978-1285770178 Solution Manual BL ComLaw 1e SM-Ch07

in whole or in part.

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 7.1—QUESTION (PAGE 119)

THE LEGAL ENVIRONMENT DIMENSION

omissions are proved to be material, their nondisclosure in the registration statement is a breach

of the duty. Presumably, the plaintiffs’ injury consists of losses due to the impact of Blackstone’s

investments in FGIC and Freescale on the price of its securities.

THE ECONOMIC DIMENSION

have likewise been less.

CASE 7.2—QUESTION (PAGE 121)

WHAT IF THE FACTS WERE DIFFERENT?

in whole or in part.

CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 3

in whole or in part.

confidential sources of damaging information require a heavy discount. The sources may be ill–

informed, may be acting from spite rather than knowledge, may be misrepresented, may even

be nonexistent.” The court reasoned that the defendants had no motive to commit securities

fraud—they had nothing to gain by delaying the announcement of the First Flight’s

postponement. The court concluded that “a more plausible inference than that of fraud is that

the defendants, unsure whether they could fix the problem by the end of June, were reluctant to

tell the world ‘we have a problem and maybe it will cause us to delay the First Flight and maybe

not, but we’re working on the problem and we hope we can fix it in time to prevent any

significant delay, but we can’t be sure, so stay tuned.’ ”

officers, James McNerney and Scott Carson, knew about the likely postponement of the First

Flight of the company’s new Dreamliner aircraft, even when those officers made public

statements to the contrary. The plaintiffs asserted that their allegations were confirmed by

“internal e–mails” at Boeing, implying that someone inside the company was helping their case.

But the plaintiffs did not identify their source. The lower court then refused to give any weight to

the defendants to settle. The court suggested that those sanctions should consist of a fine, but

deferred to the lower court for the amount. That court “may have additional insights into the

accused lawyers’ conduct, by virtue of having spent more time on the litigation than the

appellate court.”

have been required to register with the SEC.

4 UNIT ONE: BUSINESS ORGANIZATIONS

in whole or in part.

2A. Securities laws

Emerson did not fail to disclose a material fact in connection with the purchase or sale of

securities. What he did do was use bad judgment and breach a fiduciary duty by mentioning the

planned takeover to his uncle, who then took the information and used it to his advantage.

There is no indication in the facts that Emerson intended to do anything wrong or knew that his

uncle would use this information to trade on the information (that he should not have disclosed).

3A. Insider trading theory

required to certify the financial statements.

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

Laws against insider trading were put in place to prevent insiders—usually highly paid

upper-level managers—from undeservedly benefiting from their positions in the publicly head

companies. If insider trading were no longer illegal, insiders would stand to make fortunes from

buying the companies’ stock before good news is released. If the inside news is bad, insiders

can make fortunes selling short the companies’ stocks.

Specifically, the law imposes liability for making a false statement or omission that is

“material.” What sort of information would an investor consider material? The average

investor is not concerned with minor inaccuracies but with facts that if disclosed would tend to

deter him or her from buying the securities. This would include facts that have an important

CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 5

in whole or in part.

bearing on the condition of the issuer and its business—liabilities, loans to officers and directors,

2A. Lee is an officer of Magma Oil, Inc. Lee knows that a Magma geologist has just

discovered a new deposit of oil. Can Lee take advantage of this information to buy and

sell Magma stock? Why or why not? No. The Securities Exchange Act of 1934 extends

liability to officers and directors in their personal transactions for taking advantage of inside

(Chapter 7—Page 114)

Gustavo is right. Under Section 3(a)(11) of the Securities Act of 1933, stock offerings that are

restricted to residents of the state in which the issuing company is organized and doing

business are exempt from registration requirements. Therefore, the Estrada Hermanos offering

need not be registered with the SEC. The offering will, however, be subject to state securities

because no sale of stock is involved. The existing shares are merely being split, and no

consideration is received by the corporation for the additional shares created.

7–3A. Insider trading

(Chapter 7—Page 120)

can be established when it can be inferred that the most likely source of that belief was an

insider. For example, a stock purchase or sale’s proximity in time to a phone conversation

between a trader and one with inside information provides a reasonable basis for inferring an

exchange of that information. Thus, in this problem, on this basis, a court could hold David liable

for insider trading.

CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 7

in whole or in part.

that reasonable investors would have viewed this information as material. Zicam products

account for 70 percent of Matrixx’s sales. Matrixx received reports of consumers who suffered

anosmia after using Zicam Cold Remedy.

In public statements discussing revenues and product safety, Matrixx did not disclose this

information. But the information was significant enough to likely affect a consumer’s decision to

7–7A. Disclosure under SEC Rule 10b-5

(Chapter 7—Page 120)

Even if Goldman did not affirmatively misrepresent any facts about the CDOs, Dodona can

recover if Goldman failed to disclose material facts. An omission is regarded as material if it is

(a) The court issued a summary judgment against the defendants and ordered

injunctive relief. The defendants were given time to respond to the injunction order, after which

“the court will determine . . . the appropriateness and amount of any order of disgorgement

with . . . interest as well as with respect to the assessment and amount of any other civil

penalties.”

The court found that Montana, Lyttle and Knight “misrepresented the use, safety and

control of the investor funds. Each represented to the investors that their funds would be placed

in a program that would generate extraordinary rates of return with no risk to the principal. The

evidence makes clear that neither promise was ever intended nor did it ever materialize. In fact,

8 UNIT ONE: BUSINESS ORGANIZATIONS

in whole or in part.

no Trading Program even existed.” The “Defendants’ representations and assurances made in

of return and control of the funds they were investing, were important in terms of the investors’

decisions to invest.”

Proof of scienter is also required. “Persons who act with an intent to deceive or with

reckless regard for the truth are deemed to possess the necessary scienter.” In this case, “it is

clear that Montana . . . acted recklessly in relying on Lyttle’s representations concerning the

It was also clear that Lyttle acted with scienter “insofar as he had to have known that his

statements about the Trading Program were false.” And Lyttle “continued to sign people up . . .

long after he well knew that the investor funds were being used in a manner contrary to his

representations to these investors and even after using some of the investors’ funds for his own

personal purposes.”

substantive and official, which actually carried no legitimate significance with regard to the types

of trades supposedly to be conducted. In fact, . . . many of the representations in these

agreements have no significance in the financial world and amount to little more than gibberish.”

The court also referred to the investors as “unsophisticated.”

There is an adage that if something sounds too good to be true, it probably is. That would

Montana, Lyttle, and Knight’s representations as to the safety of the principal. The investors’

only ethical transgression may have been to trust too readily in their advisors’ veracity. In that

circumstance, it would seem less fair, or at least less supportable, that they should suffer a loss.

7–9A. LEGAL REASONING GROUP ACTIVITY—Violations of securities laws