Federal SEC Regulation.

1934 Act Important Provisions.

1933 Act
§ 10 Fraud. § 12 §14 Proxies §16 Insider
Registration Reporting Rules §13 Disclosure
-Purpose was to ensure
No use of Requirements. Regulates the Requirements
complete and truthful
mail/interstate soliciation and Has 'short swing'
information (disclosure 1934 Act commerce Anything falling substance of rules and
theory). Periodic Reporting
involving the under this proxies; including requirments for for §12 Corps.
-Filled gaps purchase/sale section is disclosure disclsoure of
-Prohibits offers and of 1933 -> of security and condsidered requriements. insider trading -10K Audited
sales of securities applies to involvees " public" activities Annual Financial
WHICH AREN'T trades on fraudulent Report
registered with the SEC. market. conduct. §12(a) ->
Anything on a -10Q Unaudited
-20 Day Waiting Period. Centerpiece national Quarterly
Must wait 20 days after of Current SUPER exchage ONLY APPLY TO Reports
filing registration with SEC Regulation FUCKING " PUBLIC" CORPS PER
and selling stock to public; Regime. IMPORTANT; §12(g)1 - THE § 12 REGISTRATION -8k Interim
ensures access to Companies on reports for BIG
Insider trading, REQS.
information. NASDAQ w/ at events (Change in
frauds,
least 2,000 SH control,
breaches, ALL
DOES NOT EFFECT or 500 resignation of
SORTS OF
DAILY TRADING; JUST non-accredited directors, changes
ACtioN investors AND
REGISTRATION AND in accountants,
REPORTING 10 million net and Bankruptcy)
assets.

Trust Indenture Act of 1939 Williams Act of

1968
BOND REGULATION Securities
Investment Investment
Investment 14(e) [not subject to Sarbanes Oxley Act
Company Act of Advisors Act of
- IMposes limitations, disclosure, Protection Act of 12(g), to all publicly of 2002
1940 1940
and structuring requriments for 1970 (SIPA) traded corps]
all companies that issue bonds 14(d) subject to the
publicly reqs.

Trust Indenture: Master

agreement that governs the
terms & conditions of general
obligation corproate bonds
(debentures) that are offered to
the public under the 1933 Act.

Reporting Companies &

Requirements
§12 §12(g)(1)
AVOIDING THE PROXY RULES. Hint, you can't.
§12(a) Any Company with (1) a -> Limit use of proxies or regular meetings.
class of securities
Companies that sell having more than 2,000 2. In Delaware (some othrs), can act
securities (stocks or regular SH of record or 1. Try to get a quorum w/o soliciting
w/o meeting if there is majority
bonds) on a national 500 people who are not proxies.
consent of SH on action.
securities exchange accredited investors HOWEVER
HOWEVER!!
AND (2) total net assets -> the information statement
SEC rules still require MGMT to issue
of at least $10 million required before ALL meetings must
proxy statement to all SH's if it acts
have essentially same info 14(f)
by consent w/o meeting.
Once above 2,000 persons
or 500 non-instituitonal
investors, status STICKS
until the number falls
If EITHER of these
below 1,200.
requirements are met, the
PUBLIC company is
subject to §13, §14, §16 & Vast maj of companies;
Williams Act. remember -> record
holder and
§10 applies to all, incl. BENEFICIAL owner is
private. different.

The Proxy Rules

Four Main. Enabling statute. Allows the
§ 14(a)(1) - " It shall be unlawful . . . to use
(1) Rule 14(a)(1) when moved to real proxy rules which follow.
mail/ISCI . . . in contravention of such rules as
(2) Rule 14a-7 page, insert this here Important implications on
may be adopted . . . to solicit a proxy of any
(3) Rule 14a-8 security registered per § 12."
scope. NOTHING CAN GO
(4) Rule 14a-9 BEYOND SCOPE.

