Ch. 42: Securities Law and Corporate Governance – No. 10
Clarkson et al.’s Business Law (13th ed.)
The Securities Exchange Act of 1934 regulates brokers,
dealers, exchanges, and national securities associations, as
MATERIALITY
Facts that a seller or buyer of securities must truthfully
disclose to avoid liability under Rule 10b-5, if not disclosing
developments, such as a new discovery, process, or
product, a contract to sell all or a substantial part of
the corporation’s assets, or prospective litigation, that
are likely to cause a significant change in the
corporation’s financial condition; and
Safe Harbor: The Private Securities Litigation Reform Act
of 1995, inter alia, protects financial forecasts and other
“forward–looking” statements from giving rise to liability
under Section 10(b) and Rule 10b-5, provided that
“meaningful cautionary statements” accompany the forward–
Ch. 42: Securities Law and Corporate Governance – No. 12
Clarkson et al.’s Business Law (13th ed.)
INSIDE INFORMATION
Anyone who acquires inside information as a result of a
corporate insider’s breach of his fiduciary duty to the
corporation – even tippees, who are not “insiders,” but who
receive inside information from an insider – can be liable
(3) as a result of the tipper’s breach of his fiduciary
duty to the corporation,
(4) of which breach the tippee knows or should know,
and
(5) from which breach the tippee benefits financially.
Clarkson et al.’s Business Law (13th ed.)
INSIDER REPORTING AND TRADING
Insider Reporting: Section 12 of the 1934 Act requires that
basis of information that is not publicly available.
Sanctions: Section 16(b) of the 1934 Act allows the
corporation to “recapture” any profits realized by an
insider on any sale and purchase or purchase and sale of
In addition, the Insider Trading Sanctions Act of 1984
and the Insider Trading and Securities Fraud
Enforcement Act of 1988 give the SEC broad powers to
bring civil suit against insiders and others who use inside
Ch. 42: Securities Law and Corporate Governance – No. 14
Clarkson et al.’s Business Law (13th ed.)
STATE SECURITIES LAW
Every state has its own securities law (a.k.a. “blue sky” law)
that regulates the offer and sale of securities within a state, to
or from the state, and to or by a citizen of the state.
purchasing) securities.
Ch. 42: Securities Law and Corporate Governance – No. 15
Clarkson et al.’s Business Law (13th ed.)
CORPORATE GOVERNANCE
Effective corporate governance is particularly important to
publicly-traded corporations where ownership (by
shareholders) is separated from corporate control (by
directors and officers). Good corporate governance standards
should
compensate officers in a manner that better aligns the
officers’ interests with those of the corporation’s
shareholders, and take prompt remedial steps when one
or more officers appear to be pursuing a course of action
that is not in the shareholders’ best interest.
Ch. 42: Securities Law and Corporate Governance – No. 16
Clarkson et al.’s Business Law (13th ed.)
SARBANES-OXLEY
corporations must file certain financial and stock
transaction reports with the SEC earlier than before;
senior executives are personally responsible for the
whom is a “financial expert,” and must operate
according to a written charter.
The Public Company Accounting Oversight Board
regulates the public accounting firms that audit corporations
Ch. 42: Securities Law and Corporate Governance – No. 17
Clarkson et al.’s Business Law (13th ed.)
ONLINE SECURITIES FRAUD
Illegal Offerings: The SEC has brought enforcement actions
against issuers who use Internet discussion boards, chat
rooms, and even auction sites to offer or sell securities
without complying with the requirements of the 1933 Act.
Cybersmear: Falsely defaming a particular stock to
artificially lower its price – either to do economic harm to the
issuer or to enable the culprit to purchase valuable stock at a
below-value price.
MATERIALITY
Facts that a seller or buyer of securities must truthfully
disclose to avoid liability under Rule 10b-5, if not disclosing
developments, such as a new discovery, process, or
product, a contract to sell all or a substantial part of
the corporation’s assets, or prospective litigation, that
are likely to cause a significant change in the
corporation’s financial condition; and
Safe Harbor: The Private Securities Litigation Reform Act
of 1995, inter alia, protects financial forecasts and other
“forward–looking” statements from giving rise to liability
under Section 10(b) and Rule 10b-5, provided that
“meaningful cautionary statements” accompany the forward–
Ch. 42: Securities Law and Corporate Governance – No. 12
Clarkson et al.’s Business Law (13th ed.)
INSIDE INFORMATION
Anyone who acquires inside information as a result of a
corporate insider’s breach of his fiduciary duty to the
corporation – even tippees, who are not “insiders,” but who
receive inside information from an insider – can be liable
(3) as a result of the tipper’s breach of his fiduciary
duty to the corporation,
(4) of which breach the tippee knows or should know,
and
(5) from which breach the tippee benefits financially.
Clarkson et al.’s Business Law (13th ed.)
INSIDER REPORTING AND TRADING
Insider Reporting: Section 12 of the 1934 Act requires that
basis of information that is not publicly available.
Sanctions: Section 16(b) of the 1934 Act allows the
corporation to “recapture” any profits realized by an
insider on any sale and purchase or purchase and sale of
In addition, the Insider Trading Sanctions Act of 1984
and the Insider Trading and Securities Fraud
Enforcement Act of 1988 give the SEC broad powers to
bring civil suit against insiders and others who use inside
Ch. 42: Securities Law and Corporate Governance – No. 14
Clarkson et al.’s Business Law (13th ed.)
STATE SECURITIES LAW
Every state has its own securities law (a.k.a. “blue sky” law)
that regulates the offer and sale of securities within a state, to
or from the state, and to or by a citizen of the state.
purchasing) securities.
Ch. 42: Securities Law and Corporate Governance – No. 15
Clarkson et al.’s Business Law (13th ed.)
CORPORATE GOVERNANCE
Effective corporate governance is particularly important to
publicly-traded corporations where ownership (by
shareholders) is separated from corporate control (by
directors and officers). Good corporate governance standards
should
compensate officers in a manner that better aligns the
officers’ interests with those of the corporation’s
shareholders, and take prompt remedial steps when one
or more officers appear to be pursuing a course of action
that is not in the shareholders’ best interest.
Ch. 42: Securities Law and Corporate Governance – No. 16
Clarkson et al.’s Business Law (13th ed.)
SARBANES-OXLEY
corporations must file certain financial and stock
transaction reports with the SEC earlier than before;
senior executives are personally responsible for the
whom is a “financial expert,” and must operate
according to a written charter.
The Public Company Accounting Oversight Board
regulates the public accounting firms that audit corporations
Ch. 42: Securities Law and Corporate Governance – No. 17
Clarkson et al.’s Business Law (13th ed.)
ONLINE SECURITIES FRAUD
Illegal Offerings: The SEC has brought enforcement actions
against issuers who use Internet discussion boards, chat
rooms, and even auction sites to offer or sell securities
without complying with the requirements of the 1933 Act.
Cybersmear: Falsely defaming a particular stock to
artificially lower its price – either to do economic harm to the
issuer or to enable the culprit to purchase valuable stock at a
below-value price.