40. When can a securities fraud claim be used as a predicate act in a civil case under the Racketeer Influenced and Corrupt
Organizations Act (RICO)?
a.
When the defendant has been arrested in connection with the fraud.
b.
When a conspiracy can be proven.
c.
When the defendant has been criminally convicted in connection with the fraud.
d.
When the defendant has been held liable for other civil damages in connection with the fraud.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–21 RICO
Blooms: Application
41. A buyer or seller of stock can only recover damages if a material fact is misrepresented or omitted from company
communications. All of the following are considered material facts, EXCEPT:
a.
statements about corporate earnings.
b.
compensation of corporate officers.
c.
statement of corporate optimism.
d.
statements about corporate assets.
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
22-5 Materiality
Blooms: Analysis
42. Under the Securities Fraud Enforcement Act, when may a brokerage house be fined?
a.
If it knew or recklessly disregarded information that would indicate insider trading activities on the part of its
employees.
b.
Whenever an employee is found guilty of insider trading.
c.
If it was negligent in failing to discover insider trading.
d.
A brokerage house may not be fined under the Act.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-22b SEC Enforcement Actions
Blooms: Application
43. Which of the following is true regarding “holder” claims?
22-7 In Connection With the Purchase or Sale of Any Security
Blooms: Comprehension
a.
They are disallowed by federal statute.
b.
State law is preempted, and they are allowed under federal law only if the plaintiff purchased securities issued
under fraudulent pretenses.
c.
They may be allowed under blue sky laws as either individual or class actions.
d.
They may be allowed under blue sky laws, but not as class actions.
44. Which of the following is true regarding Section 16(c)’s restriction on selling stock short?
a.
Section 16(c) prohibits officers, but not directors, from selling any of their company’s equity securities short.
b.
Section 16(c) prohibits directors, but not officers, from selling any of their company’s equity securities short.
c.
Section 16(c) prohibits officers or directors from selling any of their company’s equity securities short.
d.
Section 16(c) allows both officers and directors to sell their company’s equity securities short so long as the
equities are obtained and delivered within twenty days after the short sale.
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
Blooms: Comprehension
45. A(n) __________ period is any period longer than three business days during which _____ of the participants in a
retirement plan are prevented from trading.
a.
loss causation; 80%
b.
scheme liability; 25%
c.
blackout; 50% or more
d.
stock parking; 80%
c
Blooms: Application
United States – BUSBROG: – Analytic
46. Section 16(b) of the 1934 Act governs __________ by officers, directors, and greater-than-10% shareholders of equity
securities of a public company.
a.
fraud
b.
deceptive practices
c.
short-swing profits
d.
unorthodox transactions
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-7 IN Connection With the Purchase or Sale of any Security
Blooms: Comprehension
47. Which of the following is NOT a requirement for a Rule 10b-5 violation?
a.
The defendant either used the mails, an instrumentality of interstate commerce, or a facility of a national
securities exchange.
b.
The defendant made a statement that either misrepresented or omitted a fact of material importance.
c.
The misrepresentation or omission was made with scienter.
d.
The statement was made in connection with a public offering.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-2 Rule 10b-5
Blooms: Comprehension
48. Which of the following is NOT true regarding the misappropriation theory of insider trading?
a.
If a trader discloses to a source of nonpublic information that he or she plans to trade on the basis of that
information, there is no violation under the misappropriation theory.
b.
Liability under the misappropriation theory requires deception.
c.
The misappropriation theory widens the class of persons who can be found liable for insider trading.
d.
The trader cannot be held liable unless he or she is an insider of the company whose securities are traded.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-18b Misappropriation Theory of Insider Trading
Blooms: Application
49. Which of the following is true regarding the regulation propounded by the SEC titled Regulation Analyst
Certification, Regulation AC?
a.
It prohibits analysts from issuing reports that they do not personally believe to be true, and it also requires the
disclosure of any analyst compensation arrangements related to specific recommendations or views contained
in research reports.
b.
It prohibits analysts from issuing reports that they do not personally believe to be true, but it does not require
disclosure of any compensation reports.
c.
It requires that analysts report compensation arrangements in relation to recommendations or views contained
in research reports but, because of problems involving proof, it does not specifically prohibit analysts from
issuing reports that they do not personally believe to be true.
d.
The regulation will be put into action in phases with the first phase, effective in 2012, requiring disclosure of
compensation arrangements in relation to recommendations or views contained in research reports and the
second phase, effective in 2014, prohibiting entirely the issuance of recommendations or views in relation to
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22-1 Overview of Antifraud Provisions
Blooms: Comprehension
stock for which an initial public offering was made within the previous twelve months.
50. Which of the following is true regarding remedies available under Rule 10b–5?
a.
The measure of damages is typically out-of-pocket loss, or an investor may elect to rescind the transaction;
and the court may award prejudgment interest; but punitive damages are unavailable.
b.
The measure of damages is typically out-of-pocket loss with no right on the part of an investor to elect to
rescind the transaction, and the court may award prejudgment interest; but punitive damages are unavailable.
c.
