United States , U. Following Chiarella , the Court ruled in Dirks v. Securities and Exchange Commission see Section Levinson see Section This case is also important in its discussion of the degree of reliance investors must prove to support a Rule 10b-5 action. Therefore, a defendant is not saved by arguing that the trade was made independent of knowledge of the nonpublic information. In a leading misappropriation theory case, the Second Circuit Court of Appeals reinstated an indictment against employees who traded on the basis of inside information obtained through their work at investment banking firms.
United States v. Newman , F.
The Securities and Exchange Commission
Under this new rule, the duty of trust or confidence exists when 1 a person agrees to maintain information in confidence; 2 the recipient knows or should have known through history, pattern, or practice of sharing confidences that the person communicating the information expects confidentiality; and 3 a person received material nonpublic information from his or her spouse, parent, child, or sibling.
In , in Carpenter v. United States , Carpenter v. The reporter, who was sentenced to eighteen months in prison, had been convicted on both mail and wire fraud and securities law charges for misappropriating information. The Court upheld the mail and wire fraud conviction by an 8—0 vote and the securities law conviction by a 4—4 vote.
In effect, the tie vote affirmed the conviction. Carpenter v. Beyond these judge-made theories of liability, Congress had been concerned about insider trading, and in and , it substantially increased the penalties. A civil penalty of up to three times the profit made or loss avoided by insider trading can also be imposed. This penalty is in addition to liability for profits made through insider trading.
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In , Martha Stewart was indicted on charges of insider trading but was convicted for obstruction of justice, serving only five months. More recently, in , billionaire founder of the Galleon Group, Raj Rajaratnam, was arrested for insider trading; he was convicted in May of all 14 counts of insider trading. In Stoneridge Investment Partners v. Scientific-Atlanta , Stoneridge Investment Partners v.
Congress, the Supreme Court, and the Rise of Securities-Fraud Class Actions
Scientific-Atlanta , U. Congress enacted the Sarbanes-Oxley Act in in response to major corporate and accounting scandals, most notably those involving Enron, Tyco International, Adelphia, and WorldCom. The act created the Public Company Accounting Oversight Board A body created by Sarbanes-Oxley that oversees, inspects, and regulates accounting firms in their capacity as auditors of public companies. As a result of the act, the SEC may include civil penalties to a disgorgement fund for the benefit of victims of the violations of the Securities Act of and the Securities Exchange Act of Corrupt practices, misuse of corporate funds, and insider trading unfairly benefit the minority and cost the public billions.
Numerous federal laws have been enacted to create liability for these bad actors in order to prevent fraudulent trading activities. Both civil and criminal penalties are available to punish those actors who bribe officials or use inside information unlawfully. We conclude that they are. The Co-Op is an agricultural cooperative that, at the same time relevant here, had approximately 23, members. In order to raise money to support its general business operations, the Co-Op sold promissory notes payable on demand by the holder.
Although the notes were uncollateralized and uninsured, they paid a variable rate of interest that was adjusted monthly to keep it higher than the rate paid by local financial institutions. The Investment is not Federal [sic] insured but it is…Safe…Secure…and available when you need it.
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Despite these assurances, the Co-Op filed for bankruptcy in Petitioners claimed that Arthur Young violated these principles in an effort to inflate the assets and net worth of the Co-Op. A panel of the Eighth Circuit, agreeing with Arthur Young on both the state and federal issues, reversed. Reves, F. We granted certiorari to address the federal issue, U.
Forman, U. In defining the scope of the market that it wished to regulate, Congress painted with a broad brush. Congress therefore did not attempt precisely to cabin the scope of the Securities Acts. Finally, we examine whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary. Dirks v. Securities and Exchange Commission. Whether disclosure is a breach of duty therefore depends in large part on the purpose of the disclosure. Absent some personal gain, there has been no breach of duty to stockholders.
And absent a breach by the insider, there is no derivative breach.
Securities Litigation: Damages (Vol. 26 & 26A, Securities Law Series)
Under the inside-trading and tipping rules set forth above, we find that there was no actionable violation by Dirks. It is undisputed that Dirks himself was a stranger to Equity Funding, with no preexisting fiduciary duty to its shareholders. He took no action, directly, or indirectly, that induced the shareholders or officers of Equity Funding to repose trust or confidence in him.
