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?

Question

Quizplus · Accepted Answer

Monika has an obligation to disclose the hair loss side effect since it is a material issue that affects the safety and efficacy of the drug. Even if Monika was not aware of the side effect at the time previous statements were made, Rule 10b-5 requires her to make full and fair disclosure of all material information to investors. Failure to disclose this information could be considered a violation of the anti-fraud provisions of the Securities Exchange Act of 1934.

Drug Company X Reports the Introduction of a New Pill