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For twenty years, Harley-Davidson (HD), a well-known CPA firm audited Ajax Funds, a Wall-Street investment company. HD routinely prepared financial statements and disclosure documents required by the SEC and Sarbanes-Oxley. Donald, the CPA was personally representing Ajax. During his representation of Ajax, Donald was concealing his regular theft of the investors' funds, but none of the accountants in the office ever knew about the theft. However, Carly, the CEO of Ajax, knew about the irregularities and 'struck a deal' with Donald for 50% of the funds that had been stolen in exchange for not reporting the theft. After Donald had accumulated enough money, both he and Carly left their companies and moved to South America, and the theft was eventually discovered. The SEC sued Ajax and HD for securities fraud. What is the most likely result and why?

Both Ajax and HD were liable for securities fraud if the SEC can prove material misstatements and knowledge of the transactions under the Sarbanes-Oxley Act.

If Jack was to buy the stock in GreenLife Company based on Susan's advice about the merger, who might be liable for insider trading?

Both Susan and Jack

Suppose EPA requires polluters to report compliance with air pollution emission regulations. Which of the following statements could be true, given the power EPA is likely to have?

If a firm does exceed pollution limits and fails to file reports, it may be fined, and if a firm does exceed pollution limits, it may be fined even if it does file reports on time and if a firm does not exceed pollution limits but fails to file reports, it may be fined.

Harry works for a securities firm matching orders to buy and sell stocks in small companies. A customer places an order to buy 100 shares of Z Tech when they sell for $40 a share. Marius finds a seller at $39 per share. May Harry buy the shares himself at $39 and then sell them for $40 to his client?

No, specialists cannot deal for their own benefit.

The Food and Drug Administration (FDA) regulates the distribution of Gensol. The FDA is a federal executive agency. It has rules about off-label marketing of drugs. If Pharzime was to be accused of violating one of the FDA rules, which of the following is true?

Pharzime could only have the case heard in the federal court system after it exhausted all of the administrative remedies available to it.

The Department of Homeland Security has asked the Internal Revenue Service for the tax returns of U.S. citizens who have been identified as having ties to terrorist organizations. The IRS has declined to turn over the tax returns. Which of the following the rights relating to the individuals and the authority of the two agencies is correct?

The Department of Homeland Security can obtain the information because it is engaged in law enforcement activity.

If Susan was found to be liable for insider trading in this transaction, which of the following is true?

The SEC could bring a civil lawsuit against her. She could have criminal charges brought against her. She could be sued civilly by other shareholders who lost money because of the inside trade.

Benzene is a colorless, aromatic liquid used in manufacturing a variety of products including motor fuels, solvents, detergents, pesticides, and other organic materials. Benzene is a toxic substance and rapid inhalation can be fatal. Exposure has also been shown to lead to various types of nonmalignant diseases such as blood disorders (including leukemia). OSHA passed a regulation limiting maximum benzene exposure for employees. OSHA set a 1 ppm maximum, even though the medical evidence only discussed exposures at 10 ppm and more. The petroleum industry wishes to challenge the regulation. Which of the following statements is correct?

The petroleum industry can challenge the ruling by showing the agency's decision is arbitrary and capricious.

If Jack were to buy the stock in GreenLife Company based on Susan's advice about the merger, under what theory might he liable for insider trading?

The tipper/tippee theory, with Susan being the tipper and Jack being the tippee.

Suppose an agency inspector, such as an OSHA safety inspector, discovers an apparent violation of a regulation at a business being inspected. Which if the following statements is true?

The violation may be cleared up informally

Would Hal (the maitre d') be liable for insider trading if he bought stock in GreenLife Company based on the information he received from Jack?

Yes under the tipper/tippee theory, but only if he knew that the source of Jack's information was an insider.

A developer announced that a new "tenant owned" office building was to be constructed. To have first chance at an office in the building, you would have to deposit $50 per square foot. Each square foot was called a share of stock in the building. If you wanted a 1,500 square foot office, you had to buy 1,500 shares of stock and later pay the sale price or rental rate. The stock price was to be refunded at the time you sold your office or quit renting and left the building. You could not sell the stock directly to another person. Is this stock a security?

Yes, because the sale meets the definition of a security

Hawkin and Snead is a partnership located in South Dakota that specializes in documentary films. Hawkin and Snead feel that they need additional capital to expand and their personal assets are fully tapped. The partners envision a sale of common stock shares only to South Dakota residents and they need about $2,000,000. They also realize that their pool of investors is large, but shallow. That is, they can recruit many potential share purchasers, but their investment amounts will be small. They feel they do not have the money for a national offering and full-blown SEC registration. Which of the following exemptions will suit Hawkin and Snead's needs best?

a Rule 505 offering under the 1933 Act.

