 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

In Matrixx Initiatives v.Siracusano,the U.S.Supreme Court analyzed the question of whether an issuer must disclose known information about possible side effects of a drug that could affect the drug's stock price even though no proven statistical link exists between use of the drug and the adverse effect.The Court held:

A) a fact finder could determine the company's statements to be material to a reasonable investor and therefore had a duty to update them as soon as they became unreliable.
B) a person who trades while in possession of inside information violates Rule 10b-5 only if he or she decided to trade based on that information.
C) a requirement of such a representation in the agreement did not exclude a finding of reasonable reliance on the misrepresentation.
D) a plaintiff must prove that the defendant acted with "deliberate recklessness" to satisfy the scienter requirement.

Question 34

A person may be liable under Section 16(b)of the 1934 Act if that person 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 35

A controlling shareholder is traditionally considered an insider.

Question 36

Lawsuits under Section 10(b)must be brought within __________ of the date the plaintiff discovered or should have discovered the facts constituting the violation 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 37

Under what circumstances will reliance be presumed for purposes of establishing liability under Rule 10b-5?

A) If the investor shows that the defendant made a public material misrepresentation that would have caused reasonable investors to misjudge the value of the defendant's stock.
B) If the investor shows that (1)the defendant made a public material misrepresentation that would have caused reasonable investors to misjudge the value of the defendant's stock and (2)the investor traded shares of the defendant's stock in an open securities market after the misrepresentations were made and before the truth was revealed.
C) If the investor shows that (1)the defendant made a public material misrepresentation that would have caused reasonable investors to misjudge the value of the defendant's stock,(2)the investor traded shares of the defendant's stock in an open securities market after the misrepresentations were made and before the truth was revealed,and (3)the investor made specific inquiries from professionals regarding the value of the stock before trading.
D) If the investor shows that (1)the investor traded shares of the defendant's stock in an open securities market after the misrepresentations were made and before the truth was revealed,and (2)the investor made specific inquiries from professionals regarding the value of the stock before trading.

Question 38

In relation to forward-looking statements,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 39

In CASE 22.1 Securities and Exchange Commission v.Texas Gulf Sulphur Co.(1971),the question was whether a press release giving a misleading impression about the results of a drilling operation violated Rule 10b-5.How did the court rule?

A) The company acted only in response to rumors and had no obligation to set forth additional facts regarding the drilling operation,thereby negating any basis for Rule 10b-5 liability.
B) The company violated Rule 10b-5 by issuing the misleading press release.
C) A press release standing alone may not violate Rule 10b-5,and the company could not be held liable because it made no actionable statements outside the press release.
D) The company could be held liable under Rule 10b-5 but only because it issued other statements in addition to the press release.

Question 40

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,defrauds the principal of the exclusive use of that information,but does not make the fiduciary an insider.

Question 41

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 42

A(n)__________ period is any period longer than three business days during which __________ of the participants in a retirement plan are prevented from trading.

A) loss causation; 80%
B) scheme liability; 25%
C) blackout; 50% or more
D) stock parking; 80%

Question 43

Which of the following is true regarding Section 16(c)'s restriction on selling stock short?

A) Section 16(c)prohibits officers,but not directors,from selling any of their company's equity securities short.
B) Section 16(c)prohibits directors,but not officers,from selling any of their company's equity securities short.
C) Section 16(c)prohibits officers or directors from selling any of their company's equity securities short.
D) Section 16(c)allows both officers and directors to sell their company's equity securities short as long as the equities are obtained and delivered within 20 days after the short sale.

Question 44

In CASE 22.3 Halliburton Co.v.Erica P.John Fund,Inc.(2014),the U.S.Supreme Court considered the __________ theory,as well as the question a defendant in a securities fraud trial should be allowed to present evidence to challenge the __________.

A) truth-on-the-market; Levinson presumption of reliance
B) efficient capital market; Basic presumption of reliance
C) fraud-on-the-market; Basic presumption of reliance
D) bespeaks doctrine; Basic presumption of scienter

Question 45

__________ prohibits the practice of selective disclosure by issuers of publicly traded securities of material nonpublic information,such as advance warnings of earning results,to securities analysts or selected institutional investors before making full disclosure of the same information to the general public.

A) The bespeaks caution doctrine
B) The Misstatement Rule
C) Regulation FD
D) Regulation AC

Question 46

Which of the following is true regarding remedies available under Rule 10b-5?

A) The measure of damages is typically out-of-pocket loss,or an investor may elect to rescind the transaction; and the court may award prejudgment interest,but punitive damages are unavailable.
B) The measure of damages is typically out-of-pocket loss with no right on the part of an investor to elect to rescind the transaction,and the court may award prejudgment interest; but punitive damages are unavailable.
C) The measure of damages is typically out-of-pocket loss,or an investor may elect to rescind the transaction; the court may award prejudgment interest,with punitive damages available in appropriate cases.
D) The measure of damages is typically out-of-pocket loss with no right on the part of an investor to elect to rescind the transaction; the court may award prejudgment interest,with punitive damages available in appropriate cases.

Question 47

Selby,an accountant and auditor with ABC Accounting,was auditing XYZ Company.Denali,the president of XYZ Company,told Selby that if the true condition of the company were exposed,Denali would certainly be fired.Denali is sure things can be turned around if Selby will only "help" out in the audit report.Selby agreed to include inaccurate numbers in the company's audit report knowing that the opinion would be included in the company's annual report on Form 10-K filed with the SEC.Unfortunately,Denali was not able to turn the company's performance around,and it went into bankruptcy later that year.Selby becomes aware that an investigation is being conducted.Which of the following is true regarding Selby's potential liability?

