Q&A Hero

Q: Pharmicon, Inc., a pharmaceutical firm, discovered a complete cure for the common cold. The medicine could be put into a pill that would be taken once a day for a week. Knowing these results, directors of Pharmicon decided to delay the press release and bought thousands of shares of Pharmicon stock. After the purchases, Pharmicon issued a press release about the pill. The price of the stock skyrocketed. When the SEC found out about the purchases and the delay in the press release, it sued Pharmicon for violating Rule 10b-5. Based on the decision in Case 41.1, SEC v. Texas Gulf Sulphur Co., the court in this case would most likely rule in favor of a. the SEC, because the information about the cure was material and was not disclosed to the public prior to the directors' purchase of the stock. b. Pharmicon, because the information was not material. c. the SEC, because owning company stock is a conflict of interest for the directors. d. Pharmicon, because they issued a press release to the public.

Q: Lee, a salesperson for Macro Corporation, learns that Macro will increase the dividend it pays to shareholders. Lee buys 1,000 shares of Macro stock. When the price increases, Lee sells his shares for a profit. Lee would not be liable for insider trading if the information about the dividend was a. material when he sold the stock. b. public after he bought the stock. c. public before he bought the stock. d. too speculative when he bought the stock.

Q: Interstate Retail Company has assets of less than $10 million and fewer than five hundred shareholders. Jiffy Outlets, Inc., has assets of more than $10 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to a. Interstate Retail and Jiffy Outlets. b. Interstate Retail only. c. Jiffy Outlets only. d. neither Interstate Retail nor Jiffy Outlets.

Q: As part of a stock offering for First Products Corporation (FPC), Glen, FPC's accountant, intentionally misrepresents material facts in the prospectus. Holly buys the stock unaware of the misrepresentation and suffers a loss. Glen may be subject to a. a fine and damages only. b. a fine and imprisonment only. c. a fine, imprisonment, and damages. d. damages only.

Q: Delta Capital Corporation is a noninvestment company that wants to issue stock of $3 million in a twelve-month period. Delta, with less than $20 million in annual sales, qualifies as a small business issuer. Before Delta sells the stock, it must provide investors with a. an offering circular. b. a notice of the issue. c. a red herring prospectus. d. a tombstone ad.

Q: Alpha, Inc., a corporation traded on a national stock exchange, wants to offer bonds for sale to the public. Beta Insurance Company, a state-regulated insurance company, wants to offer annuity contracts for sale to the public. Before any sale, registration must be made with the SEC for a. Alpha's bonds and Beta's annuity contracts. b. Alpha's bonds only. c. Beta's annuity contracts only. d. neither Alpha's bonds nor Beta's annuity contracts.

Q: Consumer Products Corporation wants to make an offering of securities to the public. This 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 prospectus. b. a registration statement. c. a tombstone ad. d. all of the above.

Q: Great Stores, Inc., makes a public offering of securities that is subject to the Securities Act of 1933. Under the act, the securities can be sold a. as soon as a registration statement is filed. b. by an underwriter only. c. only if an investor is furnished with a prospectus. d. without a registration statement.

Q: Generally, states have disclosure requirements patterned after federal securities law.

Q: Generally, states do not have antifraud provisions that cover securities.

Q: For purposes of the Investment Company Act of 1940, "investment companies" include closely held corporations.

Q: Corporate governance is the system by which state governors direct and control corporations doing business within their states.

Q: Private parties cannot sue violators of Section 10(b) and Rule 10b-5.

Q: Scienter is a requirement for liability under Section 16(b) of the Securities Exchange Act of 1934.

Q: A corporation can recapture any profits realized by an insider on any purchase or sale of the firm's stock within any twelve-month period.

Q: Publicly held companies that make financial forecasts about themselves can be liable to those who rely on the forecasts if they turn out to be wrong.

Q: SEC Rule 10b-5 applies in nearly all cases involving the trading of securities.

Q: Any corporation with more than $10 million in assets must register with the Securities and Exchange Commission.

Q: Those who buy securities and suffer harm as a result of false statements may bring a suit in a federal court to recover their losses.

Q: An offering of securities to residents of the state in which the offering company is organized and does business may be exempt from federal registration requirements.

Q: Generally, stock offerings that are made in a limited manner during any twelve-month period are exempt from securities registration requirements.

Q: An offering of $10 million in securities by a non-investment company is not exempt from the Securities Act of 1933.

Q: An offering of $4 million in securities by a non-investment company can be exempt from some of the requirements of the Securities Act of

Q: Generally, stock offerings that involve a small amount of money are not exempt from securities registration requirements.

