Топик: Insider trading
1.COVERED CONDUCT --rule 10b-5 applies to nondisclosure by dirs or officers, as well as to misrepresentations . It applies not only to insider trading but also to any person who makes a misrepresentation in connection with a purchase or sale of stock.
2.COVERED SECURITIES --rule 10b-5 applies to the purchase or sale of any security, registered or unregistered. a jurisdictional limitation requires that the violation must involve the use of some instrumentality of interstate commerce .
3.WHO CAN BRING SUIT UNDER 10B-5 --private plaintiffs and the SEC. Private plaintiffs must be either purchasers or sellers of security.
4.MATERIALITY --for rule 10b-5 to apply, the information misrepresented or omitted must be material (i.e., a reasonable sh would consider it important in deciding whether to buy or to sell).
5.FAULT REQUIRED (SCIENTER) --a defendant is not liable under rule 10b-5 if he was without fault or merely negligent. The scienter requirement is satisfied by recklessness or an intent to deceive, mislead, or convey a false impression. Scienter is also required for injunctive relief.
a)Recklessness Defined :
1)D knew the hazard and proceeded nonetheless (subjective test);
2)D proceeded despite what a reasonable person would perceive (objective test);
b)Recklessness Under PSLRA :
1)Knowing conduct -- yields jointly and severally liable;
2)Non-knowing conduct (e.g., recklessness)--yields fair share (proportionate liability), found in accordance with special interrogatories.
6.CAUSATION AND RELIANCE --a plaintiff must prove that violation caused a loss (i.e., he must establish reliance on the wrongful statement or omission). However, in omission cases, there is a rebuttable presumption of reliance once materiality is established.
a)Fraud On The Market --where securities are traded on a well-developed market (rather than in a face-to-face transaction), reliance on a misrepresentation may be shown by alleging reliance on the integrity of the market.
b)Face-to-Face Misrepresentations --a plaintiff can show actual reliance in these cases by showing that the misrepresentation was material, testifying that he relied upon it, and showing that he traded soon after misrepresentation.
7.WHEN NONDISCLOSURE CONSTITUTES a VIOLATION
a)Mere Possession of Material Information --generally, nondisclosure of material, nonpublic information violates rule 10b-5 only when there is a duty to disclose independent of rule 10b-5
b)Insider Trading --insiders (dirs, officers, controlling shs and corporate employees) violate rule 10b-5 by trading on the basis of material, nonpublic info obtained through their positions. They have a duty to disclose before trading.
c)Misappropriation --the liability of noninsiders who wrongfully acquire (misappropriate) material nonpublic info has not been ruled upon by the US Supreme Court, although some lower level federal courts have imposed criminal liability.
1)Duty to Employer --using the misappropriation theory, criminal liability under rule 10b-5 has been imposed where an employee trades on info used in violation of the employee’s fiduciary duty to his employer. An employee’s duty to “abstain or disclose” with respect to his ER does NOT extend to the general public. However, the Insider Trading and Securities Fraud Enforcement Act of 1988 makes any person who violates rule 10b-5 by trading while in possession of material, nonpublic info liable to any person who, contemporaneously to the transaction, purchased or sold securities of the same class. Liability is limited to the defendant’s profit or avoided loss.
2)Mail and wire fraud --the application of the federal mail and wire fraud statute to this situation lessens the importance of the misappropriation theory in imposing criminal liability under rule 10b-5.
3)Special rule for tender offers --once substantial steps toward making a tender offer have begun, it is a fraudulent, deceptive, or manipulative act for a person possessing material information about the tender offer to purchase or sell any of the target’s stock, if that person knows that the info is nonpublic and has been acquired from the bidder, the target, or someone acting on the bidder’s or the target’s behalf.
d)”Disclose or Abstain” --nondisclosure by a person with a duty to disclose violates rule 10b-5 only if he trades (Cady rule)
8.LIABILITY OF NONTRADING PERSONS FOR MISREPRESENTATION --a nontrading corp or person who makes a misrepresentation that could cause reasonable investors to rely thereon in the purchase or sale of securities is liable under rule 10b-5, provided the scienter requirement is satisfied.
9.LIABILITY OF NONTRADING CORPORATION FOR NONDISCLOSURE --the basic principle is “disclose or abstain.” Thus, a nontrading corp is generally not liable under rule 10b-5 for nondisclosure of material facts.
a)Exceptions --a corp has a duty to:
1)Correct misleading statements (even if unintentional);
2)Update statements that have become materially misleading by subsequent events; 3)Correct material errors in statements by others (e.g, analyst’s report) about the corp, but only if the corp was involved in the preparation of the statements; and
4)Correct inaccurate rumors resulting from leaks by the corp or its agents.
10.TIPPEE AND TIPPER LIABILITY --a person, not an insider, who trades on info received from an insider is a tippee and may be liable under rule 10b-5 if he received info through an insider who breached fiduciary duty in giving the info, AND the tippee knew or should have known of the breach (Dirks )