Deck 30: Investor Protection, Insider Trading, and Corporate Governance

Question 1

Insider trading occurs when persons buy or sell securities on the basis of information that is not available to the pubic.

Answer 1

True

Question 2

Liability can be imposed on those who are negligent in not discovering fraud in connection with a registration statement or prospectus.

Answer 2

True

Question 3

The definition of security in the Securities Act of 1933 does not include instruments commonly known as securities.

Answer 3

False

Question 4

The Securities Exchange Act of 1933 is a one-time disclosure law.

Question 5

Anyone who wrongfully obtains inside information and trades on it for his or her personal gain can be liable under SEC Rule 10b-5.

Question 6

The Securities Exchange Act of 1934 is a one-time disclosure law.

Question 7

The sale and transfer of securities are heavily regulated by federal and state statutes and by government agencies.

Question 8

Securities can be sold after the effective date of the registration statement without restrictions.

Question 9

Securities offerings in unlimited amounts can be exempt from the registration requirements in certain circumstances.

Question 10

If a security does not qualify for an exemption, an issuer cannot offer it to the public.

Question 11

Accredited investors include banks, but not investment companies.

Question 12

For criminal sanctions to be imposed under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5scienter must exist.

Question 13

Most private, midsize-business, noninvestment company offers of securities are not exempt from the registration requirements.

Question 14

Most private, small-business, noninvestment company offers of securities are exempt from the registration requirements.

Question 15

Most securities can be resold without registration.

Question 16

A well-known seasoned issuer cannot file a registration statement until after it announces a new offering.

Question 17

The Securities and Exchange Commission does not regulate the content of proxy statements.

Question 18

"Forward-looking" financial forecasts that turn out to be wrong are not protected against liability for securities fraud.

Question 19

Once a registration statement has been filed, a waiting period begins while the Securities and Exchange Commission reviews the statement.

Question 20

The Securities and Exchange Commission has implemented no new regulations since Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Question 21

The Sarbanes-Oxley Act of 2002 attempts to corporate accountability by imposing strict disclosure requirements and harsh penalties for securities laws.

Question 22

State corporation statues set up the legal framework for corporate governance.

Question 23

Sun & Ski Tours Corporation is poised to issue securities that, under the Securities Act of 1933, are “exempt.” This means that the securities can be sold

A)on the basis of a material omission or misrepresentation.
B)on the basis of nonpublic information.
C)within any six-month period by certain insiders.
D)without being registered.

Question 24

For a defendant to be convicted in a criminal prosecution under the securities laws, there can be no reasonable doubt that the defendant knew he or she was acting wrongfully.

Question 25

Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 apply just to corporate "insiders."​

Question 26

Corporate "outsiders" may not be held liable for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Question 27

Social Media Sites Corporation is required to file a registration statement with the Securities and Exchange Commission. This statement must contain

A)a copy of prospectuses to be provided to investors.
B)a description of securities being offered for sale.
C)a record of pre-registration sales in securities.
D)all of the choices.

Question 28

Fact Pattern 30-1
Drilling Tools, Inc., wants to make an initial public offering of securities. Drilling Tools believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933.
Refer to Fact Pattern 30-1. Drilling Tools decides to sell its new securities via the Internet. This offering

A)will avoid the payment of commissions to brokers or underwriters.
B)is an investment scam.
C)is a Ponzi scheme.
D)constitutes insider trading.

Question 29

State securities laws apply mainly to interstatetransactions.

Question 30

The key to liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 is whether information omitted or misrepresented in connection with the purchase or sale of a security is material.

Question 31

Exemptions from federal securities law are notexemptions from state laws.

Question 32

Fact Pattern 30-1
Drilling Tools, Inc., wants to make an initial public offering of securities. Drilling Tools believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933.
Refer to Fact Pattern 30-1. If Drilling Tools is exempt from the federal registration requirement, Drilling Tools is

A) ​automatically exempt from any state registration requirement.
B) ​not subject to any state securities laws.
C) ​not necessarily exempt under a state registration requirement.
D) ​automatically subject to all state registration requirements.

Question 33

In the context of Section 16(b) of the Securities Exchange Act of 1934, insiders include officers, directors, and large stockholders of Section 12 corporations.