Q: Sales of securities may not occur until ninety days after registration.

Q: A security that does not qualify for an exemption must be registered before it is offered to the public through a facility of interstate commerce.

Q: The U.S. Internal Revenue Service prosecutes criminal violations of federal securities law.

Q: Section 10(b) of the Securities Exchange Act of 1934 covers only corporate officers, directors, and majority shareholders.

Q: To be resold, most securities must be registered.

Q: Private offerings of securities in unlimited amounts that are not generally solicited or advertised may be exempt from the registration requirements of the Securities Act of 1933.

Q: No securities are exempt from the registration requirements of the Securities Act of 1933.

Q: Stock splits are not exempt from the registration requirements of the Securities Act of 1933.

Q: The red herring prospectus may not be distributed until ninety days after registration.

Q: After a security is sold to the public, investors must be provided with a prospectus.

Q: The least common forms of securities are stocks and bonds issued by corporations.

Q: Securities include investment contracts.

Q: Standard Corporation is a public company whose shares are traded in public securities markets. Standard's officers want to set up and maintain a system of "good corporate governance." What is "corporate governance"? What is its practical significance? What, at a minimum, should a "good" system of corporate governance include?

Q: In May 2001, National Biotech Corporation generally advertises that it will make a $4 million offering of stock in June. National makes the offering as advertised and, ten days after the first sale, notifies the Securities and Exchange Commission (SEC). All buyers of the stock are given material information about the company, its business, and the stock. Before the end of the year, the offering is completely sold out. The buyers include forty unaccredited investors and fifty accredited investors. National does not register the offering. The SEC files a suit against National, seeking civil sanctions on the ground that this offering was not exempt from registration. National argues that the applicable exemption is Rule 505 of Regulation D of the Securities Act of 1933 and that because of this exemption, any resale of the stock is also exempt. Who is correct?

Q: Fresh Goods, Inc., wants to make an initial public offering of securities over the Internet. To do so, Fresh Goods must comply with a. federal and state filing requirements. b. federal filing requirements only. c. neither federal nor state filing requirements. d. state filing requirements only.

Q: Fidelity Financial, Inc., is an investment company. Fidelity must file with the Securities and Exchange Commission a. a notification of registration only. b. annual reports and a notification of registration. c. annual reports only. d. neither annual reports nor a notification of registration.

Q: Kelly is the chief financial officer of Leading Corporation, which is required to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Kelly 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.

Q: Joy, an executive officer of Kappa Marketing Company, receives a bounty payment. This is a payment by a. a government official to a recipient for an act beneficial to the state. b. an investor to a company officer for information beneficial to the investor. c. a publicly held corporation to an employee for a business opportunity. d. a tippee to a tipper for a tip.

Q: North American Properties, Inc., and its officers, directors, and shareholders, buy and sell securities. Section 16(b) of the Securities Exchange Act of 1934 covers a. all purchases and sales of securities. b. only purchases and sales of securities by investment companies. c. only purchases and sales of securities involving short-swing profits. d. only purchases and sales of securities involving tippers and tippees.

Q: Amy, an officer for Best Corporation, buys 100 shares of Best stock. One week later, Best announces that it will merge with Competing Company, and the price of Best stock increases. One month later, Amy sells her shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Amy would not be liable if, after buying the stock, she 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.

Q: John was an accountant with the tax firm, Taxes "˜R" Us. A pharmaceutical company, Pharmicon, hired Taxes "˜R" Us to "handle its books." While reviewing paperwork for the firm, John came across documentation about Pharmicon's discovery of a cure for the common cold. The discovery had not been made public. John immediately bought stock in Pharmicon. When the discovery was announced, John made a large profit. The SEC sued John for securities fraud in violation of Rule 10b-5. Based on the decision in Case 41.2, United States v. O"Hagan, the court in this case would most likely rule in favor of a. John, because he was not an employee of Pharmicon. b. the SEC, because John breached his fiduciary duty to his firm and the firm's client. c. John, because he did not breach his fiduciary duty to his firm. d. the SEC, because John is not allowed to buy stock in any company that is a client of his firm.

Q: Hugh, an engineer for Innovative Corporation, learns that Innovative has developed a computer chip to triple the speed of any computer. Hugh buys 1,000 shares of Innovative stock. He tells Jen, who buys 500 shares. After the new chip is announced publicly, the price of Innovative stock increases. Hugh and Jen sell their shares for a profit. Under the Securities Exchange Act of 1934, liability may be imposed on a. Hugh and Jen. b. Hugh only. c. Jen only. d. neither Hugh nor Jen.

