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Chapter 45 - Securities Regulation
V. ANSWERS TO PROBLEM CASES
1. No, the LLC interests were not securities, because they did not meet the third requirement of
A dissenting judge would have found the LLC interests to be securities on the grounds that
the undeniably significant efforts that determined the success of the LLC were those of
2. Yes. The Howey test applies. All three Howey elements are met, making the LLC interests
investment contracts. There is an investment of money because each investor made monetary
investments, totaling $190 million for all the investors. There was a common enterprise,
3. AltaVerba may release any information about itself more than 30 days prior to filing the
registration statement provided it does not reference the prospective offering of securities.
Therefore, releasing historical information 72 days before the filing day is OK. AltaVerba
may not release forward-looking information less than 30 days prior to the filing date,
because it is not a public issuer. Therefore, 23 days before the filing day, it may not release
4. $2 billion is not too much for Rule 506, because Rule 506 does not limit the dollar amount of
securities offered. The number of purchasers is not a problem, because Rule 506 is limited to
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 45 - Securities Regulation
5. Yes. It is the right type of issuer for Rule 504, a nonpublic issuer. The $835,000 amount of
the offering is below the limit of $1 million for Rule 504. The number of purchasers is
6. No, Podcast may not make the offer in compliance with Rule 147. As an issuer organized
and doing business in Illinois, Podcast must meet three 80% tests to comply with Rule 147.
It must have 80% of its assets in Illinois (met because all its assets are there); it must generate
7. No. The court held that RBS's disclosures satisfied their legal obligations. While the
prospectus did not disclose the percentage of the relevant securitizations that included
subprime mortgages, offering documents need not identify every type of asset a security
contains so long as they provide "extensive descriptions" of the security's contents that are
8. Facebook amended its registration statement to state among the risk factors of its business
that its users were moving to mobile applications and there was no assurance that Facebook
http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm
Growth in use of Facebook through our mobile products, where we do not currently
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 45 - Securities Regulation
substantial majority of our mobile users also access and engage with Facebook on
You may want to point out that Facebook went public for $38 a share. Shortly thereafter, the
9. No. The court held that Section 16(b) does not apply to transactions involving separately
traded, nonconvertible stocks with different voting rights. The court refused to find that the
two classes of shares were the "economic equivalent" of each other. This conclusion was
consistent with the views of the SEC, which is uniquely experienced in confronting short-
10. The court found that the vice-president was not an officer for purposes of section 16(b); thus,
he was not liable for buying and selling 3,500 shares of UA in a six-month period. The court
held that an employee’s duties, not his title, determine whether he is an insider. A vice-
president is an officer only if he has access to inside information such as the financial or
11. No. The SEC staff wrote,
We are unable to concur in your view that PNC may exclude the proposal under rule 14a-
8(i)(7). In arriving at this position, we note that the proposal focuses on the significant
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 45 - Securities Regulation
12. Yes. The Supreme Court held that paying an inflated purchase price will not by itself
constitute or proximately cause the relevant economic loss needed to allege and prove loss
13. No. The court found the shareholder plaintiffs took the statements out of context. The court
considered each statement in its context and found none to be false.
As to the statement that the quality level was the highest in the industry, which was at the
company's website, the website stated the company's belief in high quality compared to
As to being a leader in technical fabrics and quality construction, the shareholder-plaintiffs
extracted that statement from longer statements in 10-Qs filed on September 7 and December
6, 2012. In both 10-Qs, the company stated, "We believe that our brand is recognized as
As to quality as a key differentiating factor, that was culled from statements by the CEO on a
September 7, 2012 investor call and in a April 3, 2013 press release. Both documents also
contained important context. On the September 7, 2012 investor call, in the sentence
immediately preceding the CEO's reference to quality as a differentiating factor, she noted (as
14. Probably. The Supreme Court remanded the case after holding that the Northway materiality
test applied to the Rule 10b-5 context, and therefore the merger negotiations would be
material if they would be important to the ordinary investor, that is, if the merger negotiations
would alter the total mix of facts the ordinary investor would consider in deciding whether to
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 45 - Securities Regulation
15. No. The court ruled that Pension Fund had not alleged that the defendants acted with
scienter, a requirement for liability for damages under Rule 10b-5. The court found the
16. No. Applying the safe harbor protections for forward-looking statements under the Private
Securities Litigation Reform Act, the court determined that the defendants were not entitled
to safe harbor protection under the “meaningful cautionary language” prong of the safe
17. No. Although Cuban lost his bid for summary judgment, SEC v. Cuban, 620 F.3d 551 (5th
Cir. 2010), after the Court of Appeals remanded the case to the trial court, a jury found that
18. Yes. The SEC alleged that Chen misappropriated the information that he knew to be
confidential and nonpublic. It is possible that Chen could also have been argued to have held
a fiduciary duty of confidentiality, as the only reason he had access to the information was
19. No. The SEC found that Polizzotto on behalf of First Solar intentionally selectively disclosed
to approximately 20 sell side analysts and institutional investors that First Solar would not
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 45 - Securities Regulation
20. The court held that First City failed to make a timely filing of a Schedule 13D. The
requirement to file a Schedule 13D with the SEC is triggered when an investor buys 5% or
more of an issuer’s equity securities registered under the Securities Exchange Act of 1934.
First City had purchased 4.9% in its own name and then told Bear Stearns that it wouldn’t be
a bad idea if it bought more shares. The issue was whether Bear Stearns’s purchases were for
First City. If they were, First City’s holdings exceeded 5% and the filing on the 26th was 12
days too late. The court found that Bear Stearns’s purchases were for First City, because only
21. Yes. The court held that the distribution of shares for no monetary or financial consideration
was nonetheless a sale of securities, which because it was unregistered violated the Utah
Securities Act. Generally, an owner of securities may give away shares for free and not be
subject to securities regulation: there is no risk of harm to investors who have not paid
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