Question 34

For civil sanctions to be imposed under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5,scienter must not exist.

Question 35

NuTrend Clothing Corporation is a public company whose securities are traded among investors. Under the Securities Act of 1933, a security is

A)almost any stake in the ownership or debt of a company.
B)an investment that is guaranteed to make a profit.
C)only such common forms of debt and equity as bonds and stocks.
D)whatever a company represents to the public as a security.

Question 36

Private parties may sue violators of Section 10(b) and Rule 10b-5.

Question 37

The Securities Exchange Act of 1934 applies to companies that have assets in excess of $5 million and five hundred or more employees.

Question 38

Under the Sarbanes-Oxley Act of 2002, chief financial officers must certify the accuracy of information in corporate financial statements and reports that are filed with the Securities and Exchange Commission.

Question 39

Every state has its own corporate securities laws that regulate the offer and sale of securities within tis borders.

Question 40

Under the Sarbanes-Oxley Act of 2002, chief executive officers no longer need to certify the accuracy of information in corporate financial statements.

Question 41

Fact Pattern 30-2
​Eddie, an accountant for Fresh Dairy, Inc., learns of undisclosed company plans to market a new smooth-tasting, fat-free butter. Eddie buys 10,000 shares of Fresh Dairy stock. He reveals the company plans to Giselle, who buys 5,000 shares. Giselle tells Hong, who tells Irwin, each of whom buy 1,000 shares. They know that Giselle got her information from Eddie. When Fresh Dairy publicly announces its new product, Eddie, Giselle, Hong, and Irwin sell their stock for a profit.
Refer to Fact Pattern 30-2. Under the Securities Exchange Act of 1934, Giselle is most likely

A) ​liable for insider trading.
B) ​not liable because Giselle did not prevent others from profiting.
C) ​not liable because Giselle did not solicit information from Eddie.
D) ​not liable because Giselle does not work for Fresh Dairy.

Question 42

Adrian, the chief executive officer of Beds+Sofas, Inc., intentionally understates the amount of Beds+Sofas' debts in information provided to investors as part of an issue of Beds+Sofas' stock. Cassie buys the stock and suffers a loss. Adrian may be subject to

A) ​government prosecution and Cassie's suit.
B) ​negative publicity but no criminal prosecution or civil suit.
C) ​only government prosecution.
D) ​only Cassie's suit.

Question 43

Hawaiian Shirts, Inc., wants to issue stock of $4 million in a single offering. The corporation must provide disclosure documents that generally are the same as those used in registered offerings to​

A) ​all investors and the Securities and Exchange Commission.
B) ​the Securities and Exchange Commission.
C) ​any accredited investors.
D) ​any unaccredited investors.

Question 44

Global Trade Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that Global Trade must​

A) ​file a registration statement with the SEC.
B) ​issue the securities through an online registration site.
C) ​refrain from issuing the securities to unregistered investors.
D) ​register the securities with a national stock exchange.

Question 45

Karin, an officer for Liquified Natural Gas Corporation (LNG), buys 10,000 shares of LNG stock. One week later, LNG announces that it will merge with a competitor, Mining & Piping Company, and the price of LNG stock increases. One month later, Karin sells her shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Karin 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.

Question 46

Fact Pattern 30-3
Dhani, an accountant for Eureka! Inc. learns of undisclosed company plans to market a new laptop. Dhani buys 1,000 shares of Eureka! stock. He reveals the company plans to Fay, who tells Geoff. Both Fay and Geoff buy 100 shares. Geoff knows that Fay got her information from Dhani. When Eureka! publicly announces its new laptop, Dhani, Fay, and Geoff sell their stock for a profit.
Refer to Fact Pattern 30-3. Under the Securities Exchange Act of 1934, Fay is most likely

A) ​liable for insider trading.
B) ​not liable because Fay did not prevent others from profiting.
C) ​not liable because Fay did not misappropriate any information.
D) ​not liable because Fay does not work for Eureka!

Question 47

Shoes & Sox Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933​

A) ​imposes increased responsibility on chief corporate executives.
B) ​prevents insiders from trading among themselves.
C) ​requires disclosure.
D) ​creates a "safe harbor" for companies to make forward-looking statements.