Q: Fact Pattern 41-1 Tina, an accountant for United Technology, Inc., learns of undisclosed company plans to market a revolutionary new desktop computer. Tina buys 1,000 shares of United stock. She reveals the company plans to Vic, who buys 500 United shares. Vic tells Wendy, who buys 100 shares. Wendy knows that Vic got his information from Tina. When United publicly announces its new desktop, they all sell their stock for a profit. Refer to Fact Pattern 41-1. Wendy is a. a red herring. b. a tombstone. c. a tippee. d. a tipper.

Q: Fact Pattern 41-1 Tina, an accountant for United Technology, Inc., learns of undisclosed company plans to market a revolutionary new desktop computer. Tina buys 1,000 shares of United stock. She reveals the company plans to Vic, who buys 500 United shares. Vic tells Wendy, who buys 100 shares. Wendy knows that Vic got his information from Tina. When United publicly announces its new desktop, they all sell their stock for a profit. Refer to Fact Pattern 41-1. Tina is a. a red herring. b. a tombstone. c. a tippee. d. a tipper.

Q: Fact Pattern 41-1Tina, an accountant for United Technology, Inc., learns of undisclosed company plans to market a revolutionary new desktop computer. Tina buys 1,000 shares of United stock. She reveals the company plans to Vic, who buys 500 United shares. Vic tells Wendy, who buys 100 shares. Wendy knows that Vic got his information from Tina. When United publicly announces its new desktop, they all sell their stock for a profit.Refer to Fact Pattern 41-1. Subject to liability under the Securities Exchange Act of 1934 for insider tradinga. are Tina and Vic.b. is neither Tina nor Vic.c. is Tina only.d. is Vic only.

Q: Fact Pattern 41-1 Tina, an accountant for United Technology, Inc., learns of undisclosed company plans to market a revolutionary new desktop computer. Tina buys 1,000 shares of United stock. She reveals the company plans to Vic, who buys 500 United shares. Vic tells Wendy, who buys 100 shares. Wendy knows that Vic got his information from Tina. When United publicly announces its new desktop, they all sell their stock for a profit. Refer to Fact Pattern 41-1. If Vic is subject to liability, it would be because the information on which he based his purchase of United stock was a. about United's future plans. b. not material. c. not public. d. revolutionary.

Q: In Case 41.1, SEC v. Texas Gulf Sulfur Co., the U.S. Court of Appeals for the Second Circuit held that a. Texas Gulf Sulfur failed to comply with the SEC regulations for the registration of a stock offering. b. Rule 10b-5 did not require Texas Gulf Sulfur to disclose a dividend change to the public. c. Texas Gulf Sulfur failed to disclose a contract for the sale of corporate assets in violation of Rule 10b-5. d. Rule 10b-5 required Texas Gulf Sulfur to disclose preliminary test mining results to the public.

Q: Gamma Financial Corporation, and its officers, directors, and shareholders, buy and sell securities. SEC Rule 10b-5 applies to a. all purchases and sales of securities. b. only purchases and sales of securities by financial corporations. c. only purchases and sales of securities involving officers or directors. d. only purchases and sales of securities involving shareholders.

Q: Global Investment Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 covers a. all purchases and sales of securities. b. only purchases and sales of securities by investment companies. c. only purchases and sales of securities involving short-swing profits. d. only purchases and sales of securities involving tippers and tippees.

Q: Mona is a stockbroker. The National Association of Securities Dealers (NASD) is a national securities association. The Securities Exchange Act of 1934 regulates the activities of a. Mona and the NASD. b. Mona only. c. neither Mona nor the NASD. d. the NASD only.

Q: Mary, the chief executive officer of Nationwide Service, Inc. (NSI), intentionally misrepresents material facts in information provided to investors as part of an issue of stock in NSI. Owen buys the stock and suffers a loss. Mary may be subject to a. government prosecution and Owen's private suit. b. neither government prosecution nor Owen's private suit. c. only government prosecution. d. only Owen's private suit.

Q: Retail Sales, Inc., wants to issue stock of $1 million in a single offering. Retail does not have to provide any investors with any material information about itself, its business, or its securities if a. all of the investors are accredited. b. all of the investors are unaccredited. c. any of the investors are accredited. d. any of the investors are unaccredited.

Q: ABC Enterprises, Inc., completes its registration requirements and begins advertising the availability of its new issue of securities. ABC places a tombstone ad in the financial papers. This ad tells prospective investors a. about the company's background. b. about the risks and rewards of investing. c. where to buy the securities. d. where to obtain a prospectus.