Main Consequences/Holdings.
1) Must be full & fair
disclosure of all material
facts on any MGMT-submitted
proposals subject to SH vote
2) Material misstatements/
omissions & fraud in
connection with soliciation of
proxy prohibited.
3) MGMT must not only submit
relevant SH proposals, but
must allow proponents short
space to explain their position
in face of MGMT opposition.
4) There must be full
disclosure in any non-MGMT
proxy materials [significant in
proxy wars]
Within scope of rules?
a1) Is Corp covered?
If under §12(g)(1) -> can TERMINATE registration
with SEC if number of S/H drops below 1,200
OR
its assets drop below $10 million FOR THREE
YEARS IN A ROW AND the number of SH is <
2,000
"in connection with"
a3) What is a solicitation?
Not limited to 'pure' solicitations
Rule 14a-1(L) -> A solicitiation is "any
communication which is reasonably
calcualted to solicit a S/H vote."
"Reasonably calculated" means not direct;
therefore something which reasonably COULD
HAVE altered SH votes = proxy solication if from
a SH or MGMT.
a2) Is the investor covered?
Special 10 person rule: Investors may communicate with
one another about voting SO LONG AS THERE ARE 10 or
FEWER communicating.
ALL OTHERS ARE IN IF CORP IS. NOTE:
Non-Shareholders ARE INCLUDED IN THIS SCOPE!!!!!
a4) Is the type of communication otherwise
exempted?
"A statement made by a person stating how they
will vote is NOT A SOLICITATION if it is a press
release, publication, ad, or broadcast opinion.
(Meant to change result of Long Island Lighting)

If all met:
-Proxy solicitations MUST
be field with SEC or
cannot be voted. See
14(a)(2).
- Need to be concerned
with FRAUD liability.
Must follow:
AVOIDING THE PROXY RULES.
§ 14(a)(4) (Requirements to Proxy) -> Mandates -> Don't use proxies or regular meetings.
form for Proxy Solicitation
1. Try to get a quorum w/o
2. In Delaware (some othrs), can
§ 14(a)(5) (Proxy Statements Required for soliciting proxies. act w/o meeting if there is
MGMT) -> Must use specific Schedule 14A (1) HOWEVER majority consent of SH on action.
before every meeting ANDl (2) when soliciting -> the information statement HOWEVER!!
proxies. required before ALL meetings SEC rules still require MGMT to
must have essentially same info
MGMT proxy statements MUST include BOTH issue proxy statement to all SH's if
(but would avoid 14a; still may it acts by consent w/o meeting.
deal with 10b-5)

FEDERAL Shareholder Right to Information. (state rights still Rule 14a-9 -> False or Misleading Statements; ANTI-FRAUD Rule.
apply) See 10b-5 for more detalied process of fraud.

14(a)(7) -> IF a S/H wants to communicate with other SHs "No solicitation (under this) shall be made . . . containing any statement which . .
about a matter that is a proper subject in a proxy . is false or misleading w/ respect to any material fact or which omits to state
mat fact necessary to make remainder non-misleading"
solicitation, the SH may demand that MGMT provide him
with access to toher SH's 3) Was
2) NO SCIENTER. Unlike 10b-5, information
1) Public material?
Offer to send out the proxy solicitation there is no requirement for
companies only. -> Rsbl investor
FIRST using corp list, etc. BUT -> AT THE deceptive intent.
Not as expansive would have
SH S/H expense.
Corp as 10b-5. consiered it.->>
Requests. Negligent mistatements COUNT.
has MAG v. PROB.
Choice
Must be S/H
of record. Provide the SH with the SH list. Misstatement or Omission?
- Materially misleading or fraudulent affirmative statements prhobit.
-Material omissions (needed to make accurate) are prohibited.

