ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 42
SECURITIES LAW AND CORPORATE GOVERNANCE
42-1A. Violations of the 1934 Act
(Chapter 42—Pages 820–822)
The court refused to dismiss the complaint. The court explained, “A statement is material if its disclosure
ary 19.” The court emphasized that the preliminary agreement with IBM was not reached until early
February. In other words, two weeks elapsed from the date of the first announcement until the Web site
was “even in its preliminary development stage.” The court added that it could not understand “how
42-2A. Insider reporting and trading
(Chapter 42—Pages 823–824)
The court ordered Bleakney to disgorge his profits. The court explained that Section 16(b) of the Securi-
B-182 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 42
chanically, and . . . imposes liability without fault.” In this case, Bleakney was an NMC officer “in No-
vember of 1998, when he sold the shares at issue . . . . To the extent Bleakney’s duties as an officer may
42–3A. Insider trading
(Chapter 42—Pages 824–826)
The most likely allegation in these circumstances was that Scott violated Section 10(b) and SEC Rule 10b–
5 by communicating material nonpublic information to Mark and Jordan, who then bought EZ stock
42-4A. SEC Rule 10b-5
(Chapter 42—Pages 820–822)
FMC did not succeed in its suit against Boesky. A federal district court dismissed FMC’s claims, and on
appeal, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal. FMC suffered no injury—
42-5A. Definition of a security
(Chapter 42—Page 814)
The federal district court in which this case was brought held that the investment contracts were securi-
ties within the meaning of the Securities Act of 1933—a “contract, transaction or scheme whereby a
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 42 B-183
person invests his money (1) in a common enterprise and (2) is led to expect profits (3) solely from the
efforts of the promoter or a third party.” The court acknowledged that the efforts of the promoter, af-
ter the investment, were “ministerial in nature” but emphasized that the pre- and post-investment ef-
forts should be looked at as a whole. The court also stated that the post–investment efforts were “criti-
cal since the promoter, not the investor, has the contractual relationship with the insurer.”
On appeal, the U.S. Court of Appeals for the District of Columbia reversed and remanded the
case. The court agreed that the contracts met the first two parts of the test, but disagreed that they also
42-6A. SEC Rule 10b-5
(Chapter 42—Page 823)
The federal district court in which the case was brought found that Maio and Ladavac violated SEC Rule
42-7A. Section 10(b)
(Chapter 42—Pages 824–826)
The district court dismissed the complaint, and the plaintiffs appealed. The U.S. Court of Appeals for the
B-184 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 42
42-8A. SEC Rule 10b-5
(Chapter 42—Page 823)
The court held that Falbo was liable under the misappropriation theory. Grand Met placed Falbo in a
position of trust and confidence, which, like the restrictions of a fiduciary relationship, prohibited him
42-9A. Definition of a security
(Chapter 42—Page 814)
The court held that the franchises were investments required to be registered under the Securities Act
of 1933. The court ordered the Levines to stop selling the franchises, refund the investors’ money, and
pay damages at the “highest allowable level.” The court pointed out that a security “exists if there is (a)
an investment of money, (b) in a common enterprise, (c) based on an expectation of profits to be de-
rived from the entrepreneurial or managerial efforts of others.” Here, each “partner” invested money in
FPC through the franchises. A “common enterprise” is a relationship in which “the fortunes of the inves–
42-10A. A QUESTION OF ETHICS
1. One cannot escape the suspicion that Willis realized that his use of the inside information
was, at a minimum, unethical. More than perhaps any other members of the medical profession, psy-
chiatrists, due to the nature of their profession, have a duty to hold information communicated to them
by clients in the strictest confidence. Furthermore, one in Willis’s position could not help but know that
2. It would seem unlikely that Willis’s individual investment, in itself, would be harmful to Weill’s
interests. It is conceivable, however, that even by telling just one other person—the stockbroker—Willis
might have caused Weill’s husband and/or BankAmerica to eventually learn (because the stockbroker
3. One could simply argue that it would be basically unfair to allow other persons—simply be-