Deck 41: Corporations: Securities and Investor Protection

Question 1

If an investor purchased securities and suffered damages as a result of an issuer's false or misleading statement,the investor is entitled to bring a civil suit to recover his or her losses.

Answer 1

True
Explanation: If an investor purchased securities and suffered damages as a result of an issuer's false or misleading statement, the investor is entitled to bring a civil suit to recover his losses.

Question 2

Under the Securities Exchange Act of 1934,executive officers are not considered statutory insiders.

Answer 2

False
Explanation: Under Section 16(a) of the 1934 act, certain large stockholders, executive officers, and directors are considered statutory insiders.

Question 3

Securities may be sold during the prefiling period.

Answer 3

False
Explanation: The prefiling period begins when an issuer begins to think about issuing securities, and it ends when the issuer files the registration statement and prospectus with the SEC. Before filing a registration statement and prospectus with the SEC, an issuer cannot make any offers to sell securities.

Question 4

Alice,a certified public accountant (CPA)made mistakes in auditing the financial statements of ABC Company,a publicly traded corporation.Although Alice later became aware of the mistake and knew ABC was soliciting investors,she kept quiet about it,and ABC proceeded to sell stock without revealing the error.After ABC went bankrupt,investors sued Alice alleging that she had primary liability under federal securities law.Which of the following is the most likely result assuming the court follows the reasoning of David Overton and Jerome I.Kransdorf v.Todman & Co.,CPAs,P.C.and Trien,Rosenberg,Rosenberg,Weinberg,Ciullo & Fazzari,the case in the text involving a similar situation?

A) That while Alice had a duty to correct her opinion, she could not be held primarily liable under federal securities law.
B) That Alice had no duty to correct her opinion in regard to investors because her contract was only with ABC Company, and the investors had no right to rely upon it.
C) That Alice had a duty to correct her opinion and that she could be held primarily liable under federal securities law.
D) That Alice had no duty to correct her opinion unless the facts establish that one or more investors specifically asked her about the results of the audit in which event she could be held primarily liable under federal securities law if she failed to disclose the mistake.
E) That Alice had a duty to correct her opinion only if the mistake resulted from gross negligence on her part in which event she would also have a duty to disclose the mistake to any potential investors.

Question 5

How are the heads of the Securities and Exchange Act chosen?

A) They are appointed by the president.
B) Each state has one appointee appointed by the governor of each state.
C) They are appointed by a two-thirds vote of the Senate.
D) They are appointed by a majority vote of the Senate.
E) They are appointed by a majority vote of the House of Representatives.

Question 6

If a violation of federal securities laws is serious enough to merit criminal prosecution,the Fraud Section of the Securities and Exchange Commission prosecutes the action.

Question 7

Which of the following is true regarding examples of securities?

A) Debentures, warrants, bonds, and stocks are all securities.
B) Warrants and stocks are securities, but debentures and bonds are not.
C) Stocks, warrants, and bonds are securities, but debentures are not.
D) Stocks, warrants, and debentures are securities, but bonds are not.
E) Stocks and bonds are securities, but debentures and warrants are not.

Question 8

The Securities and Exchange Commission is headed by how many individuals?

A) 50
B) 25
C) 20
D) 10
E) 5

Question 9

A person who violates the 1933 Securities Act can be fined but not sent to jail.

Question 10

Which of the following did the appellate court rule in Securities and Exchange Commission v.Mutual Benefits Corp.,the case in the text involving whether a viatical settlement investment is an investment contract under securities laws?

A) That a viatical settlement investment is not an investment contract because no significant post-purchase activity takes place in such contracts, and the expectation of profits is not therefore based solely on the efforts of the promoter or a third party.
B) That a viatical settlement investment is not an investment contract because profit depends entirely upon the mortality of the insured.
C) That a viatical settlement investment is not an investment contract because such contracts are void as against public policy.
D) That a viatical settlement investment is an investment contract in that investors were offered and sold an investment in a common enterprise in which they were promised profits that were dependent on the efforts of the promoters.
E) That a viatical settlement investment is an investment contract because no significant post-purchase activity took place, thereby establishing the dependence of profits on the presale activities of the promoter.

