MODULE 22 FEDERAL SECURITIES ACTS AND ANTITRUST LAW 101

(7) Even if exempt from registration under 1934 Act, still subject to antifraud provisions
(8) Extensive potential liability for insiders
(a) Must forego trading if one has such knowledge until public has information
1] Includes insiders and anyone with knowledge (e.g., accountant, attorney, engineer)
2] Illegal for person (tipper) to give inside information to another person (called tippee)
3] Tippee is liable if acts on inside information until information is known by public

a] Tipper is liable for illegal profits of tippee

12. Civil liability

a. Any person who intentionally (willfully) manipulates a security may be liable to the buyer
or
seller of that security if the buyer or seller is damaged

(1) Note that both buyers and sellers may recover under the 1934 Act
b. Any person who makes a misleading (or of course false) statement about any material fact in
any
, application, report, or document is liable to an injured purchaser or seller if s/he
(1) Relied on the statement, and
(2) Did not know it was false or misleading
(3) Privity of contract is not necessary
(4) However, the party sued can avoid liability if s/he can prove s/he
(a) Acted in good faith, and
(b) Had no knowledge that the statement(s) was (were) materially misleading or false
(c) SEC may collect liability funds for victims of securities fraud
l3. Criminal liability
a. Has been increased due to Sarbanes-Oxley Act
(1) Individuals in violation of Rule lOb-5 may be put in prison for up to twenty years and/or may
be fined for up to five million dollars

(a) May be put in prison for up to twenty-five years and/or fined for willful violation of 1934
Act

(2) Corporations or partnerships are subject to fines of up to twenty-five million dollars

b. Criminal liability can also be used for intentional false or misleading statements on material
facts
provided in applications, reports, or other documents under this Act

14. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 prohibits discharge of any
debts incurred in violation of securities laws

a. This Act applies to parts of Modules 27 and 28 too, and is now effective and is therefore
testable
onCPAexam.

15. Both private parties and SEC now have civil remedies against violators of 1934 Act
a. Private parties may recover from those who violate rule lOb-5 as well as from others sharing
re-
sponsibility such as attorneys, accountants, corporations

(1) Private parties may also rescind contracts to purchase contacts when violations hurt them
b. SEC authorized to give awards to individuals that provide information leading to prosecution
of
insider-trading violators

16. Statute of limitations extended for securities fraud

17. Reporting requirements of insiders under 1934 Act
a. Must file statement with SEC
(1) Discloses amount of equity securities
(2) Time of statement disclosure

(a) When securities registered, or

(b) When registration statement becomes effective, or
(c) Within ten days of person attaining insider status
(3) Insider must report any changes in ownership within ten days