Drug Company X reports the introduction of a new pill that is guaranteed to cause 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.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 new information regarding the side effect of premature hair loss as it is a material issue that could significantly affect the decision of investors. The failure to disclose could be considered a violation of Rule 10b-5, which prohibits fraud in the sale of securities. The fact that the initial statements were made in connection with a public offering of stock only reinforces the materiality of the issue. Therefore, Monika has made the wrong decision by choosing to do nothing in response to the additional testing.

Drug Company X Reports the Introduction of a New Pill