Chapter 24: Investor Protection and Corporate Governance

37. Under the Securities Act of 1933, securities include a. any instrument representing corporate ownership or debt. b. a common enterprise reasonably expected to make a profit. c. an investment in one's own personal entrepreneurial effort. d. whatever a corporation represents to the public as profitable.

ANSWER: a

42. Jazz Inc. makes and markets music. The company wants to make an initial public offering of securities via the Internet. Most likely, this offering a. can avoid high costs and complicated procedures. b. is an attempt to deceive and manipulate investors. c. is a way for investors to fairly break the rules. d. will result in higher expenses and extended oversight.

ANSWER: a

45. Ewan, the chief executive officer of Furniture Inc., intentionally understates the amount of the firm's debts in information provided to investors as part of an issue of stock. Gary buys the stock and suffers a loss. Ewan may be subject to a. government prosecution and a private investor's suit. b. negative publicity but no criminal prosecution or civil suit. c. only government prosecution. d. only a private investor's suit.

ANSWER: a

48. Components Assembly Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that the company must a. file a registration statement with the SEC. b. issue the securities through an online registration site. c. refrain from issuing the securities to unregistered investors. d. register the securities with a national securities exchange.

ANSWER: a

50. Fleet Trucking Corporation is a public company with a market capitalization of less than $75 million. Fleet is poised to issue securities in a transaction that, under the Securities Act of 1933, is exempt. This enables Fleet to a. reduce the compliance costs by not requiring an auditor report. b. buy and sell the securities without liability for recaptured profit. c. make forward-looking financial forecasts without liability. d. withhold inside information from accredited investors.

ANSWER: a

57. Luan, a programmer for Monetized Nation Inc., a business modeling service, learns of undisclosed company plans to distribute a new app. Luan reveals the company plans to a friend, Ono, who buys 5,000 shares of the firm's stock. Under the Securities Exchange Act of 1934, Ono is most likely a. liable for insider trading. b. not liable because Ono did not prevent others from profiting. c. not liable because Ono did not solicit information from Luan. d. not liable because Ono does not work for the firm.

ANSWER: a

63. Ross, a sales executive with Steel Mill Inc., learns of undisclosed company plans to produce a new type of steel. Ross tells Tim, who tells Uri, who buys 100 shares of Steel stock. Uri knows that Tim got the information from Ross. When the firm publicly announces its new product, Uri sells the stock for a profit. Under the Securities Exchange Act of 1934, Uri is most likely a. liable for insider trading. b. not liable because Uri is only a tippee, not a tipper. c. not liable because Uri is too far removed from the initial disclosure. d. not liable because Uri traded on the basis of a material fact.

ANSWER: a

67. Furnaces & Filters Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that the firm's financial results are accurate and timely, its senior officers must set up and maintain a. internal "disclosure controls and procedures." b. external "release and reveal timetables." c. personal "peruse and review liability policies." d. public "information and discussion forums."

ANSWER: a

68. Bev is the chief executive officer of Chef Cafés Inc., which is required to file certain financial reports with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Bev must a. certify that the reports are complete and accurate. b. designate a corporate official to assume liability for inaccuracies. c. do nothing. d. read the reports and be prepared to answer questions about them.

ANSWER: a

69. Dez is the chief financial officer of Elements Corporation, which is required to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Dez must personally a. certify that the statements are accurate. b. delegate the responsibility for preparing the statements. c. deliver the statements to the appropriate SEC officer. d. prepare the statements.

ANSWER: a

36. The goal of securities regulation is to a. contribute to the operations of national security exchanges. b. prohibit deceptive and manipulative practices in the securities markets. c. prescribe ways and means for investors to fairly break the rules. d. none of the choices.

ANSWER: b

38. Fabrication Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Fabrication is required to a. contribute to the operations of national security exchanges. b. disclose all essential information about the issuance of its securities. c. engage in market surveillance to deter undesirable practices. d. meet investors' reasonable expectations to make a profit.

ANSWER: b

39. United Delivery Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, United Delivery is required to a. buy or sell its securities only on a national security exchange. b. register its securities transactions unless they qualify for an exemption. c. invest its own managerial or entrepreneurial efforts. d. issue instruments representing corporate ownership or debt.

ANSWER: b

40. Market Data Corporation is required to file a registration statement with the Securities and Exchange Commission. This statement must contain a. a copy of prospectuses to be provided to investors. b. a description of securities being offered for sale. c. a record of pre-registration sales in securities. d. a statement that securities being offered for sale are worth the price.

ANSWER: b

44. To raise $120 million to expand operations, Primo Inc. makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. The firm plans to notify the SEC of sales. Under the Securities Act of 1933, this issue may qualify as an exempt transaction a. as is. b. if all of the investors are also given material information about the firm. c. if the offering is also made to the general public. d. under no circumstances.

ANSWER: b

53. Mars Mission Inc. is a regulated publicly held corporation. Under the Securities Act of 1934, Mars is required to a. contribute to the operations of national stock exchanges. b. disclose information about its organization and financial situation. c. engage in market surveillance to deter undesirable practices. d. all of the choices.

ANSWER: b

58. Eli, an officer for Food Stores Inc., buys 10,000 shares of its stock. One week later, the company announces that it will merge with a competitor, Grocery Mart Corporation, and the price of Food Stores' stock increases. One month later, Eli sells his shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Eli would not be liable if, after buying the stock, he had waited a. less than fourteen days to sell it. b. more than six months to sell it. c. ninety days to sell it. d. two months to sell it.