A) As a secondary actor,Selby cannot be found liable for the violation of any laws involving securities even though Selby was aware of how the audit opinion would be used.
B) As a primary actor,Selby can be found liable for the violation of some laws involving securities,but not Section 10(b).
C) As a primary actor,Selby can be found liable for a violation of Rule 10(b)based on participation in the making of a false statement.
D) As a secondary actor,Selby can be found liable for the violation of Section 10(b)based on awareness of how the audit opinion would be used.

Question 48

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 49

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 50

In United States v.O'Hagan,O'Hagan,a partner in the law firm of Dorsey & Whitney,represented Grand Met.Grand Met revealed to O'Hagan that Grand Met intended to make a tender offer to Pillsbury.Based on this confidential material information from his client O'Hagan purchased stock and options in Pillsbury prior to a public announcement of Grand Met's tender offer for Pillsbury.O'Hagan realized more than $4million in profits but was later convicted of insider trading.The U.S.Supreme Court upheld O'Hagan's criminal conviction based on the:

A) Derivative Insider Theory of Insider Trading.
B) Classical Theory of Insider Trading.
C) Misappropriation Theory of Insider Trading.
D) Bespeaks Doctrine of Insider Trading.

Question 51

Section 16(a)of the 1934 Act requires that officers,directors,and greater-than-10% shareholders of companies that have registered any class of equity securities under the 1934 Act file __________ reports with the SEC and with any national securities exchange on which their company's equity securities are listed.

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

Question 52

In CASE 22.4 Salman v.United States (2016),the court addressed the issue of whether a tipper breached a fiduciary duty by giving a tip to a relative who received no pecuniary benefit when the relative tipped a third party.How did the court rule?

A) Salman cannot be held liable as a tippee because the tipper did not personally receive money or property in exchange for the tips.
B) Fiduciary duty can only be breached when the tipper discloses the inside information for a personal benefit.
C) A tipper does not personally benefit unless the tipper's goal in disclosing inside information is to obtain money,property,or something of tangible value.
D) A gift of confidential information to anyone,not just a "trading relative or friend," is enough to prove securities fraud and upheld Salman's conviction for conspiracy and insider trading.

Question 53

Which of the following is true regarding the regulation propounded by the SEC titled Regulation Analyst Certification (Regulation AC)?

A) It prohibits analysts from issuing reports that they do not personally believe to be true,and it also requires the disclosure of any analyst compensation arrangements related to specific recommendations or views contained in research reports.
B) It prohibits analysts from issuing reports that they do not personally believe to be true,but it does not require disclosure of any compensation reports.
C) It requires that analysts report compensation arrangements in relation to recommendations or views contained in research reports but,because of problems involving proof,it does not specifically prohibit analysts from issuing reports that they do not personally believe to be true.
D) The regulation will be put into action in phases with the first phase,effective in 2018,requiring disclosure of compensation arrangements in relation to recommendations or views contained in research reports and the second phase,effective in 2020,prohibiting entirely the issuance of recommendations or views in relation to stock for which an initial public offering was made within the previous 12 months.

Question 54

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 55

In CASE 22.5 Somers v.Digital Realty Trust Inc.,the court addressed the question of whether an employee who reports possible violations of securities laws only internally,and not to the SEC,is entitled to the whistleblower protections of the Dodd-Frank Act.How did the court rule?

A) The court held that whistleblowers may recover under the Dodd-Frank Act even if they have only reported suspected violations of law internally and not to the SEC.
B) The court found that internal reporting brings a higher likelihood of a problem being addressed,along with an increased risk of employer retaliation.
C) Whistleblower protections under Dodd-Frank are only available to individuals in an auditor capacity.
D) The court found that the SEC regulation incorrectly reflects congressional intent to provide protection for those who make internal disclosures as well as those who make disclosures to the SEC.

Question 56

When a brokerage house knew or recklessly disregarded information that would indicate insider trading activities on the part of its employees:

A) it may be fined.
B) it must fire the employees.
C) the SEC will recall its securities license.
D) it can be sued,unless the information resulted from communication via social media.

Question 57

Under the blue sky laws in certain states,investors who allege that they did not sell their securities because of the defendants' fraud may bring __________ claims.

A) federal
B) meritless
C) class action
D) holder

Question 58

If a purchase or sale by an officer,director,or greater-than-10% 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 59

Which of the following is NOT true regarding the misappropriation theory of insider trading?

A) If a trader discloses to a source of nonpublic information that he or she plans to trade on the basis of that information,there is no violation under the misappropriation theory.
B) Liability under the misappropriation theory requires deception.
C) The misappropriation theory widens the class of persons who can be found liable for insider trading.
D) The trader cannot be held liable unless he or she is an insider of the company whose securities are traded.

Question 60

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 of material importance.
C) The misrepresentation or omission was made with scienter.
D) The statement was made in connection with a public offering.

Question 61

Drug Company X reports the introduction of a new pill that is guaranteed to result in weight loss with no side effects.The information was advertised in connection with a public offering of stock of the company's stock.Later,it becomes apparent through additional testing that unfortunately the new pill also results in premature hair loss,a material issue.Misha is the president of Company X and is pleased with sales of the drug but recognizes that the drug can no longer be advertised as having no side effects.Still,Misha does not believe any misrepresentations were made because Misha was not aware of the hair loss side effect when previous statements were made.Misha decides to do nothing.Is this decision correct as far as Rule 10b-5 is concerned?

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