If a manager of an unprofitable business induces shareholders to sell their stock to him by representing that the business will fail, although he knows that the business has become potentially profitable, he violates Rule 10b-5.

Question

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This scenario involves the manager making a material misstatement (representing that the business will fail) with knowledge of its falsity, in order to induce shareholders to sell their stock to him. This would be considered fraud and a violation of Rule 10b-5, which prohibits such conduct in connection with the purchase or sale of securities. The fact that the business has become potentially profitable is also significant, as it would likely be a material fact that shareholders would consider in deciding whether to sell their stock.

If a Manager of an Unprofitable Business Induces Shareholders to Sell