1. A securities fraud claim can be used as a predicate act in a civil case under the Racketeer Influenced and Corrupt
Organizations Act regardless of whether the defendant has been criminally convicted in connection with the fraud.
a.
True
b.
False
2. Under Rule 10b-5 a company may not have a “no comment” policy, and must act to dispel untrue rumors.
a.
True
b.
False
False
Moderate
22-2 Rule 10b-5
3. A violation of Rule 10b-5 does not give investors a private right of action.
a.
True
b.
False
False
Moderate
22-2 Rule 10b-5
4. Accountants have to sign a written consent before their audited report can be included in a registration statement.
a.
True
b.
False
True
Challenging
5. A prediction about the future can be a misstatement under Rule 10b-5, but only if the person making the prediction does
False
Moderate
22–21 RICO
not believe it at the time.
a.
True
b.
False
6. Research shows that because of the severe penalties involved, insider trading in China is very rare.
a.
True
b.
False
False
Moderate
7. Under Rule 10b–5, any use of the mails is sufficient to satisfy the interstate commerce condition even if the mail does
not leave the state.
a.
True
b.
False
True
Moderate
22-2 Rule 10b-5
8. In Morrison v. National Australia Bank Ltd. referenced in the text, the U.S Supreme Court held that Section 10(b) of
the 1934 Act and SEC Rule 10b-5 apply to any company that trades on the NY Stock Exchange.
a.
True
b.
False
False
Moderate
22–22e Extraterritorial Application of the Securities Laws
True
Challenging
22-4 Misstatement or Omission
9. According to Rule 10b-5, a company’s silence or “no comment” to a rumor will make it liable, but only if the company
has not previously spoken on the subject and insiders are not trading or tipping.
a.
True
b.
False
10. The European Union Market Abuse Directive requires member states to enact national legislation punishing primary,
but not secondary insiders.
a.
True
b.
False
False
Moderate
11. A company is not liable for hyperlinks to third-party information that the company has explicitly or implicitly
endorsed or approved.
a.
True
b.
False
False
Moderate
22–4a Misstatement
12. Scienter requires more than mere negligence or lack of due care.
a.
True
b.
False
True
Moderate
22-6 Scienter
False
Challenging
22–4b Omission
13. CASE 22.3 SEC v. Contorinis (2014) dealt with a question of whether the defendant was required to disgorge the
profits even though he had made the insider trades on behalf of a third party, and did not realize the profits personally.
a.
True
b.
False
14. The safe harbor provision applies to forward-looking statements in connection with an initial public offering.
a.
True
b.
False
15. The SEC itself has criminal enforcement power.
a.
True
b.
False
False
Moderate
22–22c Criminal Prosecutions
16. To prevail on a securities fraud claim, a plaintiff must prove “loss causation”, that the defendant’s misstatement caused
her to suffer economic loss.
a.
True
b.
False
False
Moderate
22-9 Causation
True
Challenging
22-22b SEC Enforcement Actions
17. Under the efficient market hypothesis, in an open and developed securities market, the market price of a company’s
stock equals its true value.
a.
True
b.
False
18. The Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act) provides that “political intelligence” firms,
but not Congressional staff, can be liable for trading based on material nonpublic information derived from the officials’
positions.
a.
True
b.
False
False
Challenging
19. Under the Sarbanes-Oxley Act of 2002, it is a misdemeanor to knowingly execute a scheme to defraud any person in
connection with any security of a publicly traded company.
a.
True
b.
False
False
Moderate
22–12 Regulation AC and Securities Fraud Involving a Publicly Traded Company
20. Temporary insiders are persons not directly employed by the corporation, but who acquire confidential information
through the performance of professional services.
a.
True
b.
False
True
22–18 Definition of Insider Trading
True
Moderate
21. A right of action under section 10(b) may expire before a plaintiff discovers he has been wronged or even before
damages have been suffered at all.
a.
True
b.
False
Moderate
22–11 Statute of Limitations
22. If an insider resigns before trading, he or she cannot be held liable for improper insider trading.
a.
