978-1259638855 Chapter 45 Part 3

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Chapter 45 – Securities Regulation

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

information for all investors. Regulation D is about the SEC looking out for the

little investor.

2) Cover the examples in the textbook, which show how easily Regulation FD may

4) Example: Problem Case # 19.

h. Securities Exchange Act Statute of Limitations

1) Note that the Sarbanes-Oxley Act has changed the statute of limitations for Rule

10b-5 to a two-year/five-year scheme.

K. Tender Offer Regulation.

1. Tender offer regulation was a reaction to a great increase in the use of hostile tender

offers in the mid-1960s. Initially, Congress was concerned that tender offers would

corporation dominated by one shareholder. Eventually, Congress recognized that tender

offers provide an effective check on entrenched, inefficient management; therefore,

shareholders in the hope of promoting an auction for the shares, allowing the highest

bidder to win a tender offer battle.

2. Note that the Williams Act does not contain a definition of tender offer. The courts have

compiled a list of factors indicative of a tender offer, which you should cover in class.

(S.D.N.Y. 1979):

a. Active and widespread solicitation of public shareholders;

b. Solicitation made for a substantial percentage of the target’s shares;

maximum number to be purchased;

f. Offer open only for a limited period of time;

g. Offeree subjected to pressure to sell his shares;

3. Note how shareholders are protected by federal tender offer rules:

a. Minimum offering period. Shareholders have at least 20 business days to consider

their decision to sell.

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

reconsider an imprudent decision and, more importantly, promotes an auction market

for the shares.

c. Proration of purchases. Shareholders need not fear tendering too late if the offer is

oversubscribed, since the purchaser must prorate its purchases among all tenderers.

4. You may note that most shareholders do not sell to the bidder; instead they sell on the

market to arbitrageurs who then sell to the bidder. Arbitrageurs are highly sophisticated

investors who are willing to assume the risk that a tender offer may be withdrawn in

return for high returns on their investments. Arbitrageurs are important to the creation of

an efficient market and perform a vital function in tender offer battles.

5. Private acquisitions of public shares are also regulated by the Williams Act, on the

grounds that such acquisitions may foreshadow a future tender offer. Note the disclosure

obligation is reached when 5% of the shares are held.

Example: Problem Case #20.

L. The Global Business Environment: The Foreign Corrupt Practices Act (p. 1225)

1. Note especially the history of the practices that led to the enactment of the Foreign

Corrupt Practices Act. Ask your students whether they think that such a statute would be

enacted today?

2. Review the payments prohibition. Distinguish between payments that influence

discretionary governmental decisions [which are illegal] and grease payments that

merely facilitate nondiscretionary governmental actions [which are legal].

Example: A corporation may not pay an elected official $10,000 in order to ensure that

it will be granted a government contract. However, the money may be paid to expedite a

government official’s processing of an application to do business in a country, if the

money does not affect the decision whether to grant the corporation the authority to do

business in the country.

3. Note the record keeping and internal control requirements of the FCPA.

M. State Securities Regulation

1. Note that state securities regulation predated federal securities regulation. Although

federal regulation is more important, state securities law remains important as well. The

state securities commissioners tend to be aggressive enforcement officers.

Log On (p. 1226): State commissioners’ websites often have sections that warn investors

of risky or fraudulent securities.

2. Note how merit registration—which exists in many states—is different from the federal

scheme of disclosure-based registration. The states tend to be very paternalistic toward

their investors. Some states even apply a merit standard to exemptions from registration.

3. Registration by coordination. Note how this type of state registration eases an interstate

issuer’s burden of complying with all the securities laws in the United States.

4. Example: Problem Case #21.

IV. RECOMMENDED REFERENCES

A. Acharya, Cooley, Richardson, & Walter, Regulating Wall Street: The Dodd-Frank Act and

the New Architecture of Global Finance (2010). An assessment of the strengths and

weaknesses of the Dodd-Frank Act.

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

substantial portion of the actions by Tschetters were taken after the restaurant had undergone

significant financial losses and its ability to survive under any circumstances was at best,

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

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Radical Bunny LLC. Investors did not exercise any control over the loans; only the LLC’s

managers had the authority to manage the investments. SEC v. Radical Bunny LLC, 2013

U.S. App. LEXIS 13953 (9th Cir. 2013).

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.

writing prospectus may contain any information when used less than 30 days prior to the

filing date, it may be used only by a well-known, seasoned issuer, not a nonpublic issuer like

audience, or if the road show meets the requirements of a free-writing prospectus. After the

effective date, AltaVerba can use a free writing prospectus containing any information that

be OK.

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

investors and, therefore, accredited. EMG is also a high level insider by being the

controlling shareholder of GME. GME must restrict the transfer of its shares for one year,

5. Yes. It is the right type of issuer for Rule 504, a nonpublic issuer. The $835,000 amount of

disclosure is required by Rule 504. ROI must not make general solicitations to the

investors.