Question 11

The average investor does not have to register securities when he or she wants to sell.

Question 12

Which of the following created the Securities and Exchange Commission?

A) The Securities Act of 1933
B) The Securities Exchange Act of 1934
C) The Exchange Commission Act of 1932
D) The Oversight Act of 1935
E) The Stock and Bond Act of 1930

Question 13

Banks themselves oversee the issuance of shares and bonds in Sweden.

Question 14

The SEC may issue bounty payments to insider-trading whistle-blowers.

Question 15

Which of the following is true regarding federal acts regulating securities transactions?

A) The Securities Act of 1933, the Securities Exchange Act of 1934, and the Anti-Fraud Securities Act of 2001 are all federal acts regulating securities transactions.
B) The Securities Exchange Act of 1934 and the Securities Act of 1933 are federal acts regulating securities transactions, but the Anti-Fraud Securities Act of 2001 is not.
C) The Anti-Fraud Securities Act of 2001 and the Securities Exchange Act of 1934 are federal acts regulating securities transactions, but he Securities Act of 1933 is not.
D) The Anti-Fraud Securities Act of 2001 and the Securities Act of 1933 are federal acts regulating securities transactions, but he Securities Exchange Act of 1934 is not.
E) The Securities Act of 1933 is a federal act regulating securities transactions, but the Securities Exchange Act of 1934 and the Anti-Fraud Securities Act of 2001 are not.

Question 16

The SEC issues opinions regarding the worth of securities.

Question 17

Under the 1933 act,any security offered or sold to a permanent resident of the single state where the issuer of the security resides and does business is exempt.

Question 18

Which of the following is false regarding the Mexican Securities Market?

A) Existing laws permit non-Mexican entities to issue securities.
B) Existing laws do not limit investments in securities outside Mexico by Mexican individuals or companies.
C) The Mexican Stock Exchange is a private sector corporation owned and operated by authorized brokerage dealers.
D) The Mexican Stock Exchange requires that dealers complete all transactions on a cash basis and settle them within a 48-hour period.
E) The National Security Commission (CNV) regulates public offerings and securities trading.

Question 19

Which of the following refers to the practice of an owner of a particular stock telling other investors about the virtues of the stock,artificially increasing demand for the stock,and causing an increase in price only to sell it for a quick profit?

A) Pumping and dumping
B) Marketing and selling
C) Pushing and pulling
D) Increasing and decreasing
E) Inflating and deflating

Question 20

Which of the following references stock and bonds issued by corporations to raise capital for corporate expansion?

A) Acknowledgements
B) Securities
C) Stock and bond options
D) Investment options
E) Funding agreements

Question 21

Which of the following describes investment banking firms that purchase securities from the issuing corporation with the intent of selling them to brokerage houses,which then sell them to the public?

A) Underwriters
B) Offerors
C) Issuers
D) Accredited purchasers
E) Unaccredited purchasers

Question 22

For how long does each member at the head of the Securities and Exchange Commission serve?

A) 5 years
B) 3 years
C) 2 years
D) 1 year
E) Eighteen months

Question 23

Which of the following is a person who controls,is controlled by,or is in common control with the issuer?

A) An affiliate
B) An associate
C) A partner
D) A holder
E) A tipper

Question 24

Which of the following is true regarding the case opener,the case in which Martha Stewart was charged with insider trading after selling stock in a company based on information that her stockbroker gave her that the CEO of the company and his daughter had just sold all of their company stock?

A) She was not convicted of insider trading and sentenced to jail.
B) After a jury trial she was found innocent of insider trading and did not go to jail for anything.
C) She was not convicted of insider trading, but she went to jail for convictions relating to statements made to SEC investigators.
D) She pled guilty to lesser offenses on all counts, paid a large fine, and all charges were dismissed.
E) Charges were dismissed after she agreed to repurchase all shares of stock.

