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The basic elements of a securities fraud action are as follows:

1. A material misrepresentation (or omission) in connection with the purchase and sale of securities. 2. Scienter (a wrongful state of mind). 3. Reliance by the plaintiff on the material misrepresentation. 4. An economic loss. 5. Causation, meaning that there is a causal connection between the misrepresentation and the loss.

The following are some examples of material facts calling for disclosure under SEC Rule 10b-5:

1. Fraudulent trading in the company stock by a broker-dealer. 2. A dividend change (whether up or down). 3. A contract for the sale of corporate assets. 4. A new discovery, a new process, or a new product. 5. A significant change in the firm's financial condition. 6. Potential litigation against the company.

Tippees

1. There is a breach of a duty not to disclose inside information. 2. The disclosure is made in exchange for personal benefit. 3. The tippee knows (or should know) of this breach and benefits from it.

Tipper/Tippee Theory.

Anyone who acquires inside information as a result of a corporate insider's breach of his or her fiduciary duty can be liable under SEC Rule 10b-5.

Misappropriation Theory.

Patricia Rocklage was the wife of Scott Rocklage, the CEO of Cubist Pharmaceuticals, Inc. Scott had sometimes disclosed material, nonpublic information about Cubist to Patricia. She had always kept the information confidential. When Scott told Patricia that one of Cubist's key drugs had failed its clinical trial, however, Patricia informed her brother, William Beaver, who owned Cubist stock. Beaver sold his Cubist shares and tipped his friend David Jones, who sold his shares. When Cubist publicly announced the trial results, the price of its stock dropped. Beaver and Jones avoided significant losses by selling when they did. The SEC filed a lawsuit against Patricia, Beaver, and Jones. The court found all three defendants guilty of insider trading under

The Securities Exchange Act of 1934

applies to companies that have assets in excess of $10 million and five hundred or more shareholders. These corporations are referred to as Section 12 companies because they are required to register their securities under Section 12 of the 1934 act. Section 12 companies are required to file reports with the SEC annually and quarterly, and sometimes even monthly if specified events occur (such as a merger). the SEC to engage in market surveillance to deter undesirable market practices such as fraud, market manipulation, and misrepresentation.

insider trading,

which occurs when persons buy or sell securities on the basis of information that is not available to the public. Corporate directors, officers, and others, such as majority shareholders, often have advance inside information that can affect the future market value of the corporate stock. Obviously, if they act on this information, their positions give them a trading advantage over the general public and other shareholders.

Sec Rule 10b-5,

which prohibits the commission of fraud in connection with the purchase or sale of any security.