Deck 42: Securities Law Corporate Governance

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

The Securities and Exchange Commission does not enforce the antifraud provisions of the securities laws in the online environment.

Answer 3

False

Question 4

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

Question 5

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 6

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 7

Most securities can be resold without registration.

Question 8

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

Question 9

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

Question 10

The Securities and Exchange Commission cannot exempt persons, securities, and transactions from the requirements of the securities laws.

Question 11

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 12

Private parties can sue violators of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 for rescission of a contract to buy securities.

Question 13

Corporate accountability can be increased by imposing strict disclosure requirements and harsh penalties for securities laws.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

The Securities and Exchange Commission (SEC) requires companies to file certain information electronically so that it can be posted on the SEC's EDGAR database.

Question 19

For civil sanctions to be imposed under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, the violator must not have had an intent to defraud or knowledge of his or her misconduct.

Question 20

Securities generally do not include any documents evidencing corporate ownership or debt.

Question 21

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 sub?ject 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 22

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 23

Fact Pattern 42-1B (Questions B12-B13 apply)
Dhani, an accountant for Eureka! Inc. learns of undisclosed com?pany plan?s to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He re?veals the company plans to Fay, who tells Geoff. Both Fay and Geoff buy 100 shares. Geoff knows that Fay got her informa?tion from Dhani. When Eureka! publicly an?nounces its new laptop, Dhani, Fay, and Geoff sell their stock for a profit.
Refer to Fact Pattern 42-1B. Under the Securities Ex?change 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 24

Rico does not work for Street Bikes Company, but wrong?fully obtains inside information concerning the firm. Based on the in?forma?tion, Rico buys and sells Street Bikes stock for personal gain. The Securities and Exchange Commission prose?cutes Rico, arguing that he is liable because he stole in?formation right?fully 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 25

Riverwalk Restaurants Corporation is a noninvestment company that wants to is?sue stock of $3 million in a twelve-month period. Riverwalk, with less than $20 mil?lion in annual sales, qualifies as a small business issuer. Before Riverwalk 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.

Question 26

OnSpec, Inc., and its officers, directors, and share?holders, 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 27

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 28

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 29

Fact Pattern 42-1B (Questions B12-B13 apply)
Dhani, an accountant for Eureka! Inc. learns of undisclosed com?pany plan?s to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He re?veals the company plans to Fay, who tells Geoff. Both Fay and Geoff buy 100 shares. Geoff knows that Fay got her informa?tion from Dhani. When Eureka! publicly an?nounces its new laptop, Dhani, Fay, and Geoff sell their stock for a profit.
Refer to Fact Pattern 42-1B. Under the Securities Ex?change 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 30

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 31

Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries, Inc., has assets of more than $50 mil?lion 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 32

Cotton Products 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 33

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 34

Boats & 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 35

As part of a stock offering for Designer Studio Corporation, the firm's accountant Evelyn intention?ally misrepresents material facts in the pro?spectus. Flores buys the stock unaware of the misrepresentation and suf?fers 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 36

Household Products Corporation wants to make an offering of securities to the pub?lic. This offering is not exempt from registration under the Se?curities Act of 1933. Before Household Products sells its securities, it must provide in?vestors with

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

Question 37

To raise capital to form Business Apps Corporation with Cris, Dona sells bonds and stock in other companies, and plans to register an initial public of?fer?ing under the Securities Act of 1933. SEC Rule l0b-5 covers

A) just about any form of securities.
B) only bonds.
C) only securities registered under the Securities Act of 1933.
D) only stock.

Question 38

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 39

Bonds & Stocks Corporation, and its officers, directors, and sharehold?ers, 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 40

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 41

When OmniOil Corporation wishes to issue certain securities, it must provide sufficient in?for?mation for Petra, and other unsophisticated investors, to evaluate the fi?nancial risk involved. Specifically, the law imposes liability for making a false statement or omission that is "material." What sort of information would Petra consider material?

Question 42

Ridley is an officer of Sun Watts, Inc. Ridley knows that a Sun Watts engi?neer 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?