NOBO List - Non-Objecting Beneficial

-List of ben owns who do not object to disribution of
SECOND.
names.
Two types of Plaintiffs Remedies
- Not all record holders are ben. ownrs.
lists. -SH -Injunction
- Fed Law permits ben ownr. to
-SEC -Recission
-Corporation -Damages
CEDE List - Depository that holds shares for others

A record holder for a large number of beneficial

owners.

BIG CAVEAT for

REASON:
EXCLUSIONS!!
Rule 14a-8
Shareholder MGMT required by Schedule
If SH proposal is excluded,
Proposal Rule Under limited circumstances, certain minority S/H have a right to include AND SH says he will
14A TO INCLUDE all
shareholder proposals on MGMT's own proxy statement. matters which MGMT
appear at meeting and
reasonably believes will be
raise it anyway, MGMT
voted upon ie THIS.
MUST include anyway.

FIrst -> Can S/H get it prima facie in? Note: If 1-4 are not met, MGMT must still notify SH of problem and give opprotunity to correct. 14a-8(f)(1).

1) Is the Does the MBCA or Del. C. 5) Submitted soon

submission for 2) Is the shareholder
NEED or ALLOW 3) Is this the enough?
a PROPER ELIGIBLE? 4) Is the
shareholder input on this? ONLY proposal
MATTER for proposal TOO
for the Must be submitted in
SH Must hold at least $2,000 LONG?
-> Can't influence regular meeting? "sufficient advance of
consideration of shares in MKT value the meeting for the
business decisions left to
under state OR at least 1% of No more than
MGMT w/o shareholder Rule 14a-8(a)(4) company to respond as
law? securities FOR AT LEAST 500 words in
say. says only one to whether they are
ONE YEAR before the proposal.
per meeting. going to accept
BIG!!!! submission of proposal.
-> No votes for protest in proposal.
YUGE!!!! this sense.

Second -> Can MGMT keep it out? 14a-8(

Improper Under Would Cause Violation of SEC Personal Claim Proposal Is NOT Relates to ORDINARY BUSINESS
State Law Corp to violate Proxy Rules or Greivance RELEVANT OPERATION of mgmt
14a-8(i)(1) state, federal, or 14a-8(i)(3) (i)(4) (i)(5) (i)(7)
foreign law. Rule: Look at what proposal is really about.
Wording -> "may 14a-8(i)(2) MOST COMMON eg -> "I love ANTHR BIG ONE.
or shall" SOURCE OF rockets. I propose Test has Objctv & Ask: Does the proposal go beyond ordinary
Shall = BAD. Eg. DENIAL!!!!!. that BOD interview Subjective Cmpts. business operation?
May = GOOD. Recommendation me b/c they turned Is it national in scope or global in policy?
that BoD commit If the statement is me down. NOT "A subject of Does it speak to heart of business?
If proposal is not arson or fraud. materially COOL. proposal is
proper subject for misleading OR irrelevant if it (1)
Even discriminatory practices were ordinary
action by SH; !!! too vauge (or eg -> complaints relates to
business decisions. -> Crackerbarrel
omitts mat fact that company's operations that
case.But new SEC opinion says SIGNIFICANT
-If proposal is req.); it triggers product prices are account for <5%
SOCIAL ISSUES go beyond mere business
binding on liability under. too high and want of corporation's
decision
corporation, is to pay less. NOT business (objctv)
NOT PROPER. Usually something COOL. AND (2) is not
Need to distinguish: Show it goes beyond
SH may not such as "to make "significantly
ordinary business. If broader general or
mandate actions; corp better" Better related to" the
overriding statement on who the company is
only recommend is VAGUE, so corp's business.
and how percieved/ principles -> GOES
and approve. IMPROPER. (subjct)
BEYOND OBO and is non-excludable.
-THUS, big diff Usually given Must meet BOTH to be excluded. NOTE:
b/w may and some chance to " signif related" INCLUDES SOCIAL ie "Hiring practices ie "Hiring practices
Corp would not
shall. amend and SIGNIFICANCE. could be more could be less racist"
Have
remedy. ie) social extremists use these to watch out/ efficient" so we so we aren't
Power/Authority to
advocate for animal treatment make more $$ -> ASSHOLES -> NOT
Contradicts a Effectuate Proposal
EXCLUDABLE. EXCLUDABLE.
MGMT (i)(6)
MOOTNESS
Proposal Relates to Election of
(i)(10) Resubmission of
(i)(9) Highly related to Office (i)(8)
(i)(2). Coverse -> Dividends (Law gen Proposal from <
MGMT has leaves to BoD) 12 months w/ <
B/c matter is lacks legal auth EXTREMELY
instead of prohibited. substantially Duplication (i)(13) 3%.
already before CONTROVERSIAl.
implemented of another (i)(12)
SH, would be
the Proposal Particular Dividend?
waste of ex) "I propose Is seen as directly
General Motors proposal (i)(11) (ie we should have $8) IF the SH proposal
resources to adversarial to MGMT, if this
already. EXCLUDABLE was submitted
have converse should end war in is the case, SH should have
vote. Iraq" to do it at own expense Duplicate of recently but "failed"
(like state law provides). prop from General Question? to get 3% or >.
CURRENT (ie should we dividend
Corp not responsible for YEAR. at all?) Applies to most
BIG NOTE: Schd 14A Item 20. Even if MGMT can
providing forum for BoD NOT EXCLUDABLE repeats.
keep the proposal out, if it has reason to know
that something will be voted on at the next challenges.
meeting it must include a mention in their proxy [Proposal for new seat is
statement that it will be voted on. HOwever, okay though.]
they do NOT need to include it AS a proposal, it
just must be noted.