True
b.
False
False
Moderate
22–18 Definition of Insider Trading
23. A controlling shareholder is traditionally considered an insider.
a.
True
b.
False
True
Moderate
22–18a Classical Theory of Insider Trading
24. An employee who trades or tips using confidential information belonging to his or her employer can be liable under
the Mail and Wire Fraud Acts.
a.
True
b.
False
True
22–20 Mail and Wire Fraud
25. There is no provision in the security laws for the payment of bounties to individuals whose tips result in insider
trading prosecutions.
a.
True
b.
False
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-22d Bounty Payments and Whistleblower Claims
Blooms: Knowledge
26. Which of the following represents the general rule under rule 10b-5 in regard to the duty of a company to reveal
corporate developments?
a.
A company has no general duty under Rule 10b-5 to reveal corporate developments unless the company or its
insiders (1) trade in securities or (2) recommend trading to someone else.
b.
A company has no general duty under Rule 10b-5 to reveal corporate developments unless the company or its
insiders (1) trade in securities, (2) recommend trading to someone else, or (3) disclose the information as a tip
while withholding it from the general public.
c.
A company has a general duty under Rule 10b-5 to reveal corporate developments that are material.
d.
A company had a general duty under Rule 10b-5 to reveal corporate developments if it appears (1) that
developments are material and (2) that the material developments will have a negative effect on the company’s
financial reports.
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–4b Omission
Blooms: Knowledge
27. Lawsuits under Section 10(b) must be brought within __________ of the date the plaintiff discovered or should have
discovered the facts constituting the violation or within __________ of the date of the violation, whichever is earlier.
a.
two years; five years
b.
six months; one year
c.
two years; three years
d.
one year; two years
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–11 Statute of Limitations
Blooms: Knowledge
Blooms: Comprehension
28. Section 20(a) imposes __________ liability on every person who, directly or indirectly, controls any person liable
under the 1934 Act, unless the controlling person acted in good faith and did not directly or indirectly induce the acts
constituting the violation.
a.
strict
b.
individual
c.
joint and several
d.
criminal
29. The requirement that the defendant in a 10b-5 action have used interstate commerce, the mails, or a national securities
exchange gives Congress the power to regulate the defendant’s conduct under:
a.
the due process clause of the U.S. Constitution.
b.
the Commerce Clause of the U.S. Constitution.
c.
the fifth amendment to the U.S. Constitution.
d.
executive order 90210.
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-3 Interstate Commerce
Blooms: Application
30. A person may be liable under Section 16(b) of the 1934 Act if he or she was an officer or director at the time of:
a.
the purchase.
b.
the sale.
c.
both the purchase and the sale.
d.
either the purchase or the sale.
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–24a Short Swing Trading
Blooms: Comprehension
31. In relation to forward-looking statements, under the bespeaks caution doctrine, a court may determine that the
inclusion of sufficient __________ in a document renders immaterial any misrepresentation or omission contained
therein.
a.
facts
b.
cautionary statements
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-14b Controlling Person Liability
Blooms: Comprehension
c.
expert opinions
d.
information
32. In order to be actionable under Rule 10b–5, misstatements or omissions must be made with:
a.
negligence.
b.
lack of due care.
c.
scienter.
d.
recklessness.
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-6 Scienter
Blooms: Comprehension
33. In CASE 22.1 SEC v. Texas Gulf Sulphur Co. (1971) the question was whether a press release giving a misleading
impression about the results of a drilling operation violated Rule 10b–5. How did the court rule?
a.
That the company acted only in response to rumors and had no obligation to set forth additional facts
regarding the drilling operation, thereby negating any basis for Rule 10b-5 liability.
b.
That the company violated Rule 10b-5 by issuing the misleading press release.
c.
That a press release standing alone may not violate Rule 10b-5 and that the company could not be held liable
because it made no actionable statements outside the press release.
d.
That the company could be held liable under Rule 10b-5 but only because it issued other statements in addition
to the press release.