Q: Ace Technologies, Inc., wants to issue securities for sale to the public. With respect to this issue, the essential purpose of the Securities Act of 1933 is to a. proscribe fraud. b. provide for proxy solicitation. c. regulate the securities markets. d. require disclosure.

Q: A Regulation D exemption may be disqualified if the offeror places the offering circular on the Web for general consumption by anybody on the Internet.

Q: A prospectus in downloadable form can meet the requirements of the Securities and Exchange Commission.

Q: "Blue sky laws" are federal securities laws.

Q: State securities laws apply only to interstate transactions.

Q: Investment companies may pay dividends to their investors only from accumulated, undistributed net income.

Q: Scienter is a requirement for liability under Section 10(b) of the Securities Exchange Act of 1934.

Q: The misappropriation theory has a much narrower scope than the tipper/tippee theory with regard to liability for inside trading.

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

Q: The key to liability under Section 10(b) of the Securities Act of 1933 and SEC Rule 10b-5 is whether undisclosed inside information is material.

Q: The Securities Exchange Act of 1934 does not define the term "inside information."

Q: The Securities Exchange Act of 1934 provides for the regulation of brokers.

Q: Champ Sports Corporation buys the assets of Delta Athletic Company. Champ continues Delta's business and retains the same personnel. Delta is a firm on paper only, with many unpaid debts. Is Champ liable for Delta's debts?

Q: Jiffy Corporation proposes to combine with Kwik, Inc., and asks Jiffy shareholders to vote on the proposal. Lena, a Jiffy shareholder, votes against it, but is outvoted by the other shareholders. Is there an action that Lena can take to avoid being forced to go along with the transaction? If so, what can Lena do? After the combination, Jiffy ceases to exist. Kwik is the surviving firm. What type of combination is this?

Q: World Tech Corporation is in the process of ending its existence. The legal death of the artificial "person" of the corporation is known as a. dissolution. b. liquidation. c. receivership. d. termination.

Q: Fact Pattern 40-2 Mega Corporation wants to gain control of MiniCo, Inc. The companies negotiate for several months, without coming to terms. Mega decides to pursue a takeover attempt. MiniCo decides to resist. Refer to Fact Pattern 40-2. MiniCo attempts its own takeover of Mega. This is a a. crown jewel defense. b. Pac-Man defense. c. poison pill defense. d. white knight defense.

Q: Fact Pattern 40-2 Mega Corporation wants to gain control of MiniCo, Inc. The companies negotiate for several months, without coming to terms. Mega decides to pursue a takeover attempt. MiniCo decides to resist. Refer to Fact Pattern 40-2. MiniCo solicits a merger with Nation Corporation, a third party, which makes a better offer to MiniCo's shareholders. Nation Corporation is a a. crown jewel. b. Pac-Man. c. poison pill. d. white knight.

Q: Fact Pattern 40-2 Mega Corporation wants to gain control of MiniCo, Inc. The companies negotiate for several months, without coming to terms. Mega decides to pursue a takeover attempt. MiniCo decides to resist. Refer to Fact Pattern 40-2. MiniCo issues shares that its shareholders can exchange for cash if a takeover is successful, intending to make Mega's takeover attempt too expensive. This is a a. crown jewel defense. b. Pac-Man defense. c. poison pill defense. d. white knight defense.

Q: Total Business, Inc., wishes to acquire a controlling interest in United Company by buying its stock. A public offer by Total Business to United shareholders is a. a buyout notice. b. a golden parachute. c. an acquisition call. d. a tender offer.

Q: Salt Corporation wants to acquire or merge with Pepper Corporation. The board and the shareholders of Pepper are resisting. Salt should a. file a plan of merger with the secretary of state. b. file an article of merger with Pepper. c. make a tender offer to the shareholders of Pepper. d. make a tender offer to the shareholders of Salt.

Q: Nina is a dissenting shareholder of Oil Company whose management is considering a tender offer by Power, Inc. Nina and Oil cannot agree on the fair value of the stock. The value will be determined by a. a court. b. Nina. c. Oil's directors. d. Oil's other shareholders.

Q: As explained in Case 40.2, Glassman v. Unocal Exploration Corp., "appraisal rights" entitle minority stockholders to a. demand that the majority stockholders seek an independent appraisal of any proposed merger. b. be paid the fair value of their shares in the event of a merger. c. demand that the majority stockholders seek an independent appraisal of possible alternatives to any proposed merger. d. challenge the fairness of any merger proposed by the majority stockholders.

Q: Mona is a shareholder of National Corporation. Mona could normally exercise appraisal rights if National participated in a. a consolidation only. b. a consolidation or a merger. c. a merger only. d. neither a consolidation nor a merger.