Question 25

Which of the following prohibits the use of manipulative devices to bypass SEC rules?

A) Section 15(a)
B) Section 10(b)
C) Section 5
D) Rule 2
E) Rule 2(5)

Question 26

Which of the following oversees the purchase and sale of securities?

A) The Securities Act of 1933
B) The Securities Exchange Act of 1934
C) The Depression Act of 1932
D) The Oversight Act of 1935
E) The Stock and Bond Act of 1930

Question 27

Once an issuer files a registration statement and prospectus,the ______ period begins.

A) Advertising
B) Post-filing
C) Waiting
D) Approval
E) Prospectus

Question 28

Which of the following permits the SEC to exempt persons,securities,and transactions from securities regulations?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 29

Which of the following created the Public Company Accounting Oversight Board to regulate public accounting firms?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 30

Which of the following begins when the SEC declares the registration statement effective,and ends when the issuer sells all securities offered or withdraws them from sale?

A) The posteffective period
B) The acknowledgement period
C) The approved period
D) The sell period
E) The investment period

Question 31

Which of the following allows the SEC to suspend securities trading if prices vary excessively in a short time period?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 32

Which of the following is not considered an accredited investor?

A) Any natural person whose annual income has been at least $200,000 for the two previous years and expects to make at least $200,000 in the current year.
B) Any corporation or partnership with total assets in excess of $5 million.
C) Insiders of the issuers, such as executive officers or directors.
D) Colleges and universities.
E) Any natural person who has a net worth of at least $500,000.

Question 33

Which of the following references a brief ad that may be issued by an issuer during the waiting period?

A) An advertisement
B) A special offering
C) An unsolicited offering
D) An approved offering
E) A tombstone advertisement

Question 34

Which of the following is false regarding what must occur in order for the exemption involving intrastate issues to apply?

A) Issuers must do at least 80 percent of their business within the state.
B) Issuers must have at least 80 percent of their assets within the state.
C) Issuers must plan to use at least 80 percent of the profits within the state.
D) Issuers must have their main offices in the state.
E) Issuers must conduct at least 80 percent of advertising in the state.

Question 35

Which of the following regulates how companies issue corporate securities?

A) The Securities Act of 1933
B) The Securities Exchange Act of 1934
C) The Depression Act of 1932
D) The Oversight Act of 1935
E) The Stock and Bond Act of 1930

Question 36

Which of the following is the period beginning when an issuer begins to think about issuing securities and ends when the issuer files the registration statement and prospectus with the SEC?

A) The initial filing period
B) The beginning filing period
C) The prefiling period
D) The required filing period
E) The waiting period

Question 37

Which of the following permits the SEC to seek punishment of violators of foreign securities laws?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 38

A[n] ______ prospectus is a prospectus with a warning written in red print at the top of the page warning investors that the registration has been filed with the SEC but has not yet been approved.

A) Red-line
B) Red-herring
C) Red-fish
D) Bait
E) Advertising

Question 39

Which of the following is true regarding exempt transactions?

A) Limited offers, intrastate issues, and resales of securities are all exempt transactions.
B) Intrastate issues and limited offers are exempt transactions, but resales of securities are not.
C) Resales of securities and intrastate issues are exempt transactions, but limited offers are not.
D) Limited offers and resales of securities are exempt transactions, but intrastate issues are not.
E) Limited offers are exempt transactions, but intrastate issues and resales of securities are not.

Question 40

Which of the following permits qualified issuers to register securities that they will sell on a delayed or continuous basis in the future?

A) Delayed registrations
B) Continuous registrations
C) Approved registrations
D) Shelf registrations
E) Acknowledged filings

Question 41

Assuming requirements are satisfied,which of the following,if any,may allow Bernice to avoid registration with the SEC if she proceeds with her plan to offer securities only to friends without advertisement?

A) The limited exemption
B) The accredited exemption
C) The unadvertised exemption
D) The private placement exemption
E) There is no such exemption to registration requirements

Question 42

In which of the following prohibited practices,if any,was Linda engaged by purchasing the shares after she found out about the merger?