Question 48

Space Trips Inc. files a registration statement with the SEC before making an offering to the general public. The registration contains false, immaterial statements of which the investors are unaware. Space Trips is charged with violating the Securities Act of 1933. Space Trips's best defense is​

A) ​the investors were not aware of the misrepresentations.
B) ​the issuer reasonably believed the misstatements were true.
C) ​the offering was made available to the general public.
D) ​the untrue statements were not material.

Question 49

As part of a stock offering for Designer Studio Corporation, the firm's accountant Evelyn intentionally misrepresents material facts in the prospectus. Flores buys the stock unaware of the misrepresentation and suffers a loss. Evelyn 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.

Question 50

Global Resources Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to the purchase or sale of a security​

A) only by an investment company.
B) ​only involving short-swing profits.
C) ​only involving a tipper and tippee.
D) ​in almost any circumstances.

Question 51

Bonds & Stocks Corporation, and its officers, directors, and shareholders, buy and sell securities. SEC Rule 10b-5 applies to the purchase or sale of

A) ​a security by a financial corporation only.
B) ​a security involving a corporate insider only.
C) ​a security involving short-swing profits only.
D) ​any security.

Question 52

Trail Bike Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Trail Bike is required to​

A) ​contribute to the operations of national stock exchanges.
B) ​disclose financial and other information about its securities.
C) ​engage in market surveillance to deter undesirable practices.
D) ​all of the choices.

Question 53

Guitar Factory Corporation files a registration statement and delivers a prospectus to the appropriate parties. These items are intended to enable the evaluation of certain financial risks by​

A) ​market professionals to explain to all investors.
B) ​government regulators to disclose to the general public.
C) ​sophisticated investors only.
D) ​​unsophisticated investors.

Question 54

Household 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 Household Products sells its securities, it must provide investors with​

A) ​a forward-looking financial forecast.
B) ​an investment contract.
C) ​a prospectus.
D) ​samples of its products.

Question 55

Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries, Inc., has assets of more than $50 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to​

A) ​Fresh Fruit and Gourmand Pastries.
B) ​Fresh Fruit only.
C) ​Gourmand Pastries only.
D) ​neither Fresh Fruit nor Gourmand Pastries.

Question 56

Fleet Delivery Corporation is a public company with a market capitalization of less than $75 million. Fleet is poised to issue securities in a transaction that, under the Securities Act of 1933, is "exempt." This enables Fleet to​

A) ​reduce the compliance costs by not requiring an auditor report.
B) buy and sell the securities without liability for "recaptures."​
C) ​make forward-looking financial forecasts without liability.
D) ​withhold inside information from accredited investors.

Question 57

Orbital Flights, Inc., is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 16(b) of the act covers

A) ​the declaration of dividends by Orbital's board of directors.
B) ​the later re-registration of Orbital's securities.
C) ​the short-swing activities of Orbital's insiders.
D) ​the solicitation of proxies from Orbital's shareholders.

Question 58

To raise $120 million to expand operations, Premiere Movies Corporation makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. Premiere Movies plans to notify the SEC of sales. Under the Securities Act of 1933, this issue may qualify as an "exempt" transaction​

A) ​as is.
B) ​if all of the investors are also given material information about the firm, including its most recent financial statements.
C) ​if the offering is also made available to the general public.
D) ​under no circumstances.

Question 59

Nester, a salesperson for Olive Grove Corporation, learns that Olive Grove will increase the dividend it pays to shareholders. Nester buys 10,000 shares of Olive Grove stock. When the dividend is announced to the public and the price of the stock increases, Nester sells his shares for a profit. Nester would not be liable for insider trading if the information about the dividend was

A) ​material when he sold the stock.
B) ​available to the public after he bought the stock.
C) ​available to the public before he bought the stock.
D) ​forward-looking when he bought the stock.

Question 60

Fact Pattern 30-2
​Eddie, an accountant for Fresh Dairy, Inc., learns of undisclosed company plans to market a new smooth-tasting, fat-free butter. Eddie buys 10,000 shares of Fresh Dairy stock. He reveals the company plans to Giselle, who buys 5,000 shares. Giselle tells Hong, who tells Irwin, each of whom buy 1,000 shares. They know that Giselle got her information from Eddie. When Fresh Dairy publicly announces its new product, Eddie, Giselle, Hong, and Irwin sell their stock for a profit.
Refer to Fact Pattern 30-2. If Eddie is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of Fresh Dairy stock was​

A) ​a forward-looking forecast.
B) ​not material.
C) ​not yet public.
D) ​not yet true.

