Quiz 46: Securities Regulation
Business
Q 1Q 1
Which of the following is least likely to be considered a security under the Securities Act of 1933
a. Stock options
b. Warrants
c. General partnership interests
d. Limited partnership interests
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Securities Act of 1933 - regulates the offer and sales of security. Securities are defined in the section 2 of the act which includes investment contracts, stocks, bonds, etc. a) A stock option is an option contract to purchase a stock, this is an investment. This is likely to be considered a security. b) Warrants are an option contract that allows a purchaser to buy a stock at a certain price before expiration date. This is explicitly stated as a security in section 2 of the Securities Act of 1933. This is considered a security. c) General partnership interests, gives a person a right to control and profit of a partnership business. This is unlikely a security because the right to become a partner is granted by others and general partners will have to manage the business themselves. This is unlikely to be a security. d) Limited liability partnership interest can be transferred as the limited partner doesn't need to have control of a firm but is entitled to the partnership's profits. This can be considered a security.
Q 2Q 2
Cable operator Charter Communications Inc. arranged to overpay Scientific Atlanta and Motorola $20 for each set-top box it purchased- with the understanding that they would return the overpayment by purchasing cable advertising from Charter. The transactions, it was alleged, had no economic substance; but because Charter would then record the advertising purchases as revenue and capitalize its purchases of the set-top boxes-in violation of generally accepted accounting principles-the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected Wall Street revenue and operating cash-flow numbers. The suppliers agreed to the arrangement. Charter used the inflated number of $17 million on its financial statements that were filed with the SEC and reported to the public. The suppliers had no role in preparing or disseminating Charter's financial statements, and their own statements booked the transactions as a wash. A private right of action was brought against the cable box suppliers by investors for damages under Section 10(b) of the 1934 Act as "aiders and abettors." Decide. [ Stoneridge Investment Partners, LLC v. Scientific Atlantic, Inc., 552 U.S. 148]
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Not Answered
There is no answer for this question
Q 3Q 3
Which of the following statements is correct regarding a common stock offering that requires registration under the Securities Act
of 1933
a. The registration statement is automatically effective when filed with the SEC.
b. The issuer would act unlawfully if it were to sell the common stock without providing the investor with a prospectus.
c. The SEC will determine the investment value of the common stock before approving the offering.
d. The issuer may make sales 10 days after filing the registration statement.
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True False
a) A registration statement is not automatically effective when filed. Statement is false. b) Issuer of the stock needs to provide investors with a prospectus, which include the material financial information of the corporation, before the stock can be sold. Statement is true. c) The SEC is not responsible for determining the investment value of a stock. Statement is false. d) Filing a registration statement doesn't enable the issuer to sell the stock yet. Statement is false.
Q 4Q 4
Corporation A was involved in merger discussions with Corporation B. During this time, Corporation A made public statements denying that any merger negotiations were taking place or that it knew of any corporate developments that would account for heavy trading activity in its stock. A class of former shareholders who sold Corporation A stock after the public denial of merger activity and the announcement of the merger some six weeks later sued Corporation A, contending it made material misrepresentations of fact in denying the merger activity. Corporation A stock increased 25% upon the merger announcement. Corporation A stated that at the time of its denial of merger activity it was just involved in preliminary negotiations and its actions were not material until negotiations reached an agreement in principle. Moreover, it asserted that the shareholders made no showing that they relied on the denial statement. Decide.
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Not Answered
There is no answer for this question
Q 5Q 5
Hamilton Corp. is making a $4,500,000 securities offering under Rule 505 of Regulation D of the Securities Act of 1933. Under this regulation, Hamilton is:
a. Required to provide full financial information to accredited investors only
b. Allowed to make the offering through a general solicitation
c. Limited to selling to no more than 35 nonaccredited investors
d. Allowed to sell to an unlimited number of investors both accredited and nonaccredited
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True False
Q 6Q 6
Business Week magazine is sent to a national distributor of magazines, Curtis Circulations Co., which sells the magazines to various wholesalers, including Hudson News. Business Week publishes a column entitled "Inside Wall Street," and the evidence shows that stocks discussed favorably in the column tend to increase in value after release to the public. Business Week has a strict confidentiality policy prior to release of the magazine to the public applicable to all employees involved in production and distribution. This policy also applies to Hudson News. Gregory Savage, an employee of Hudson News, and the "top person" in the delivery room area, arranged to have the "Inside Wall Street" column faxed to his neighbor, a stockbroker named Larry Strath, prior to the close of the market on Thursday and prior to release to the public that evening. Strath traded on the information and passed it on to Joseph Falcone, who likewise traded on the basis of this information. While Falcone paid Strath $200 for a copy of the column each week, he contends that the information he received was too remote from the Business Week confidentiality policy to be actionable by the SEC. What theory do you believe the SEC pursued against Falcone What are the elements of the theory How would you decide this case [United States v Falcone 257 F3d 226 (2d Cir)]
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Q 7Q 7
Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to establish the defense of due diligence if:
I. The auditor performed an additional review of the audited statements to ensure that the statements were accurate as of the effective date of a registration statement
II. The auditor complied with GAAS
a. I only
b. II only
c. Both I and II
d. Neither I nor II
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Q 8Q 8
Minnesota Prostate Research Labs, Inc. (MPRL), made an initial public offering of its shares in August 1998. It stated in its prospectus that research on laboratory animals indicated that the lab may have discovered a cure for prostate cancer in humans. MPRL pointed out as well that results in animal testing did not necessarily mean that the same positive result would occur in humans. MPRL shares initially traded at $10 per share in 1999 and rose to $18 in August 2001, when the MPRL prostate cancer drug was finally approved for sale to the public. Tuttle reviewed the initial prospectus and analysts' reports on the drug and purchased 10,000 shares at $18 per share on August 18, 2001. In September of 2002, an independent study of the four leading prostate medicines indicated that MPRL's product was as effective as sugar pills in curing prostate cancer and other prostate symptoms. The price of MPRL shares plummeted to $6 per share. Tuttle is contemplating a Rule 10b-5 securities fraud classaction lawsuit against MPRL. Advise him of his chances of success in this lawsuit and any expenses that he would be exposed to other than the cost of his attorney.