A) Insider trading
B) Outlaw trading
C) Presidential trading
D) Officer profiting
E) She did not engage in any prohibited practices because as president, she had the legal right to profit from the upcoming sale.

Question 43

Which of the following is a term,if any,that would describe Scott as an investor?

A) Approved
B) Sophisticated
C) Accredited
D) Superior
E) There is no specific term to describe Scott as he is considered the same as any other investor.

Question 44

Which of the following is the term for the document referenced by Robbie involving information provided to the SEC involving a description of the securities,an explanation of how proceeds will be used,information regarding the management of the company and other matters?

A) Robbie was wrong, and there is no such document.
B) A confirmation statement.
C) A registration statement.
D) An acknowledgement statement.
E) A reference statement.

Question 45

Which of the following would describe Frank in providing information about the asset sale to George?

A) Tipper
B) Provider
C) Providee
D) Tippee
E) There is no descriptive term for Frank because he did nothing wrong.

Question 46

Which of the following is true regarding Bruno's sale of securities before the effective date of registration?

A) He will be able to avoid liability if he can establish the due diligence defense.
B) He will be able to avoid liability if he can establish that the investors who purchased stock early were aware that the securities were sold before the effective date of registration.
C) He will be able to avoid liability if he can establish that the sales before the effective date did not directly result in any losses to investors.
D) That is not a violation of the securities laws.
E) He will almost certainly be liable because the 1933 act provides no defenses for that violation.

Question 47

Which of the following is true regarding Bruno's plan to rely on the due diligence defense?

A) He will be able to do so only if he can establish that the purchasers would have had reasonable grounds to question the registration statement had they reviewed it with due diligence.
B) He will be able to do so only if he can establish that the purchasers would have had reasonable grounds to question the prospectus had they reviewed it with due diligence.
C) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question either the registration statement or the prospectus had they reviewed them with due diligence.
D) He will not be able to use that defense unless he can establish that he reviewed the registration statement and the prospectus, and had reasonable grounds to believe that the registration statement was accurate with no omission of material facts.
E) He will not be able to rely on that defense because he is an issuer.

Question 48

Which of the following would describe Frank in receiving the information from Linda and acting upon it?

A) Tipper
B) Provider
C) Providee
D) Tippee
E) There is no descriptive term for Frank because he did nothing wrong

Question 49

Which of the following is a reason Congress passed the Private Securities Litigation Reform Act of 1995?

A) To provide protection to companies who issue forecasts of earnings.
B) To provide stronger penalties against companies who issue forecasts of earnings that turn out to be wrong.
C) To provide stronger penalties against insiders who trade on forecasts of earnings.
D) To provide protection to insiders who trade on forecasts of earnings.
E) To provide protection to accredited investors who trade on insider information.

Question 50

Which of the following did Congress pass in an effort to prevent exploitation of small investors?

A) The Investment Company Act of 1940
B) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
C) The Market Reform Act of 1990
D) The Securities Act Amendments of 1990
E) The National Securities Market Improvement Act of 1996

Question 51

Which of the following,if any,may be defenses for Bruno?

A) For any alleged violations, Bruno could raise the defense that a plaintiff was aware of the omission or false statement when the security was purchased; but no defense is available based on the theory that omitted or false statements were immaterial to the sale of the security.
B) For any alleged violations Bruno could raise the defenses that a plaintiff was aware of the omission or false statement when the security was purchased, and that any omitted or false statement was immaterial to the sale of the security.
C) Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that a plaintiff was aware of the omission or false statement when the security was purchased; but no defense is available based on the theory that omitted or false statements were immaterial to the sale of the security.
D) Except for the violation of selling securities before the effective registration date, Bruno could raise the defenses that a plaintiff was aware of the omission or false statement when the security was purchased, and that any omitted or false statement was immaterial to the sale of the security.
E) No defenses are available to Bruno because he had already been held liable to the SEC once.

Question 52

Which of the following would describe Linda in providing information about the asset sale to Frank?

