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Exam 41: Corporations: Securities and Investor Protection

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Question 21

Multiple Choice

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Which of the following prohibits the use of manipulative devices to bypass SEC rules?

A) Section 15(a)
B) Section 10(b)
C) Section 5
D) Rule 2
E) Rule 2(5)

F) B) and D)
G) All of the above

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Question 22

Multiple Choice

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"In Trouble." Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble due to other projects. Bruno thought that the health club venture would be such a success that he would never get caught. Unfortunately, he was wrong. The health club venture has significant problems, and investors are looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Rick, a new lawyer, told Bruno that as far as he knew, Bruno could be fined for violations under the Securities Act of 1933, but he could not be sent to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that once before he was held liable for a violation of the Securities Act of 1933, and he does not want to be in trouble again. -Is Rick correct in that the SEC would have no authority to send Bruno to jail?

A) Rick is correct because there are no criminal penalties for violating the 1933 act.
B) Rick is incorrect because the SEC criminally prosecutes some violators although the action would only be a misdemeanor.
C) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Department of Justice resulting in imprisonment for up to five years for a violation.
D) Rick is incorrect because the SEC criminally prosecutes some violators, and a violation of the act is considered a felony.
E) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Federal Bureau of Investigation resulting in imprisonment for up to ten years for a violation.

F) B) and E)
G) C) and E)

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Question 23

Multiple Choice

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Which of the following permits the SEC to seek punishment of violators of foreign securities laws?

The average investor does not have to register securities when he or she wants to sell.

Which of the following references a profit made by a statutory insider from the purchase and sale of their own company stock within a six-month period?

Which of the following permits qualified issuers to register securities that they will sell on a delayed or continuous basis in the future?

Which of the following references a brief ad that may be issued by an issuer during the waiting period?

Alice, a certified public accountant (CPA) made mistakes in auditing the financial statements of ABC Company, a publicly traded corporation. Although Alice later became aware of the mistake and knew ABC was soliciting investors, she kept quiet about it, and ABC proceeded to sell stock without revealing the error. After ABC went bankrupt, investors sued Alice alleging that she had primary liability under federal securities law. Which of the following is the most likely result assuming the court follows the reasoning of David Overton and Jerome I. Kransdorf v. Todman & Co., CPAs, P.C. and Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari, the case in the text involving a similar situation?

Banks themselves oversee the issuance of shares and bonds in Sweden.

Which of the following did the appellate court rule in Securities and Exchange Commission v. Mutual Benefits Corp., the case in the text involving whether a viatical settlement investment is an investment contract under securities laws?

If an investor purchased securities and suffered damages as a result of an issuer's false or misleading statement, the investor is entitled to bring a civil suit to recover his or her losses.

For how long does each member at the head of the Securities and Exchange Commission serve?

Which of the following begins when the SEC declares the registration statement effective, and ends when the issuer sells all securities offered or withdraws them from sale?

"Presidential Profits." Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets although she told him to keep it quiet because it had not been made public yet. Nevertheless, unable to keep a secret, Frank told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. -Which of the following would describe Frank in receiving the information from Linda and acting upon it?

Under the Securities Exchange Act of 1934, executive officers are not considered statutory insiders.

Which of the following is not considered an accredited investor?

"Presidential Profits." Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets although she told him to keep it quiet because it had not been made public yet. Nevertheless, unable to keep a secret, Frank told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. -Which of the following would describe Linda in providing information about the asset sale to Frank?

"In Trouble." Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble due to other projects. Bruno thought that the health club venture would be such a success that he would never get caught. Unfortunately, he was wrong. The health club venture has significant problems, and investors are looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Rick, a new lawyer, told Bruno that as far as he knew, Bruno could be fined for violations under the Securities Act of 1933, but he could not be sent to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that once before he was held liable for a violation of the Securities Act of 1933, and he does not want to be in trouble again. -Which of the following, if any, may be defenses for Bruno?

What is a proxy solicitation and how is it regulated by the SEC?

Which of the following limits shareholders' ability to bring class action suits against nationally traded companies?