Six Elements
Basic Securities Fraud. 1) Mat mis/omit
10b-5. 2) in connection
with
ANY PRCHS/SALE BY OF ANY SECURITY 3) Scienter
§ 10(b)
ANY PERSON 4) Deception
Prohibits the use of any manipulative or deceptive
Applies to ALL corporate securities, 5) Reliance
device or contrivance in contravention of SEC rules in
Includes corporations and including those of Private-Held 6) Causation
connection with the purchase or sale of securities.
natural persons. Corps and Closely Held Corps.

Not self-enforcing; merely gives the SEC the

ability to make rules criminally & civily
outlawing certain acts in the purchase/sale
secs. Who Can Enforce?

Enables Three Species of Law Private

DoJ SEC Investors
10b-5(a) - Outlaws fraud AGAINST -> Anybody who
(implied)
10b-5(b) - Outlaws making a material mistatment of fact makes a statement
Criminal Civil Must have been
or omission of material fact necessary to not mislead reasonably calcualted to
Sanctions Sanctions actual
10b-5(c) - Outlaws conduct which would "operate as a
purcahser/seller affect another person's
fraud"
purchase or sale of
Then, 10b5-1 for insider trading clarifications of securities (and has the
all 3.. requisite scienter)
Can sue/charge
primary violators Can ONLY sue the
ELEMENT 1 AND primary violators
Materiality & Mistatement/ Omission. aiders/abettors

