Learning Objectives What is meant by the term securities? What are the two major statutes regulating the securities industry? When was the SEC created, and what are its major purposes and functions? What is insider trading? Why is it prohibited? What are some of the features of state securities laws? What certification requirements does the Sarbanes-Oxley Act impose on corporate executives?
Securities and Exchange Commission Major Responsibilities of the SEC: –Require disclosure of facts concerning offerings. –Regulate trade in securities. –Investigate securities fraud. –Regulate activities of securities brokers, dealers, and investment advisors. –Supervise mutual fund activities. –Recommend sanctions for violations.
Securities Act The Securities Act of 1933 and Securities Exchange Act of 1934 are designed to protect investors from deceptive, unfair and manipulative practices when buying or selling securities. Securities are instruments such as corporate stock or limited partnership interests that evidence ownership or debt.
What is a Security? In SEC v. Howey (1946), the U.S. Supreme Court held that a security exists in any transaction in which a person: (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily from others’ managerial or entrepreneurial efforts.
Violations of the 1933 Act Intentional or negligent fraud of investors by misrepresenting or omitting material facts in the registration statement and/prospectus. Defenses: Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true. Penalties : –Criminal: up to 5 years in prison and $10,000 fine. –Civil: damages, refund of investment, injunction.
Registration of securities exchanges, brokers, dealers, and national securities exchanges and associations. Requires continuous disclosure system for corporations with securities sold on national exchanges or assets in excess of $10 million and 500 or more shareholders (Sec. 12 companies or 1934 companies). Securities Exchange Act of 1934
Section 10(b) and Rule 10b(5) & Insider Trading Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC. Rule 10b(5) prohibits the commission of fraud in the connection with the purchase or sale of any security.
Insider Trading –Advance information available to corporate officers and directors that can affect future value of stock. Insider trading prohibited: –10b(5) “Insiders” (Officers, Executives and Directors). Section 10(b) and Rule 10b(5) & Insider Trading
Disclosure under SEC Rule 10b-5: –Material omission or misrepresentation may violate 1933 Act and antifraud provisions of 1934 Act and SEC Rule 10b-5. –Key is whether insider’s information is “material”: Fraudulent trading by broker-dealer. Dividend change. Contract for sale of corporate assets. New discovery, process, or product. Significant change in financial condition. Potential litigation.
Private Securities Litigation Reform Act of 1995 Provides “safe harbor” for publicly held companies that make forward-looking statements, such as financial forecasts. Protection against liability from securities fraud with “meaningful cautionary statements.”
State Securities Laws State securities laws are called “blue sky” laws. Issuers must comply with federal and state securities laws and states do not allow the same exemptions as federal government. States could require registration or qualification. Uniform Securities Act has been adopted in part by many states.
Corporate Governance Need for Effective Corporate Governance. Attempts at Aligning the Interests of Officers with Shareholders. Corporate Governance and Corporate Law. –Importance of Audit and Compensation Committees.
Sarbanes-Oxley Act of 2002 Attempts to increase corporate responsibility by: –Stricter disclosure requirements. –Harsher penalties for legal violations. –Corporate officers take responsibility for financial statements and SEC reports. –CEO’s and CFO’s must personally certify reports. Oversight by Public Company Accounting Oversight Board. Protections for Whistleblowers. Enhanced Penalties.
16 Key Provisions: Sarb-Ox
Online Securities Fraud SEC is enforcing anti-fraud provisions of Securities Laws. Use and abuse of internet chat rooms. –Where is the line between free speech and fraud? –Pumping and Dumping: buyer pumps the stock and after it rises, he dumps it, selling at a higher price. Selling unregistered securities by unregistered stock brokers is a problem.
Discussion Go to the FindLaw Web site at: bin/getcase.pl?court=3rd&navby=case&no= p to find the Weiner v. Quaker Oats Co. case that was decided by the U.S. Court of Appeals for the Third Circuit.
Discussion Answer the following questions: –What was the factual background of the dispute before the court? –What issue or issues were raised in the case? –What was the court's decision on the issue or issues, and what reasons did the court give for its decision? –What case did the Third Circuit Court of Appeals cite as precedent in this case?
Last Case Analysis(!) Langley Brothers, Inc., a corporation incorporated and doing business in Kansas, decides to sell no par common stock worth $1 million to the public. The stock will be sold only within the state of Kansas. Joseph Langley, the chairman of the board, says the offering need not be registered with the Securities and Exchange Commission. His brother, Harry, disagrees. Who is right? Explain. In responding to the question be sure to: –Discuss the exempt securities pursuant to the Securities and Exchange Act. –Determine whether or not Langley Brothers would be subject to registration requirements.
Almost Last Writing Assignment (!) Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity serving portions of Montana and North Dakota. Reliant was in the final stages of planning a takeover of Dakota Gasworks, Inc. a natural gas distributor that operated solely within North Dakota. Emerson went on a weekend fishing trip with his uncle, Ernest Wallace.
Almost Last Writing Assignment (!) Emerson mentioned to Wallace that he had been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. On returning from the fishing trip, Wallace met with a broker from Chambers Investments and purchased $20,000 of Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57% of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72% before leveling out. Wallace then sold his Reliant stock for a gross profit of $14,400.
Almost Last Writing Assignment (!) Would registration with the SEC be required for Dakota Gasworks securities? Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? What theory or theories might a court use to hold Wallace liable for insider trading? Under the Sarbanes-Oxley Act of 2002, who would be required to certify the accuracy of financial statements filed with the SEC?
Almost Last Writing Assignment (!) In responding to the questions be sure to: –Analyze the rules that determine when issuing corporations must file a registration statement with the Securities Exchange Commission. –Discuss the SEC rule 10b-5 and whether or not it applies to the above case. –Discuss insider trading, tipping, and misappropriation. –Examine the Sarbanes Oxley Act of 2002.
The End! It has been a pleasure to work with you this semester. If you have any questions or problems please feel free to get in touch with me. Take care and I wish you all the best in life!