ANSWER: b

43. Dairy Stores Inc. owns and operates convenience stores. The firm wants to make an initial public offering of securities. If Dairy qualifies for an exemption from the federal registration requirement, the firm is a. exempt from any state registration requirement. b. not subject to any state securities laws. c. not necessarily exempt from a state registration requirement. d. subject to all state registration requirements.

ANSWER: c

46. Pharma Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933 a. imposes increased responsibility on corporate executives. b. prevents insiders from trading among themselves. c. requires disclosure. d. creates a safe harbor for forward-looking statements.

ANSWER: c

49. Household Products Corporation wants to make an offering of securities to the public. The offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with a. a forward-looking financial forecast. b. an investment contract. c. a prospectus. d. a statement that the securities for sale are worth the price.

ANSWER: c

51. As part of a stock offering for Design Media Corporation, the firm's accountant Eve intentionally misrepresents material facts in the prospectus. Fred buys the stock unaware of the misrepresentation and suffers a loss. Eve may be subject to a. none of the choices. b. job termination but no other sanctions, penalties, or liability. c. a fine, imprisonment, and damages. d. professional censure but no criminal sanctions or civil liability.

ANSWER: c

55. Reno, an engineer for Shale Corporation, learns that the firm will increase the dividend it pays to shareholders. Reno buys 10,000 shares of company stock. When the dividend is announced to the public and the price of the stock increases, he sells the shares for a profit. He would not be liable for insider trading if the information about the dividend was a. material when he sold the stock. b. available to the public after he bought the stock. c. available to the public before he bought the stock. d. forward-looking when he bought the stock.

ANSWER: c

56. Chris, a coder for Drones Inc., learns of undisclosed company plans to market a new, smart drone. Chris buys 10,000 shares of the firm's stock. If Chris is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of the stock was a. a forward-looking forecast. b. not material. c. not yet public. d. not yet true.

ANSWER: c

59. Orbital Flights Inc. is required to register its securities under Section 12 of the Securities Exchange Act of 1934. This means that, with respect to Orbital, Section 16(b) of the act covers a. the declaration of dividends by Orbital's board of directors. b. the later re-registration of Orbital's securities. c. the short-swing activities of Orbital's insiders. d. the solicitation of proxies from Orbital's shareholders.

ANSWER: c

60. Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries Inc. has assets of more than $50 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to a. Fresh Fruit and Gourmand Pastries. b. Fresh Fruit only. c. Gourmand Pastries only. d. neither Fresh Fruit nor Gourmand Pastries.

ANSWER: c

64. Debt Equity Inc., and its officers, directors, and employees, buy and sell securities based on financial research and analysis. Section 16(b) of the Securities Exchange Act of 1934 covers purchases and sales of securities involving a. corporate insiders, such as officers, directors, and employees. b. misappropriation of material, nonpublic information. c. short-swing profits. d. tippers and tippees.

ANSWER: c

70. Spectrum Paints Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, the firm is subject to the direct corporate governance requirements of a. any other public company with which the firm exchanges shares. b. any state in which the firm does business. c. the federal government. d. the state in which the firm incorporated.

ANSWER: c

41. Home Meals Corporation is poised to issue securities that, under the Securities Act of 1933, are exempt. This means that the securities can be sold a. only after being registered. b. on the basis of nonpublic information. c. within any six-month period by certain insiders. d. without being registered.

ANSWER: d

47. Movie Time Corporation files a registration statement and delivers a prospectus to the appropriate parties. These items are intended to enable the evaluation of certain financial risks by a. market professionals to explain to all investors. b. government regulators to disclose to the general public. c. sophisticated investors only. d. unsophisticated investors.

ANSWER: d

52. Space Flight Inc. files a registration statement with the SEC before making an offering to the general public. The registration contains false, immaterial statements of which the investors are unaware. The firm is charged with violating the Securities Act of 1933. Its best defense is a. the investors were not aware of the misrepresentations. b. the issuer reasonably believed the misstatements were true. c. the offering was made available to the general public. d. the untrue statements were not material.

ANSWER: d

54. Equity Corporation, and its officers, directors, employees, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to the trading of securities a. only by investment companies on organized exchanges. b. only involving short-swing profits obtained in over-the-counter markets. c. only involving tippers and tippees in private transactions. d. in almost any circumstances.

ANSWER: d

61. Corporate Financial Inc., and its officers, directors, employees, and shareholders, buy and sell securities on behalf of themselves and their clients. SEC Rule 10b-5 applies to the purchase or sale of a. a security by the corporation only. b. a security involving a corporate insider only. c. a security involving short-swing profits only. d. any security.

ANSWER: d

65. Grain Mills Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 14(a) of the act regulates a. the declaration of dividends by the firm's board of directors. b. the later re-registration of the firm's securities. c. the short-swing activities of the firm's insiders. d. the solicitation of proxies from the firm's shareholders.

ANSWER: d

66. Meat Packers Inc. offers its securities for sale only in a single state. The law in this state is like the law in most states. Thus, the company's offer is subject to the state's securities statutes, which are likely to include a. antifraud provisions. b. registration provisions. c. disclosure requirements. d. all of the choices.

ANSWER: d

62. Cam, an accountant for Discount Inc., learns that the company's soon-to-be-announced quarterly sales figures exceed analysts' expectations. Cam tells Ed, who tells Frye, who buys 100 shares of the company's stock. Frye knows that Ed got the information from Cam. When Discount publicly announces the figures, Frye sells the stock for a profit. Under the Securities Exchange Act of 1934, Ed is most likely a. liable for insider trading. b. not liable because Ed did not prevent others from profiting. c. not liable because Ed did not misappropriate any information. d. not liable because Ed does not work for Discount.

ANSWER: a