a) Is there a misstatement or
omission? NOTE: " No comment" Misstatement b) OF A FACT c) Materiality
is perfectly fine way to avoid this.
Omission. a) Would the fact have been of actual
Hard facts included. significance to a reasonable
a2) Is it culpable omission? shareholder?
(1) Duty to Correct. Necessary to
correct earlier, innocent Opinions: MGMT's opinions must be
->>> TSC Ind. Magnitude x Probability
misstatement? true b/c of duty to be informed. (VA
Refined Meanings.
(2) Duty to Not Mislead. Bankshares) ->
i. Little chance, Little thing = NOT
Necessary to make an Opinions will be a misstatement
ii. Really big chance, small thing = jury call
accompanying statement NOT of fact if NOT MADE WITH
iii. Slight chance, Huge thing = jury call
misleading REASONABLE BASIS OF FACT.
iv. Big chance of big thing = MATERIAL.
(3) SEC Req. If an omission was
required by an SEC filing reg. Forward-Looking Statments: Must MORAL of Story: Decline to comment.
--------------------------------------
be supported by reasonable basis of
Silence is usually fine. No comment fact. Even if INCORRECT, two
fine.
overlapping rules may save.
1. "Bespeaks Caution" Doctrine.
No liability for fwd-lking stmt IF "adequate cautionary
stmt"
FRAUD (1) Identify factual basis of statement; AND
ELEMENT 2
(2) identify why it may not come true. Trump case.
" In connection with" Req. SAFE
HARBORS
Qualification & Standing Rule. 2. "Safe Harbor" Provision. If fwd-lking stmt is made
(1) on a reasonable basis; AND
(2) in good faith, COMPANY/MGMT SAFE.
[17a - Sale of security.]

10b-5: IN " In connection with" Can

STANDING.G. DEFENDANTS
connection Sue
REQUIRES
with the Requires "significant nexus
an actual purchase
purchase b/w fraud and transaction (or Govt:
or sale
or sale of solicitation). ie broker wrtiing SEC & DoJ
security" himself check from client Private:
stock fund. 10b-5: ANYONE (ie need not be
10b-5: Actual purchaser.
Fraud need only TOUCH the DIRECT OR DERIVATIVE!!! actual purcahser or seller; but
purchase/sale. often is) who makes a statement
14a-9: IN Options, etc ARE SALES> reasonably calculated to affect
14a-9: Holder of share who
connection recieved proxy. DIRECT OR another person's purchases/sales.
with the NO actual
DERIVATIVE!!!
solicitation purpose required; 14a-9's req is
of a proxy. only a solicitation. self-explainatory.

ELEMENT 3
SCIENTER [10b-5 ONLY, not 14a-9 - SL] NOTE: 17(a)
These are directly in the statute; were
model for 14a. NO PRIVATE RIGHT.
10b-5 Intent to Decieve Required. Ernst & Ernst v. Hocfelder.
or Negligence is NOT enough. Derry v. Peak CL Fraud. SEC Enforces These; Does not Always
17a (1) Knowing misstatement; BOTH need Scienter.
Intent to (2) making statemetn with NO BELIEF in its truth or falsity; OR private
deceive (3) Statement made in reckless disregard for the truth. parties (a)(1): Fraud SELLING securities
AND the Scienter Req.
SEC must
prove (a)(2)-(3): Misstatment/Omission OR
Negligence is sufficeint. scienter.
14a-9 operates as fraud.
Negligence NO scienter req. (Negligence)
Test; Was the misstatemetn/omission UNREASONABLE?

ELEMENT 4 ELEMENT 5
ACTUAL DECEPTION. [Not Sec, PP only] Reliance. [Not SEc, Private Parties ONLY]

Deception: Did the information CAUSE THE PLAINTIFF TO 10b-5? 14a-9?

ACT IN SOME WAY WHICH HE otherwise would not? Reliance Req. NO RELIANCE.

Deceptive Deprival of Action: Denial of a state court

remedy sufficient to constitute deception. Ie if the info 2 Elements P Must (technically, see below) Show
would have permitted to get injunction for merger but
now cannot -> deceptive. (precluded P from acting
in way which he would)
(1) Actual Reliance on D's (2) Reasonable reliance (objct)
misrep. (sub)
Manipulation: Did the information cause the market price to
fluctiuate somehow? TERM OF ART>
FRAUD ON THE MARKET THEORY
Substitutes insufficeint. (presumptivey establishes ACTUAL & REASONABLE)
B/c mkt price is reflection of all avaliable information, on which
CANNOT BE EQUITABLE FRAUD. shareholders are entitled to rely, RELIANCE IS PRESUMED IF P can
show false information was injected into the market.
2 Elements.