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Q 9Q 9
Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodic reports
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Q 10Q 10
The following transactions in Heritage Cosmetics Co., Inc., stock took place: On January 21, Jones, the corporation's vice president of marketing, purchased 1,000 shares of stock at $25 per share. On January 24, Sylvan, a local banker and director of Heritage, purchased 500 shares of stock at $26 per share. On January 30, McCarthy, a secretary at Heritage, purchased 300 shares of stock at $26.50. On February 12, Winfried, a rich investor from New England, purchased 25,000 shares at an average price of $26 per share. At that time, Heritage had a total of 200,000 shares of stock outstanding. On June 14, Winfried sold his entire holding in Heritage at an average price of $35 per share. In a local newspaper interview, Winfried was quoted regarding his reasons for selling the stock: "I have not had the pleasure of meeting any person from Heritage, but I have the highest regard for the Heritage Company,... I sold my stock simply because the market has gone too high and in my view is due for a correction." After independently reading Winfried's prediction on the stock market, Jones, Sylvan, and McCarthy sold their shares on June 15 for $33 per share. On June 20, Heritage Co. demanded that Jones, Sylvan, McCarthy, and Winfried pay the corporation the profits made on the sale of the stock. Was the corporation correct in making such a demand on each of these people
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Q 11Q 11
Dorozhko hacked into the corporate network of Thomson Financial on October 17, 2007 at 2:15 P.M. and gained access to IMS Health's soon-tobe- released negative earnings announcement due out at 5:00 P.M. He purchased $41,670 worth of put options. IMS shares were trading at $29.56 at the close on October 17. On October 18, 2007, IMS Health's stock price plunged at the opening of trading to $21.20 per share, on the negative news issued at 5:00 P.M. on October 17. Within six minutes, Dorozhko sold the put options for a net profit of $286,456. Did Dorozhko's "hacking and trading" violate either the traditional or misappropriation theories of "insider trading"
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Q 12Q 12
Mary Dale worked in the law office of Emory Stone, an attorney practicing securities law. While proofreading Mary's keying of a document relating to the merger of two computer software companies, Emory joked to her, "If I weren't so ethical, I could make a few bucks on this info. Nomac Software stock prices are going to take off when this news hits 'The Street.'" That evening, Mary told her friend Rick Needleworth, a stockbroker, what her boss had said. Needleworth bought 500 shares of Nomac Software stock the next day and sold it three days later when the news of the merger was made public. He made a profit of $3,500. Did Dale, Stone, or Needleworth violate any securities law(s) or ethical principles with respect to the profit made by Needleworth
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Q 13Q 13
International Advertising, Inc. (IA), would like to raise $10 million in new capital to open new offices in eastern Europe. It believes it could raise the capital by selling shares of stock to its directors and executive officers as well as to its bank and a large insurance company whose home office is located near IA's headquarters. Opposition to the financing plan exists because of the trouble, time, and cost involved with registering with the SEC. Advise IA how best to proceed with the registration of the new issue of stock.