The measure of damages is typically out-of-pocket loss, or an investor may elect to rescind the transaction; the
court may award prejudgment interest; and punitive damages are available in appropriate cases.
d.
The measure of damages is typically out-of–pocket loss with no right on the part of an investor to elect to
rescind the transaction, the court may award prejudgment interest, and punitive damages are available in
appropriate cases.
a
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–10 Calculation of Damages
Blooms: Comprehension
51. Which of the following is NOT a part of the safe harbor provision for forward-looking statements under the 1934 Act?
a.
A statement containing a projection of revenues, income, or other financial items.
b.
A statement of the plans and objectives of management for future operations.
c.
A statement of future economic performance.
d.
A statement in a financial statement prepared in accordance with generally accepted accounting principles.
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–13 Litigation Reform Act Safe Harbor for Forward-Looking Statements
Blooms: Comprehension
52. In United States v. McGraw-Hill Companies, Inc. referenced in the text, the U.S. Supreme Court addressed the
question of whether the statements and ratings of companies made by Standard and Poor’s, a unit of McGraw-Hill, were:
a.
puffery.
b.
forward-looking statements.
c.
material.
d.
bespeaks caution statements.
a
a
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–12 Regulation AC and Securities Fraud Involving a Publicly Traded Company
Blooms: Application
53. In CASE 22.2 Halliburton Co. v. Erica P. John Fund, Inc. (2014), the U.S. Supreme Court considered the
__________ theory, as well as the question a defendant in a securities fraud trial should be allowed to present evidence to
challenge the __________ presumption of __________.
a.
Truth-on-the-Market, Levinson, reliance.
b.
Efficient Capital Market, Basic, reliance.
c.
Fraud-on-the-Market, Basic, reliance.
d.
Bespeaks Docrine, Basic, scienter.
c
Challenging
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
22–8b Fraud on the Market
Blooms: Analysis
54. Which of the following is true regarding the state of mind needed in order to find a violation of Section 16(b)
involving short-swing trading?
a.
Liability is imposed under Section 16(b) regardless of the insider’s state of mind.
b.
Intent to violate the securities laws must be found in order for there to be a violation of Section 16(b).
c.
A trader must at least act without caution in order to be found liable for violating Section 16(b).
d.
A trader must at least act negligently in order to be found liable for violating Section 16(b).
a
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–24a Short-Swing Trading
Blooms: Comprehension
55. In the United States v. O’Hagan case referenced in the text, O’Hagan was a partner in the law firm of Dorsey &
Whitney who represented Grand Met. Grand Met revealed to O’Hagan that Grand Met intended to make a tender offer to
Pillsbury. Based on this confidential material information form his client O’Hagan purchased stock and options in
Pillsbury prior to a public announcement of Grand Met’s tender offer for Pillsbury. O’Hagan realized over $4million in
profits but was later convicted of insider trading. The U.S. Supreme Court upheld O’Hagans criminal conviction based on
the:
a.
Derivative Insider Theory of Insider Trading.
b.
Classical Theory of Insider Trading.
c.
Missappropriation Theory of Insider Trading.
d.
Bespeaks Doctrine of Insider Trading.
c
Challenging
DISC: – AICPA: BB-Legal
United States – BUSPROG: – ANALYTIC
22-5 Materiality
Blooms: Analysis
56. Under Section 16(b) pertaining to short-swing profits, a person will be considered a(n) __________ of any securities
held by his or her immediate family or any other relative living in his or her household.
a.
family owner
b.
beneficial owner
c.
actual owner
d.
imputed owner
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–24a Short-Swing Trading
Blooms: Comprehension
57. If a purchase or sale by an officer, director, or greater-than-10 percent shareholder that would otherwise result in
recoverable short-swing profits was involuntary and did not involve the payment of cash and if there was no possibility of
speculative abuse of inside information, than a court may hold that it was a(n) __________ to which no liability will
attach.
a.
innocent transaction
b.
approved negotiation
c.
unorthodox transaction
d.
designated sale
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–24a Short-Swing Trading
Blooms: Comprehension
58. When analyzing insider trading, the person giving the tip is the __________, the person receiving the tip is the
__________, officers and directors are __________, and persons working with the issuer are __________.
a.
tipper, remote tippee, temporary insider, permanent insider.
b.
tipper, remote tippee, traditional insider, temporary insider.
c.
tippee, tipper, temporary insider, traditional insider.
d.
tipper, tippee, traditional insider, temporary insider.