(2) Material Misstatment or

(1) Stock is publicly traded.
Omission (elemnt 1 re)

NOTE: Fraud on the Market is the ONLY way to prove reliance in class action
suits.
ELEMENT 6
Causation [Not Sec, private only] Miscellaneous Litigation Reform Statutes

A. Private Securities Litigation Reform Act of 1995 (PSLRA):

Procedural reforms supposed to make it harder to bring securities class
TRANSACTION CAUSATION: Showing of reliance elm 5. actions
Why I entered ESTABLISHES causation. 1. Presumption that the P with the largest economic interest will be named as
P must show that "but for" the the plaintiff, thus ensuring that institutional investors have control over
misrepresentation, the transaction 10b-5 counsel, settlement, etc.
would not have gone through (or 2. Court review of counsel appointments
would have gone through 3. Heightened pleading requirements for scienter
differently) 4. Mandatory review for Rule 11 violations when a suit is dismissed for
Causation: failure to state a claim
5. Automatic stay of discovery pending a 12(b)(6) motion
AND "Essential Link 6. Effect of PSLRA ? P?s started bringing claims in state court to bypass
to Transaction" PSLRA
LOSS CAUSATION
Why I lost. B. Securities Litigation Uniform Standards Act (SLUSA):
P must show that "but for" the 14a-9 Requires all securities fraud class actions involving 50 or more individuals to
misrepresentation, P would not be brought under federal law; state law is preempted
have suffered a loss. 1. Legislative response to the effect of PSLRA
2. Applies regardless of whether the claim is based on federal or state law
Must show that there was MATHEMATICAL POSSIBILITY that the C. Sarbanes Oxley Act of 2002:
transaction WOULD NOT PASS without the proxy vote. Heightens standards for corporate managers/directors
1. Now that Congress has nationalized some aspects of corporate
(1) Sh vote required + (2) Maj couldn't do it without mismanagement, there is some support to mandate a federal law of
(no need to show that vote would have stopped it; only that it legally could.) corporate mismanagement

Section 16 Insider Trading Requirements.

Concerned with potential abuses; penalizes some innocent conudct.

16(a) Reporting Requirements.

a) What must be reported? b) Who is subejct to requirements? 16(a)(1)

(1) Do the duties/functions the person perfomred those

Becoming Insider - Immediate
Officers & Directors -> Objective test based that OFFICER TYPICAL performs? Do they have
Within TEN days of becoming a " covered
on FUNCTION. (a lower-level could be an discretion in those functions;
person." -> MUST file Form 5 declaration.
officer and a VP could be an employee). Two AND
[10% beneficial owner, director, officer,
part test. (2) Did they have access to inside information?
insider}
-> " More likely than not" had inside. No need to prove
actual possession/use.
Familial Attribution Principle -> Shares owned by
10% Beneficial Owners
insider husband may be attributed to shareholder wife.

Any Trades - Supplemental Non-voting shares EXCLUDED from

Montly
Any month in which
an insider's holdings
change (he makes
trades), he must file
a report within the
10th day of the last
business day of the
month.
Reports; 2nd
busniess day after
trade. (Req by
Sarbanes-Oxley)
-Insider must indicate
what was bought
and/or sold
-Insider faces charges
if report is not filed
Rebuttable preesumption that the insider is the
calculation.
beneficial owner when a member of the immediate family,
who shares the indiser's residence, is the record owner of
CAN BE A GROUP OF S/Hs.
the shares.
Deputized 'Corporations'
The insider's access to knowledge will be ATTRIBUTED
Deputized = person put on ANOTHER board to the corporation that placed him on the board of the
by a corp/parnership. Corp which owns the insider information

Sec 16(b) - Disgorgment of Short Swing Private right of action. LAW

Profits OR EQUITY.