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Q 14Q 14
Dubois sold Hocking a condominium that included an option to participate in a rental pool arrangement. Hocking elected to participate in the arrangement. Under it, the rental pool's agent rented condominiums, pooled the income, and after deducting a management fee, distributed the income to the owners on a pro rata basis. Hocking brought a Rule 10b-5 fraud action against Dubois. Dubois contended that the sale of the condominium was not a security under the securities acts, so Hocking could not bring a securities suit against her. Was Dubois correct [Hocking v Dubois, 839 F2d 290 (9th Cir)]
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Q 15Q 15
William Rubin, president of Tri-State Mining Co., sought a loan from Bankers Trust Co. To secure the loan, he pledged worthless stock in six companies and represented that the stock was worth $1.7 million. He also arranged for fictitious quotations to appear in an investment reporting service used by the bank to value the pledged securities. The bank loaned Rubin $475,000 and took the securities as pledged collateral. In a criminal action against Rubin under section 17(a) of the 1933 act, Rubin's defense was that the pledging of securities did not constitute an offer or sale of securities under the act. Was Rubin correct [Rubin v United States, 449 US 424]
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Q 16Q 16
C. Cowdin, a director of Curtis-Wright Co., phoned Robert Gintel, a partner of Cady, Roberts Co., a stock brokerage house, and advised him that Curtis-Wright's quarterly dividend had been cut. Gintel immediately entered orders selling Curtis-Wright shares for his customers' accounts. The stock was selling at over $40 a share when the orders were executed but fell to $30 soon after the dividend cut was announced to the public. The SEC contended that the firm, Cady, Roberts Co., and Gintel violated section 10(b) of the 1934 act, Rule 10b-5, and section 17(a) of the 1933 act. Gintel and Cady, Roberts Co. disagreed. Decide. [In re Cady, Roberts Co., 40 SEC 907]
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Q 17Q 17
In a January 2000 prospectus for its initial public offering of shares, Apex Oil Discovery Co. (AODC) estimated a sizable volume of oil production based on the studies of two geologists and a test well at one of its Oklahoma properties. A cautionary statement advised that the projections were only estimates based on the opinion of the two experts and a test well, and that actual production could vary significantly. Lutz bought 10,000 shares of Apex in May 2000 for $20 per share. By October 2000, 12 of its 15 drilling operations under way that year turned out to be dry holes. On October 18, 2000, AODC stock fell to $6 per share. Lutz brought a private securities civil action under SEC Rule 10b-5 against AODC, alleging that the AODC oil production estimates that induced him to buy the stock were fraudulent as evidenced by the 80 percent failure rate of its drilling operations. What defense, if any, does AODC have in this case Decide.
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Q 18Q 18
Douglas Hansen, Leo Borrell, and Bobby Lawrence were three psychiatrists who recognized the need for an inpatient treatment facility for adolescents and children in their community. They became limited partners in building a forprofit psychiatric facility. Each had a 6.25 percent interest in the partnership. Healthcare International, Inc., the general partner with a 75 percent interest, had expertise in hospital construction, management, and operation. Hansen, Borrell, and Lawrence asserted that the managerial control of the partnership was undertaken and operated by the general partner to the exclusion of the limited partners. The doctors claimed that their interest was a security-"an investment contract"-that gave them status to file a securities suit against the general partner under the 1934 act. The general partner disagreed. Decide. [L B Hospital Ventures, Inc. v Health-care International, Inc., 894 F2d 150 (5th Cir)]
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Q 19Q 19
Texas International Speedway, Inc. (TIS), filed a registration statement and prospectus with the Securities and Exchange Commission offering a total of $4,398,900 in securities to the public. The proceeds of the sale were to be used to finance the construction of an automobile speedway. The entire issue was sold on the offering date. TIS did not meet with success, and the corporation filed a petition for bankruptcy. Huddleston and Bradley instituted a class-action suit in U.S. district court on behalf of themselves and other purchasers of TIS securities. Their complaint alleged violations of section 10(b) of the 1934 act. The plaintiffs sued most of the participants in the offering, including the accounting firm of Herman MacLean. Herman MacLean had issued an opinion concerning certain financial statements and a pro forma balance sheet that were contained in the registration statement and prospectus. The plaintiffs claimed that the defendants had engaged in a fraudulent scheme to misrepresent or conceal material facts regarding the financial condition of TIS, including the costs incurred in building the speedway. Herman MacLean contended that the case should be dismissed because section 11 of the 1933 act provides an express remedy for a misrepresentation in a registration statement, so an action under section 10(b) of the 1934 act is precluded. Decide. [Herman MacLean v Huddleston, 459 US 375]
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Q 20Q 20
Melvin J. Ford, president of International Loan Network, Inc. (ILN), promoted ILN's financial enrichment programs to ILN members and prospective members with evangelical fervor at revival-style "President's Night" gatherings. His basic philosophy was this:
The movement of money creates wealth. What we believe is that if you organize people and get money moving, it can actually create wealth.
One ILN program was the Maximum Consideration Program, which, somewhat like a chain letter, provided $5,000 awards to members who sold $3,000 worth of new memberships called PRAs and made a deposit on the purchases of nonresidential real estate. According to Ford, an individual purchasing $16,000 worth of PRAs could receive an award of up to $80,000 because "all of a sudden the velocity of money increases to such a point, the ability to create wealth expands to such a degree, that we could come back and give somebody an award for up to $80,000." The SEC contended that ILN was selling unregistered investment contracts in violation of the 1933 act. ILN disagreed, contending that the program never guaranteed a return and was thus not an investment contract. Decide. Could ILN have provided full disclosure to investors concerning the program in a prospectus if required by the 1933 act [SEC v ILN, Inc., 968 F2d 1304 (DC Cir)]
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