11.2 market manipulation and insider trading

Which of the following would not be allowed to purchase an initial public offering at the public offering price? A) A customer who owns 6% of the issuer's common stock and who is married to a person who owns 5% of the same stock B) A grandparent of a customer who owns 5% of the issuer's common stock and who is married to a person who owns 4% of the same stock C) A customer who owns 5% of the issuer's common stock and who is married to a person who owns 4% of the same stock D) A customer who owns 4% of the issuer's common stock and who is married to a person who owns 5% of the same stock

A customer who owns 6% of the issuer's common stock and who is married to a person who owns 5% of the same stock

Which of the following would not be allowed to purchase an initial public offering at the public offering price? A) A person owning 5% of the issuer's common stock B) An employee of a member firm C) An investment advisor on behalf of a mutual fund D) The grandparent of an officer of the managing underwriter

An employee of a member firm

Brokers placing orders for their own account ahead of notably large customer orders that are known to be entering the market in an attempt to gain from the price movement that is likely to occur is an example of what prohibited activity?

Front running

A customer's account has been frozen. Which of the following is true if the customer wants to purchase more securities?

Funds to pay in full must be available in the account before the buy order is entered.

Which of the following are elements of insider trading? I. The information is material, nonpublic information. II. The information is nonmaterial, nonpublic information. III. It is illegal to trade on insider information. IV. It is illegal to possess insider information.

I and III

In the following situation, who would be guilty of insider trading? A company leaks some insider information to some key employees, but not the public. One of those employees tells his registered representative, and the registered representative tell another customer who trades on the information before it becomes public. I. The person at the company who leaked the information II. The employee who told the registered representative III. The registered representative IV. The customer who traded on the information

I, II, III, IV

The penalties for trading on insider information include I. civil penalties up to treble damages. II. up to $1 million for registered representatives or broker-dealers. III. criminal penalties up to $25 million for broker-dealers. IV. jail time up to 30 years.

I, II, and III

Which two of the following criteria, taken together, would cause a particular fact to be considered insider information under the Insider Information and Securities Fraud Enforcement Act of 1988? I. It is personally embarrassing to the CEO of the corporation. II. It is not known to the general public. III. It could have a strong effect on the welfare of the corporation. IV. It has only been reported in the industry's technical journals.

II and III

What dollar limit is placed on damages if a suit is filed based on allegations of manipulative practices?

No dollar limit

Which of the following is not a prohibited activity?

Short selling

An investor has received insider information from a research scientist that a chemical company has just invented a new polymer that could be very useful in making strong, light girders in building construction. The investor buys several thousand shares of the company's stock through his registered representative. Several months later, when the patent comes out, the investor sells the stock for a substantial capital gain. Which of the following is least likely to be found liable under the Insider Trading Act?

The CEO of the chemical firm

A customer has been found in violation of freeriding. As a penalty which of the following will occur?

The account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.

An investor has a friend who mentions that an officer of the firm he works for reported to the CEO, in a confidential meeting, that a product had great test results. If this information were public, it would have a positive effect on the corporation's stock price. If the investor now makes a large purchase of the corporation's stock, who beside the investor might be liable under the Insider Trading and Securities Fraud Enforcement Act of 1988?

The investor's friend

What is the purpose of Rule 5130 regarding restricted persons and initial public offerings?

To protect the integrity of the public offering process and to protect public investors

Mr. Smith enters a trade in a stock at the same time as Mr. Jones, who has inside information regarding that company. Mr. Smith is considered

a contemporaneous trader.

An investor receives an unsolicited email about a startup company trading for pennies. The email notes that a patent for a new technology is forthcoming and investors need to get in now. The next day the investor sees lots of information on the same stock in an internet chat room. The hype seems to be similar to what was received in the email blast. Being cautious, the investor senses that this could be

an effort to spread market rumors in an attempt to manipulate the stock.

All of the following are forms of market manipulation except

breakpoint sales.

A form of market manipulation that attempts to hold the price of the security down is called

capping.

A registered representative with discretionary authority has been doing two or three trades per week in her customer's discretionary account. The volume of transactions is not in keeping with the historic activity in the account and the trades don't all align very well with the account objectives. A principal noted that other than generating commissions, the trades seem to have little profit potential. This is likely a red flag for

churning

A violation known as churning refers to

excessive transactions done solely for the purpose of generating commissions.

A customer has purchased a stock and then sold it before paying for the purchase. This is generally known as

freeriding

Mrs. Jones is an employee of a member firm and as such is a restricted person regarding the purchase of new issues. She belongs to an investment club and has a 1% interest in the club's brokerage account. The investment club

is not a restricted account and will be allowed to purchase equity shares of an initial public offering (IPO).

A market maker owning 70,000 shares of HCHS stock noted that it is down 0.25 on the day so far. Near the very end of the trading day the market maker enters an order to buy 100 shares at the market. This is likely an attempt to

mark the close.

A member firm receives an order to purchase shares in a common stock initial public offering (IPO) from another broker-dealer for a customer. Regarding restricted persons, the member must

obtain a written representation that the buyer is not a restricted person.

A brokerage firm has accumulated a large holding in a little known company by purchasing several hundred thousand shares of the company's stock. The firm instructs its registered representatives to begin touting the stock to every one of its customers and to make cold calls to new potential customers as well. This is most likely a scheme known as

pump and dump.

Efforts to push up the price of stock one owns by soliciting buy orders from customers so that the stock owned can be sold later at a higher price is a violation commonly known as

pump and dump.

Several registered representatives have agreed to purchase a certain security for their own accounts, then tout the security to their best customers. They hope that a number of large orders will be entered, driving up the price of the security, which they can then sell from their own accounts for a capital gain. This illegal practice is a form of

pump and dump.

Rules to protect the public during initial public offerings (IPOs) include all of the following except

shares may be held to reward others who can direct business to the member.

A form of market manipulation that attempts to keep the price of the stock from falling is called

supporting

Rule 5130 regarding restricted persons requires all of the following except

that members may make an offer to accredited investors at below the public offering price.

The president of a pharmaceutical company sells his stock in the company after learning that the Food and Drug Administration (FDA) is going to deny sales of a new drug that it was reviewing for the company. The registered representative that executes the order and knows of the denial informs a key client and recommends the client sell their stock in the pharmaceutical company. According to the Insider Trading and the Securities Fraud Enforcement Act of 1988, all of the following may be guilty of insider trading except

the FDA.

All of the following are restricted persons under Rule 5130 except

the uncle of a registered representative.