Strict liability Procedure Standing Recovery The Swing.

provision meant to
discourage NO Recovery
Quasi-Derivative.
directors from CONTEMPORANEOUS goes to the
Any PURCHASE and SALE
benefitting off the OWNERSHIP. CORPORATION.
Plaintiff must FIRST ask the within a SIX MONTH
short-term PERIOD.
Corporation to sue.
situation of a corp A person can scour Lawyers are
UNLESS doing so would be futile;
at the expense of SEC fiilings, find a the winners.
in which case no requirement. If you wait six months plus
its long term. short-swing, buy a (yay)
one day -> FINE. " Don't
Law or Equity. stock, and SUE THE mean a thing if it ain't got
NO PROFITABLE Depends on whether P asks for a SHIT out of them. that swing."
TRADING W/N jury trial.
SIX MONTHS OF If YES -> at law.
STOCK If NO -> at equity. [D can't ask for
PURCHASE. jury].

Profit Calculation. Harsh.
Highest sale price MINUS
lowest purchase price.
This means you can LOSE.
Should go back and make
sure we have right means of
calculation; do we give the
highest price to all shares
bought/sold? Or only on basis
of the ones bought/sold t the
price extremes?
Trnsctn: Purchase or Sale?
Traditional Transaction
-Cash (covered)
Unorthodox Transaction
-Options & Mergers:
pragmatic approachi
-> Look at trasnaction
pragmattically to see if it has
potential to spawn the sort
of abuse the statute was
meant to prohibit.
Who CANNOT swing? What stocks does it apply to?
Director/Officer -> Liable if in position
FOR ONE of the transactions. [On
front end; not on back end] - Common & Preferred Stock
- Anything convertible to stock
10% Beneficial Owner -> Must be > ie (conv. bond)
10% insider FOR BOTH transactions. -Options?
Spouse attribution. Exercise of option NOT 16(b)
Purchase of option SWING!!!.
Deputized -> If the deputized person
has " firewall" around them at
'basecamp' then NO LIABILITY. No
firewall = liability.

Sec 16(c) Short Sales Prohibition

A corporate insider MUST OWN the shares s/he

trades.
" Covered persons" under 16(a) MAY
NOT participate in " short sales"
CANNOT trade in borrowed or loaned stocks or
convertible bonds.

Two Species of Insider Trades

Common Law Insider Trading
Generally, a person has NO common
law duty to disclose trading
information.
EXCEPTION: When a person has a
fiduciary duty via agency law; OWES
PROFITS FROM USE OF
INFORMATION TO THE PRINCIPAL
Agency/Privity Relationship?
YES. Privity of K, purchase.
CL insider trading FRAUD
based on failure to disclose
material fact. Therefore other
party MUST be a shareholder,
to whom a duty is roughly
owed.
Buying on Good News (fid duty ONLY to current SH)
Breaches fiduciary duty b/c insider is buying from current S/Hs to whom he owes a fiducirary duty
Selling on Bad News (breaches limited to current SH)
Breaches fiduciary duty b/c insider is personally profiting from the principal
Did Transaction Invoke Duty? Recovery to?
Face-to-Face Trasaction
If contacting SH directy and insider Creates a duty to Defrauded Shareholder.
hides identity AND induces the disclose identity; Privity of contract substantiates
trade, there is ACTIONABLE cl because it is a material duty to SH. [Del. C. says insiders
fraud. (can't use corp info against fact. Common law have direct duty to SH by
SH) fraud. extension of Corp]
Open Market Transaction?
If SH who buys/sells does not know None. Not
he is working with insider, then there actionable @
is no duty invoked. C/L.
NO DUTY.