Judicial review of an agency decision does not require

a party have filed an action in federal court and received an adverse decision.

Under the ripeness doctrine for judicial review

administrative remedies must be exhausted.

A distinguishing factor between administrative agencies and courts is

an agency's authority to investigative possible violations

Congress authorizes the EPA to regulate air quality by reducing emissions from gasoline engines. The EPA immediately bans gas engines issues such a regulation. The new regulation is probably:

an improperly implemented substantive regulation.

The Food and Drug Administration (FDA) regulates the distribution of Gensol. The FDA is a federal executive agency. It has rules about off-label marketing of drugs. If Pharzime wants to challenge an FDA rule about off-label marketing, it would have to show that the rule is:

arbitrary and capricious.

The CEO of Lunar Shipyard knows his company has won a $2 billion contract to build ships for the Navy. He is told by the Navy to keep this quiet until the official announcement. Knowing that Lunar stock will rise when the announcement is made, he tells his children to buy as much Lunar stock as they can right away. He does not buy any stock. The CEO may:

be sued for insider trading because he gave out inside information he had a fiduciary duty to keep secret.

An exempt security

can be sold and resold without being registered.

Suppose there has been securities fraud in the preparation of materials sent to investors, who then lose money. Potentially, which of the following may be liable?

directors of the company and high-level officers of the company and accountants, lawyers, and other professionals who helped prepare the material

A private placement under Regulation D

does not require a prospectus or registration with the SEC.

The Food and Drug Administration (FDA) regulates the distribution of Gensol. The FDA is a federal executive agency. The legislation that set up the FDA and established its power is known as:

enabling legislation

A person who wishes to bring a complaint against another person or business for violation of a statute administered by a federal agency must first:

exhaust all administrative channels before bringing suit.

The Environmental Protection Agency has rules about the amount of chemicals that may be emitted into the air. If a factory emits a chemical and the EPA wants to know if the emissions are within legal limits, the EPA may:

have EPA employees measure the air at the factory to see if it is violating the law and get a subpoena from a court to force the company to produce documents concerning pollution from the factory.

Rules made by federal administrative agencies

have the same force as a statute enacted by Congress

The Food and Drug Administration (FDA) regulates the distribution of Gensol. The FDA is a federal executive agency. It has rules about off-label marketing of drugs. If Pharzime was to be accused of violating one of the FDA rules, Pharzime's first formal hearing would be:

in front of an administrative law judge.

The Food and Drug Administration (FDA) regulates the distribution of Gensol. The FDA is a federal executive agency. Its power to regulate Gensol:

is allowed for by through the delegation doctrine

The president of a company says that new products to be introduced are sure to double company profits. Based on this, investors buy stock in the company, pushing up its price. The products flop, the company loses money, so the stock price falls. Investors are most likely to sue the president of the company under what theory provided by the securities law?

liability for misstatements

Marcus was on the subway in New York when he overheard two people he did not know talking about an upcoming merger, news not yet public. They seem to know their stuff. If Marcus buys stock based on this information, and profits when the information turns out true, he has:

profited, but is an outsider and so his actions are probably not illegal.

The Federal Register is the publication

that provides notice of proposed rules and the agencies authority for making the rule.

GTI Technologies filed a registration statement that has been approved by the SEC. This means

the SEC has not issued a deficiency letter.

Amazing Hair, Inc. has developed technology that reverses balding in men. A month before TKI begins to publically sell stock, it discovers that men over 6'7" with red hair often develop a perpetually runny nose when they use the product. Amazing Hair does not disclose this side effect before it offers its stock for sale and is charged with violating Rule 10b-5. Its best defense is

the side effect is not material.

Four of the five commissioners for the Federal Trade Commission were working late one evening in their Washington, D.C. offices. The commissioners were catching up on their electronic mail and then checked their personal Facebook accounts. While on Facebook all four commissioners discovered that each was online at the same time. They decided to create a FB Messenger group chat and began to the chat discuss various matters. One commissioner wrote to the other three, "Let's get some business done so long as we're all here. We could resolve that unfair competition case that's pending for next month. We can iron out our differences via e-mail." The electronic exchanges of the commissioners would:

violate the Government in the Sunshine Act open meeting laws.

In its prospectus, TKI Technologies discloses a number of risks and cautionary statements about investing in its new and innovative technology, but then gives some aggressive potential profit margins. If TKI's technology never produces a profit, it shareholders

will lose a fraud lawsuit under Rule 10b-5 if TKI's statements or forecasts are deemed to be forward looking.