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.

Illinois). In addition, all the offerees and purchasers must reside in Illinois. Therefore,

Podcast may not offer or sell to the few employees who reside in Missouri, even though they

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

may work in Illinois. Podcast must also restrict resale of the debentures outside Illinois for at

least nine months.

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

previously refused to require more particularized disclosures even though the specific type of

asset at issue allegedly posed “far greater risk[s]” than the general category of assets

App. LEXIS 19571 (2d. Cir. 2013).

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

available at the following URL:

http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm

revenue and financial results.

We had more than 425 million MAUs who used Facebook mobile products in December

2011. We anticipate that the rate of growth in mobile users will continue to exceed the

access our products primarily through mobile devices. We do not currently directly

generate any meaningful revenue from the use of Facebook mobile products, and our

You may want to point out that Facebook went public for $38 a share. Shortly thereafter, the

price fell to around $19 a share as investors held concerns about Facebook’s ability to

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

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similar right with an exercise or conversion privilege at a price related to an equity security,

or similar securities with a value derived from the value of an equity security,” 17 C.F.R. §

section 16(b). Gibbons v. Malone, 703 F.3d 595 (2d Cir, 2013).

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

Realty Corp. v. Crotty, 878 F.2d 562 (2d Cir. 1989).

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 policy issue of climate change. Accordingly, we do not believe that PNC may

omit the proposal from its proxy materials in reliance on rule 14a-8(i)(7).

Rule 14a-8(i)(7) allows the omission of shareholder proposals relating to the ordinary

ownership of a share that possesses equivalent value at that instant. And the logical link

(2005).

have an established policy as to how they are handled, with actions ranging from sales in

outlet stores to total removal from all shelves into the recycle bin. In the context of the entire

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

website, the court found it unreasonable to read these statements on the company’s website

regarding product quality as guarantees of no product defects.

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

premium in our offerings of run and yoga assortment, as well as a leader in technical fabrics

and quality construction.” When read in context, this statement is undeniably a reference to

a belief as to what third parties think about the company and its products, not an assertion or

immediately preceding the CEO’s reference to quality as a differentiating factor, she noted

(as did the company’s website) that while the company‘s products are “made by humans and

therefore not always perfect, we will do what it takes to make it right when we fall short.” In

the April 3, 2013 press release, the CEO’s reference to quality as a differentiating factor is

lululemon Securities Litigation, 14 F. Supp. 3d 553 (S.D.N.Y. 2014).

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

sure that premature disclosure didn’t cause its merger partner to withdraw from the

negotiations. Nonetheless, a corporation may not make misleading statements about merger

negotiations. Therefore, Basic’s false statement that it knew of no reasons to explain the

stock’s activity provided another potential grounds for liability. It would have better if Basic,

securities. Because the mere size of an alleged fraud does not create an inference of scienter,

Pension Fund’s repeated allegation concerning the magnitude of the write-downs is

insufficient to plead scienter. Plumbers & Steamfitters Local 733 Pension Fund v. Canadian

Imperial Bank of Commerce, 694 F. Supp. 2d 287 (S.D.N.Y. 2010).

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

harbor because their cautionary language was vague. However, the court concluded that the

defendants’ allegedly misleading statement was protected by the “actual knowledge” prong

of the safe harbor, because the plaintiffs did not plead facts demonstrating that the statement

was made with actual knowledge that the statement was false or misleading. Slayton v.

American Express Co., 604 F.3d 758 (2d Cir. 2010).

is Forbes’s reporting on the jury’s verdict:

http://www.forbes.com/sites/tomvanriper/2013/10/16/mark-cuban-should-be-optimistic-as–

his-insider-trading-case–heads-to-the-jury/

18. Yes. The SEC alleged that Chen misappropriated the information that he knew to be

disgorgement and prejudgment interest of $142,365, and an additional penalty equal to his

profits of $138,068. SEC v. Chen, Securities Exchange Act Litigation Release No. 22958

(March 31, 2014).

19. No. The SEC found that Polizzotto on behalf of First Solar intentionally selectively

6, 2013).

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.

In addition, First City paid the March 4th price for the shares, far below the market price of

March 17 when First City claimed it took ownership. The court refused to accept First City’s

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

during Christmas time.” Greenberg also testified that if he gave clients a half million dollar

break on stock for which Bear Stearns bore the market risk, he would “go broke within a

week.” He added also that he “does not run that risk for anybody.” The court awarded the

SEC the remedy of disgorgement of profits. SEC v. First City Financial Corp., Ltd., 890

F.2d 1215 (D.C.Cir. 1989).

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

there any risk of harm to present or future investors due solely to CGC’s giving shares to the

900 other persons? Capital General Corp. v. Utah Dept. of Business Regul., Sec. Div., 777

P.2d 494 (Utah Ct. App. 1989).