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–4a Misstatement
Blooms: Analysis
34. Under what circumstances will reliance be presumed for purposes of establishing liability under Rule 10b–5?
a.
If the investor shows that the defendant made a public material misrepresentation that would have caused
reasonable investors to misjudge the value of the defendant’s stock.
b.
If the investor shows that (1) the defendant made a public material misrepresentation that would have caused
reasonable investors to misjudge the value of the defendant’s stock and (2) the investor traded shares of the
defendant’s stock in an open securities market after the misrepresentations were made and before the truth was
revealed.
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–5a Bespeaks Caution Doctrine
Blooms: Comprehension
c.
If the investor shows that (1) the defendant made a public material misrepresentation that would have caused
reasonable investors to misjudge the value of the defendant’s stock, (2) the investor traded shares of the
defendant’s stock in an open securities market after the misrepresentations were made and before the truth was
revealed, and (3) the investor made specific inquiries from professionals regarding the value of the stock
before trading.
d.
If the investor shows that (1) the defendant made a public material or nonmaterial misrepresentation that
would have caused reasonable investors to misjudge the value of the defendant’s stock, (2) the investor traded
shares of the defendant’s stock in an open securities market after the misrepresentations were made and before
the truth was revealed, and (3) the investor made specific inquiries from professionals regarding the value of
the stock before trading.
35. The materiality of a misstatement or omission under Rule 10b-5 is judged at the time:
a.
the statement is made.
b.
of the stock purchase.
c.
of the injury.
d.
of the lawsuit.
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-5 Materiality
Blooms: Comprehension
36. In the case of a(n) __________, the U.S. Supreme Court has ruled that the reliance will be presumed under Rule 10b-5
if the fact was material.
a.
public statement
b.
misstatement
c.
omission
d.
tip
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-8 Reliance
37. In Matrixx Initiatives v. Siracusano case referenced in the text, the U.S. Supreme Court analyzed the question of
whether an issuer must disclose known information about possible side effects of a drug that could affect the drug’s stock
price even though no proven statistical link exists between use of the drug and the adverse effect. The Court held:
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-8 Reliance
Blooms: Application
a.
that a bright-line test would be applied requiring at least one civil judgment in favor of a plaintiff before a
defendant would be required to disclose allegations of a link between a drug and an adverse effect and that the
defendants were entitled to dismissal of the case because no showing of a civil judgment had been introduced.
b.
that no statistical link between the use of the drug and adverse effects was required but that the defendants
were entitled to dismissal of the case because the plaintiffs did not personally suffer adverse health effects
from the drug.
c.
that the defendants were entitled to dismissal of the case because the plaintiffs could not prove a statistical link
between use of the drug and adverse effects.
d.
that the “total mix of information” test applied in regard to the issue of materiality, that statistical proof was
unnecessary, and that sufficient evidence existed for the plaintiffs to proceed to trial.
38. In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. referenced in the text, the U.S Supreme Court
analyzed the question of whether customer / supplier companies that agreed to arrangements allowing an issuer to
mislead its auditor are liable in a private action under section 10(b) of the 1934 Act. The Court ruled:
a.
that based on “scheme liability,” the customer / supplier companies could be held liable although no public
statement was made.
b.
that based on “transaction causation” the plaintiffs could establish reliance and that the plaintiffs were,
therefore, entitled to proceed.
c.
that plaintiff investors had no private right of action because they did not rely upon the statements or
representations at issue.
d.
that the plaintiff investors had no private right of action because the defendants were not aiders and abettors
and, instead, acted primarily on their own behalf outside the realm of securities regulation.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–14a Primary Liability
Blooms: Analysis
39. Which of the following is true regarding who can sue under Rule 10b–5?
a.
Only those who purchased the securities at issue may sue.
b.
Only those who sold the securities at issue may sue.
c.
Only those who have actually purchased or sold the securities at issue may sue.
d.
Anyone who either actually purchased or sold the securities at issue, and also anyone who can prove that he or
she would have purchased or sold the securities at issue had they known the true facts may sue.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-5 Materiality
Blooms: Analysis