LEGL 2700 Chapter Notes - Chapter 15: Securities Fraud, Insider Trading, Financial Statement

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5. Securities Exchange Act of 1934 make sure you keep records up to date after the first year
a. Regulates the transfer of securities after their initial offering to the public
1) Requires continuous periodic disclosures by publicly held corporations
b. Section 10b and Rule 10b-5 forbids fraud in connection with the purchase or sale of
c. Liability Criminal (DOJ prosecutes); could be individuals or corporations
d. Insider Transactions (disclosure) ONLY applies to insiders
1) Insider: owner of more than 10% of any security (also may depend on how you
are behaving), a director, or an officer of the issuer of a security
2) Insider must disclose stock holdings, and file a statement within 2 days of any
change to their holdings
3) Short-swing profit (6 months) is presumed illegal, regardless if sold based on
insider information or not; profit is then returned to the company
e. Non-public Information (insider trading) applies to ALL types of people; may not use
inside, non-public information to achieve profits in stock transactions (punishment is up
to 10 years in jail and 3x the profit gained to SEC)
1) Classic Insider Trading overhearing information and using it before its public
2) Misappropriation lawyers, etc. who have certain information temporary
insider; ex: O’(agan – was a partner in a law firm representing a company;
profited by using confidential information and the SEC said he violated section 10b
3) Tipper/Tippee liability cannot indirectly do what you cannot do directly can’t
tell your sister to buy certain shares so they gain financially)
a) For tipper to be liable: must communicate nonpublic information for
purpose of someone gaining financially (if tipper is not liable, neither is the
6. Sarbanes-Oxley Act of 2002
a. Revitalization of the SEC increased budget and power of SEC (allowed them to write
more rules and regulations)
b. Accounting Reforms created Public Company Accounting Oversight Board who
oversees auditors of public companies (audits the auditors; auditing committee that
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