A) Tipper
B) Provider
C) Providee
D) Tippee
E) There is no descriptive term for Linda because she did nothing wrong.

Question 53

Which of the following refer to state securities laws?

A) Pink-sky laws
B) Blue-sky laws
C) Orange-sky laws
D) Brown-ground laws
E) Green-grass laws

Question 54

Which of the following is not an example of material information under Section 10(b)and Rule 10(b)-5?

A) A change in the status of litigation against the company.
B) A change in dividends.
C) A new product, process, or discovery.
D) Any change in the financial status of the company.
E) A contract for the sale of corporate assets or for the purchase of assets.

Question 55

Which of the following is the term for the document referenced by Robbie to be provided to the SEC that will be used as an advertising tool to potential investors who can rely on it to decide whether they should buy securities?

A) An advertising statement
B) A prospectus
C) An inventory
D) A proposed income statement
E) A securities advertisement

Question 56

Which of the following prohibits fraud associated with the purchase or sale of all securities?

A) Section 32(c)
B) Section 15(b)
C) Rule 10(b)-5
D) Rule 5(c)-2
E) Rule 2(c)-5

Question 57

Is Rick correct in that the SEC would have no authority to send Bruno to jail?

A) Rick is correct because there are no criminal penalties for violating the 1933 act.
B) Rick is incorrect because the SEC criminally prosecutes some violators although the action would only be a misdemeanor.
C) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Department of Justice resulting in imprisonment for up to five years for a violation.
D) Rick is incorrect because the SEC criminally prosecutes some violators, and a violation of the act is considered a felony.
E) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Federal Bureau of Investigation resulting in imprisonment for up to ten years for a violation.

Question 58

Which of the following references a profit made by a statutory insider from the purchase and sale of their own company stock within a six-month period?

A) Short-swing profits
B) Short-term profits
C) Insider profits
D) Insider profiting profits
E) Contempt profits

Question 59

Which of the following is true regarding who may be considered an insider under the Securities Exchange Act of 1934?

A) Only directors are considered insiders
B) Only employees are considered insiders
C) Any shareholder is considered an insider along with all directors and all employees
D) Directors, officers, and anyone who receives private information regarding the trading of securities may be considered insiders
E) Only directors, officers, and majority shareholders are considered insiders

Question 60

Which of the following limits shareholders' ability to bring class action suits against nationally traded companies?

A) The Class Prohibition Act of 1997
B) The Sarbanes-Oxley Act of 2002
C) The National Securities Markets Improvement Act of 1996
D) The Market Reform Act of 1990
E) The Securities Litigation Uniform Standards Act of 1998

Question 61

For which of the following is George liable?

A) His own profits and also the profits of Frank.
B) His own profits and also the profits of both Frank and Linda.
C) His own profits regardless of whether he knew he was trading in information that had not been made public.
D) Only his own profits and those of Linda.
E) Only his own profits and then only if it can be shown that he knew or should have known that the material information was not public.

Question 62

What is a proxy solicitation and how is it regulated by the SEC?

Question 63

Set forth what a registration statement filed with the SEC generally contains.

Question 64

For which of the following is Linda liable?

A) Her own profits only.
B) Her profits and those of Frank only.
C) Her profits, the profits of Frank, and also the profits of George.
D) Her profits only plus a 10% penalty.
E) Nothing because she acted legally.

Question 65

Set forth the four major responsibilities of the SEC as set forth in the text.

Question 66

Set forth the Howey three-part test for determining if a security exists.

Question 67

ABC Company,a designer of computer software,had a number of new products ready to launch.Jason,a seller of office supplies to ABC Company,was talking with Susie,the president of the company,regarding a product order.Susie was called away from her office for a few minutes,and Jason,who liked to snoop,took the opportunity to go through the papers on her desk.Jason discovered a description of the new software products.He immediately bought lots of ABC Company stock and made a significant profit following the public announcement of the new software and the resulting increase in the price of ABC Company stock.Is there any theory on which Jason could be held liable for a securities violation,and,if so,what? Describe any such theory.