No direct harm to plaintiff? Selling on BAD NEWS. Minor problem; Corporate Coffers.
Agency Thoery - Diamond buyer must be SH to asser Deriv. some states req. Unjust enrichment theory; Profits
Must depend on Usurpation of corporate opportunity P to show an injury belong to corporation instead.
CORPORATION's fiducary to make profit off of bad news therefore this doesn't
duty. Recovery to corp. belonging to the corproation. work there.
CAVEAT! Because duty is Corps' the BoD or
DERIVATIVE SUIT (would it work for buying on good?) S/H can vote to ratify the agent's improper
action. Poof. Cleansed.

10b-5 Insider Trading Differences from §16 Differences from Com Law
- 10b-5 WIDER RANGE of possible defendants. - Federal actions. (SEC & DoJ standing)
-Insiders trading on info - 10b-5 only concerned with actual abuse - Broader scope of actions
-Tippees trading on info - No 6-month safe haven. -Applies to ALL purchases and sales of securities.
-Tippees, no trade, but
PASS ALONG to trader
(Dirks).

Framework. MISSAPP/ DUTY THEORY TIPPEE THEORY

a) What type of info does
person have?
Is it MATERIAL?
-Would a reasonable investor
find it of actual signficance?
-Magnitude x Probability Test.
& disclosure.
REVERSE MATERIALITY RULE
The date on which insiders
began to trade on info is
STRONG EV of materiality.
Materiality/ Timing safe harbor: IF
insiders trade b/w 3rd & 10th
day after quarterly report, NO Rev. Mat.
Is it NONPUBLIC @ trade?
(Timing Crucial)
No duty if the information is
public.
Avaliability Rule: Even if
released, has the MRKT/
investing public had time to
DIGEST the information?
Note: Corp may call EXGE and
ask for trading to be halted
temproarily when news
announced to allow MKT to react
in queue.
If BOTH, continue.
OR
bi) Does the person have a duty? bii) Was person a tippee (recipient of info)?
if yes, 2 elements can still trigger
Corporate Insider?
(c)(1) Was info tainted?
Fiduciary duty to the corporation and S/Hs. (1) Did the insider have a direct or indirect motive or gain
Can't use this information for their own use w/o
to offer the info?
the approval OF BOTH BoD & SH. Won't [2nd Cir -> Friendship NOT culpable motive]
happen; would prob violate other rules by early [9th Cir -> Friendship IS culpable motive]
AND
(2) Did insider ACTUALLY gain (even if no motive)?
Outsider Duty. Missapropriation Theory.
second provision protects disclosures BY
Must have fiduciary duty to the SOURCE of WHISTLEBLOWERS
AND
information.
Duty NOT TO APPROPRIATE info obtained w/ (c)(2) Did tippee knowingly trade on inside info?
"confidence of trust" -If the tippee knew the trading was impermissible.
(1) confidentialy agreement
d) Covered Info + Duty/Tippee = Disclose or Abstain.
(2) Conf. Matter of Law Disclose or Abstain Rule
-Doc/Pateint, Atty/client, When person has inside info and a duty; he must either disclose the
Emply/EMpler information to the other party or abstain from USING IT for trading.
But ->No duty MoL
-Broker/Clinet w/o history; physical
theif non-approprating. RELIANCE STILL AN ELEMENT; Fraud on Market works.
YES
(3) History of exchanging
confidences (rsbn expect; CLUB of
e) Litigating the Matter.
young prfsnls)
Use v. Possession. Safe harbor Rights of Action
10b-5 ONLY applies Insiders can 20(a) - Private class action
ANY PERSON with information on a TENDER uses 3rd pty 10b-5 trading violations;
if the information
OFFER has a duty under 14(e)(3) to not trade.
USED. Possesion of trading plan; disgorgment pro-rata. (5 year
info is almost give up all of st of limits)
Public AND private corpriatons (10b action) PRESUMPTION OF own discretion, 21(D) - SEC sues for disgorg
USE. to continue to & 3x dmgs. 10% bounty to
IF one of these three duties exists; go to trade whsitle. (no stat of limits)
Disclose-Abstain; if NOT, go to TIPPEE. Sf Hrbr