Question 61

Rollo is the chief executive officer of Specialty Magazines, Inc., which is required to file certain financial reports with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Rollo must

A) ​certify that the reports are complete and accurate.
B) ​designate a corporate official to assume liability for inaccuracies.
C) ​do nothing.
D) ​read the reports and be prepared to answer questions about them.

Question 62

Boats and Yachts Corporation is a public company, which California regulates and in which Dorian invests. The Sarbanes-Oxley Act of 2002 introduced direct federal corporate governance requirements to​

A) ​public companies.
B) ​private investors.
C) ​state regulators.
D) ​the Securities and Exchange Commission.

Question 63

HVAC Heating & Air Conditioning, Inc., is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that HVAC's financial results are accurate and timely, the firm's senior officers must set up and maintain​

A) ​internal "disclosure controls and procedures."
B) ​external "release and reveal timetables."
C) ​personal "peruse and review liability policies."
D) ​public "information and discussion forums."

Question 64

Medico Corporation is a public company whose shares are traded in public securities markets. Medico'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?

Question 65

Solder Welding Corporation is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, Solder Welding is subject to the direct corporate governance requirements of​

A) ​any other public company with which Solder Welding exchanges shares.
B) ​any state in which Solder Welding does business.
C) ​the federal government.
D) ​the state in which Solder Welding incorporated.

Question 66

Cattle Ranch Company offers its stock for sale only in a single state. The law in Cattle Ranch's state is like the law in most states. Cattle Ranch's offer is subject to state securities statutes that include​

A) ​antifraud and disclosure provisions.
B) ​antifraud provisions only.
C) ​disclosure provisions only.
D) ​neither antifraud nor disclosure provisions.

Question 67

Rico does not work for Street Bikes Company, but wrongfully obtains inside information concerning the firm. Based on the information, Rico buys and sells Street Bikes stock for personal gain. The Securities and Exchange Commission prosecutes Rico, arguing that he is liable because he stole information rightfully belonging to another. This argument is​

A) ​the blue-sky theory.
B) ​the misappropriation theory.
C) ​the free-writing prospectus theory.
D) ​the tipper/tippee theory.

Question 68

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

Question 69

Grain Mills Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 14(a) of the act regulates

A) ​the declaration of dividends by Grain Mills's board of directors.
B) ​the later re-registration of Grain Mills's securities.
C) ​the short-swing activities of Grain Mills's insiders.
D) the solicitation of proxies from Grain Mills's shareholders.

Question 70

Fact Pattern 30-3
Dhani, an accountant for Eureka! Inc. learns of undisclosed company plans to market a new laptop. Dhani buys 1,000 shares of Eureka! stock. He reveals the company plans to Fay, who tells Geoff. Both Fay and Geoff buy 100 shares. Geoff knows that Fay got her information from Dhani. When Eureka! publicly announces its new laptop, Dhani, Fay, and Geoff sell their stock for a profit.
Refer to Fact Pattern 30-3. Under the Securities Exchange Act of 1934, Geoff is most likely

A) ​liable for insider trading.
B) ​not liable because Geoff is only a tippee, not a tipper.
C) ​not liable because Geoff is too far down the chain of disclosure.
D) ​not liable because Geoff traded on the basis of a material fact.

Question 71

On Spec, Inc., and its officers, directors, and shareholders, buy and sell securities. Section 16(b) of the Securities Exchange Act of 1934 covers purchases and sales of securities involving​

A) ​corporate insiders.
B) ​misappropriation.
C) ​short-swing profits.
D) ​tippers and tippees.

Question 72

Ridley is an officer of Sun Watts, Inc. Ridley knows that a Sun Watts engineer recently developed a new, inexpensive method for collecting, storing, and converting solar power into fuel. Ridley takes advantage of this information to buy Sun Watts stock from Taylor and, after the discovery is announced, to sell the stock to Ulrich at a profit. Taylor claims that this is a violation of federal law. Is Taylor correct? If so, what federal law has Ridley violated, and what are its possible penalties?​