United States – BUSPROG: – ANALYTIC
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
22-18b Misappropriation Theory of Insider Trading
Blooms: Analysis
59. Section 16(a) of the 1934 Act requires that officers, directors, and greater-than-10 percent shareholders of companies
that have registered any class of equity securities under the 1934 Act file __________ reports with the SEC and with an
national securities exchange on which their company’s equity securities are listed.
a.
actual ownership
b.
beneficial ownership
c.
insider ownership
d.
listed stock
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
22–24a Short-Swing Trading
Blooms: Application
60. Sampson, an accountant and auditor with ABC Accounting, was auditing XYZ Company. Delilah, the president of
XYZ Company, told Sampson that she really needed to keep her job and that if the true condition of the company were
exposed, she would certainly be fired. She tells Sampson that she is sure she can turn things around if he will only look
help her out in the audit report. Sampson, who was infatuated with Delilah, agreed to include inaccurate numbers in the
company’s audit report knowing that the opinion would be included in the company’s annual report on Form10-K filed
with the SEC. Unfortunately, Delilah was not able to turn the company’s performance around, and it went into bankruptcy
later that year. Sampson becomes aware that an investigation is being conducted. Which of the following is true regarding
his potential liability?
a.
Because he is a secondary actor, he cannot be found liable for the violation of any laws involving securities
although he was aware of how the audit opinion would be used.
b.
Because he is a primary actor, he can be found liable for the violation of some laws involving securities, but
not Section 10(b).
c.
Because he is a primary actor, he can be found liable for a violation of Rule 10(b) because he participated in
the making of a false statement.
d.
As a secondary actor, he can be found liable for the violation of Section 10(b) since he was aware of how the
audit opinion would be used.
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
22–14 Liability of Secondary Actors
Blooms: Analysis
61. Drug Company X reports the introduction of a new pill that is guaranteed to cause weight loss with no side effects.
The information was advertised in connection with a public offering of stock of the company’s stock. Later, it becomes
apparent through additional testing that unfortunately the new pill also results in premature hair loss, a material issue.
Monika is the president of Company X and is very pleased with sales of the drug. She recognizes that she can no longer
advertise the drug as having no side effects, but she does not believe she has made any misrepresentations because she
was not aware of the hair loss side effect when previous statements were made. She decides to do nothing. Has she made
DISC: – AICPA: BB-Legal
22–18 Definition of Terms
Blooms: Application
the correct decision as far as Rule 10b-5 is concerned?
a.
Yes, because she has no duty to disclose later test results.
b.
Yes, because she has no duty to disclose later test results that involve only cosmetic issues.
c.
Yes, because she has no duty to disclose later test results that involve issues that are not life threatening.
d.
No, she made the wrong decision because she has an obligation to disclose the results.
Fact Pattern 22-1
Trudy was hired by Food Corporation to handle a products liability lawsuit brought against it alleging that it distributed
dangerous dog biscuits. Trudy’s investigation brought to light facts establishing that the biscuits were not defective and
that the problem actually involved improper retention policies on the part of retailers. Trudy is aware that this information
will result in the stock of Food Corporation increasing dramatically. Trudy immediately buys shares of Food Corporation
and tells her fiancé, Frank, about the expected increase as well. Trudy tells Frank because she wants to borrow money
from him for the trade and also because she believes that his investment will enable them to take a nicer honeymoon.
Frank initially resists because of his training in business law and his concern that trading on the information would violate
federal law, but he ends up going along with Trudy because he too wants a nice honeymoon. Trudy’s suspicions come
true. The lawsuit is dismissed, the stock increases dramatically, and she and Frank go on a great honeymoon. The day
after they return, an investigator from U.S. Attorney’s Office interviews her regarding her trades and those of Frank.
62. Refer to Fact Pattern 22–1. Can Trudy be considered an insider of Food Corporation?
a.
No
b.
Yes, as a derivative insider.
c.
Yes, as a temporary insider.
d.
It depends on whether she was paid as an employee or independent contractor because she may be considered
an insider only if she was paid as an employee.
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
22–18a Classical Theory of Insider Trading
Blooms: Analysis
63. Refer to Fact Pattern 22–1. Is there a basis upon which to hold Trudy liable for a securities violation for disclosing to
Frank the information regarding the likely dismissal of the lawsuit?
a.
Not unless she had signed a confidentiality agreement with Food Corporation.
b.
Yes, she could be held liable as a tipper.
c.
Yes, she could be held liable as a tippee.
d.
Yes, she could be held liable as a remote tippee.
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
22-4 Misstatement or Omission
Blooms: Analysis
64. Refer to Fact Pattern 22–1. Is there a basis upon which to hold Frank liable for a securities violation based upon his
receipt and use of the information?
a.
No because he had no duty toward Food Corporation.
b.
Yes, he could be held liable as a tipper.
c.
Yes, he could be held liable as a tippee.
d.
Yes, he could be held liable as a remote tippee.
22–18 Definition of Insider Trading
65. List the seven elements of a Rule 10b-5 cause of action.
22–2a Elements of a Rule 10b-5 Cause of Action
66. May private plaintiffs, the SEC, or both bring aider and abettor actions under Rule 10(b)? What must be proven? What
type of relief may be sought?
of the violation by the defendant. The SEC may seek damages or injunctive relief.
67. Susan, an accountant, prepared an audit report for a company that wanted to include the report in a registration
statement. What must Susan do before the company can do so? What step should she perform in relation to events
occurring subsequent to the date of the certified balance sheet in the registration statement?
68. What is the duty of an independent public accountant if, in the course of an audit, the accountant detects information
indicating that an illegal act has or may have occurred?