Reg. of Fraud in Sec. Trxn & Insider Trading: 1934 Act

Act of 34

  1. Broad Scope of §10)b & Rule 10)b)5 4 Insider Trading
    1. Section 10)b
      1. Unlawful 4 any person 2 use in cnxn w/buy / sell of any sec. 2 engage in any manipulative / deceptive contrivances in contravention of SEC rules
    2. SEC Rule 10)b)5
      1. Unlawful 4 any person dir'ly / indir'ly in cnxn w/buy / sale of sec. 2
        1. Empl. any device, scheme / artifice 2 defraud
        2. Make any untrue stmt / omit material fact
        3. Engage in any act, pract., / course of busi. operating as fraud / deceit on any person
  2. Applic. of §10)b & Rule 10)b)5
    1. Viol.'s
      1. When spec. rel. w/co. giving info, can't use it 4 stock trade (Cady Roberts)
      2. Insider trading on material nonpub. info (TX Gulf Sulphur)
      3. Insider receiving stock option (TX Gulf Sulphur)
    2. Policies
      1. Unfair 2 allow people w/info 2 trade b/c want level field 2 encourage investing
      2. Info belongs 2 corp. & improper 2 steal & profit
      3. But arg. shouldn't reg. insider trade 4 eff. & accurate mkt pricing
  3. Refinements of §10)b
    1. Indiv's Protected / Can Sue
      1. Only purchaser / seller of sec. by implied priv. C/A (Blue Chip)
    2. Indiv's Reg'ed / D: Insider Trading
      1. Corp.
        1. Buy stock back (Zahn)
        2. Make misleading stmt (Tx Gulf Sulphur)
      2. Insiders of Corp
        1. Officers / dir'ors trading by material nonpub. info (TX Gulf)
        2. Tippee but harder
      3. Theories on Who Can Viol. When
        1. Source of duty rel. gives rise 2 duty 2 discl. / refrain from trade & duty not created by holding info (Powell, Chiarella)
          1. Cov's tippee b/c derivative duty from insiders' duty
          2. Only tipper's motive matters & tippee can get free ride
        2. Misapprop'ing / obtaining improperly non-pub. info has abs. duty 2 discl. / refrain from trade (Burger)
          1. Accepted by Carpenter but Sup Ct evenly div'ed
          2. Accepted 4 crim. liab. 4 misapprop
          3. Inconsistent 2 apply 4 civil litig.
        3. Access of info by virtue of position, then duty 2 discl / refrain from trading (Blackmun)
    3. Rule 14e-3
      1. Specif. Rule 4 Takeover Which Escapes 10)b Reg.
        1. Unlawful 4 person w/nonpub. info about tender offer of takeover derived from offering party (acq'ing party) / target corp. 2 use it
        2. Need subst'l step toward tender offer
    4. Scienter Role
      1. Must prove D's intent (not neg.) 2 deceive 4 10)b & Rule 10)b)5 axns
    5. Types of Fraud Under 10)b
      1. Not Fed. Fid. Stt (Santa Fe v. Green)
        1. Only need full discl. 2 prevent manipulation / deception
  4. Insider Trade Reg. by §16
    1. Apply Only 2 Reporting Co's
    2. Sub A: Need 2 File Reports w/SEC 4 Stock Ownership If
      1. Sr. officer
      2. Dir'or
      3. Sig. SH / 10% shares
    3. Sub B: Automatic Reg.
      1. Corp. can recov. short term profit p by 16)a people from buying sec.
      2. Short term is 6 mo.
      3. Need @ least 2 trxns of buy & sell
      4. If more than 2 trxn, highest sale price - lowest purchase price = profit
      5. Need 2 status of 16)a person (sig. SH esp'ly) @ both ends of trxn
    4. Split of Auth.: Merge & Officer's Forced Surrender of Stock
      1. Some cts give forced seller exception so only vol. sale under 16)b
      2. Others not give exception
  5. Fraud on Mkt: §10)b
    1. Materiality
      1. Balance by weighing probability of event (e.g. merger) happening v. magnitude (Basic) 2 det. if material fact
      2. Mgmt not liab. 4 forward looking stmts / predictions about corp.
    2. Fraud on Mkt Theory
      1. For misrep., no need 2 est. reliance but need causation (Basic)
      2. Assume that relied on mkt pricing as fair pricing
      3. Based on eff. cap. mkt hypothesis that mkt absorbs all info

State's Role In Reg'ing Insider Trading

  1. Usually Fed. Law Gov's
  2. Min. Jxn (NY)
    1. Insider Trading Stand.
      1. Can have C/A if corp. reputation harmed by fid. duty breach (Diamond)

This material is copyrighted by the author. Use of this material for profit is strictly prohibited without written consent from the author.

12/5/1996

Ms. Haeji Hong

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