MGT 220 Exam 4 (Chapter 18)

To establish a claim of securities fraud, a plaintiff must plead and prove

(1) a false statement or omission of material fact; (2) made with scienter; (3) upon which the plaintiff relied; (4) that proximately caused plaintiff's injury.

The registration statement for a new security offering has

(a) detailed information required by the SEC and (b) a prospectus that is a condensed version of the detailed information, including (i) the issuer's finances and business, (ii) the purpose of the offering, (iii) the plans for the funds collected, (iv) the risks involved, (v) the promoter's managerial experience and financial compensation, and (vi) financial statements certified by independent public accountants.

Securities are usually classified as either

(a) equity securities, such as stocks and (b) debt securities, such as bonds and debentures.

After the stock market crash in 1929 and during the Great Depression which followed,

Congress enacted a number of statutes regulating the securities markets.

Securities and Exchange Commission v. Howey, 328 U.S. 293 (1946):

an investment is a security if it (1) is an investment of money (2) in a common enterprise (3) with an expectation of a share in the profits (4) generated by the efforts of persons other than the investors.

Crowdfunding:

beginning in 2016, up to $ 1 million can be raised over the course of 12 months from non-accredited investors, making equity funding more available for small businesses.

The Securities and Exchange Commission (SEC)

enforces and administers federal securities laws.

Exemptions from registration

include government bonds (which are exempt from securities laws altogether) and private placements (securities not offered to the public).

A security

is a certificate or other financial instrument that has monetary value and can be traded.

Rule 10b-5 states that

it is unlawful for someone to (1) employ any device, scheme, or artifice to defraud; (2) make any untrue statement of a material fact or omit a material fact; or (3) engage in any act which operates as a fraud or deceit upon any person in connection with the purchase or sale of any security.

Securities fraud involving nationally traded securities

must be brought exclusively in federal courts.

The sale of securities to investors is

one of the primary ways that publicly-traded companies can raise new capital for operations, and the main investments for pension funds.

Rule 10b-5 also prohibits insider trading

the buying or selling of stock by persons who have access to information not yet made public by a company. Not only can a defendant face millions of dollars in liability for damages for fraud or insider trading, but the SEC also may impose fines and penalties, and recommend that the Department of Justice bring criminal charges.

The various stock markets and exchanges, such as the NYSE and NASDAQ, regulate

themselves and the professionals who deal in securities markets, with monitoring by the SEC.

Brokers and dealers of securities also have professional responsibilities

to clients not to churn (buying and selling an excessive amount of stock to make commission fees) or scalp (buy a stock for personal benefit and then urging clients to buy it to drive up the price).

The Securities Act of 1933

which regulates the public offerings of securities when they are first sold and requires that issuers give investors material information.

The Securities Act of 1934

which regulates trading in existing securities and imposes disclosure requirements on corporations that have issued publicly held securities.