Nor did Dirks misappropriate or illegally obtain the information about Equity Funding. Unless the insiders breached their Cady, Roberts duty to shareholders in disclosing the nonpublic information to Dirks, he breached no duty when he passed it on to investors as well as to the Wall Street Journal.
As the facts of this case clearly indicate, the tippers were motivated by a desire to expose the fraud. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by Dirks. We conclude that Dirks, in the circumstances of this case, had no duty to abstain from the use of the inside information that he obtained. The judgment of the Court of Appeals therefore is reversed.
Prior to the merger, Basic made three public statements denying it was involved in merger negotiations. The court of appeals reversed, and the Supreme Court granted certiorari. Northway, Inc.
The application of this materiality standard to preliminary merger discussions is not self-evident. Merger negotiations, because of the ever-present possibility that the contemplated transaction will not be effectuated, fall into the latter category. Whether merger discussions in any particular case are material therefore depends on the facts. Generally, in order to assess the probability that the event will occur, a factfinder will need to look to indicia of interest in the transactions at the highest corporate levels.
Without attempting to catalog all such possible factors, we note by way of example that board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries may serve as indicia of interest. To assess the magnitude of the transaction to the issuer of the securities allegedly manipulated, a factfinder will need to consider such facts as the size of the two corporate entities and of the potential premiums over market value. No particular event or factor short of closing the transaction need to be either necessary or sufficient by itself to render merger discussions material.
As we clarify today, materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information. The fact-specific inquiry we endorse here is consistent with the approach a number of courts have taken in assessing the materiality of merger negotiations. Because the standard of materiality we have adopted differs from that used by both courts below, we remand the case for reconsideration of the question whether a grant of summary judgment is appropriate on this record.
We turn to the question of reliance and the fraud on-the-market theory. Succinctly put:. Peil v. Speiser, F. We agree that reliance is an element of a Rule 10b-5 cause of action. There is, however, more than one way to demonstrate the causal connection. Presumptions typically serve to assist courts in managing circumstances in which direct proof, for one reason or another, is rendered difficult. Requiring a plaintiff to show a speculative state of facts, i. Arising out of considerations of fairness, public policy, and probability, as well as judicial economy, presumptions are also useful devices for allocating the burdens of proof between parties.
The presumption of reliance employed in this case is consistent with, and, by facilitating Rule 10b-5 litigation, supports, the congressional policy embodied in the Act. The presumption is also supported by common sense and probability. Who would knowingly roll the dice in a crooked crap game? Four-Phase Systems, Inc. The judgment of the Court of Appeals is vacated and the case is remanded to that court for further proceedings consistent with this opinion. Beyond state corporation laws, federal statutes—most importantly, the Securities Act of and the Securities Exchange Act of —regulate the issuance and trading of corporate securities.
The federal definition of security is broad, encompassing most investments, even those called by other names. The law does not prohibit risky stock offerings; it bans only those lacking adequate disclosure of risks. The primary means for realizing this goal is the registration requirement: registration statements, prospectuses, and proxy solicitations must be filed with the Securities and Exchange Commission SEC.
Penalties for violation of securities law include criminal fines and jail terms, and damages may be awarded in civil suits by both the SEC and private individuals injured by the violation of SEC rules. A amendment to the act is the Foreign Corrupt Practices Act, which prohibits an issuer from paying a bribe or making any other payment to foreign officials in order to gain business by inducing the foreign official to influence his government in favor of the US company. The Securities Exchange Act of presents special hazards to those trading in public stock on the basis of inside information.
Under Rule 10b-5, the SEC and private parties may sue insiders who traded on information not available to the general public, thus gaining an advantage in either selling or buying the stock.
Insiders include company employees. The Sarbanes-Oxley Act amended the act, creating more stringent penalties, increasing corporate regulation, and requiring greater transparency. The law that prohibits the payment of a bribe to foreign officials to gain business is called. To enforce its prohibition under insider trading, the SEC requires reimbursement to the company of any profits made from selling and buying stock during any six-month period by directors owing.
Previous Chapter. Table of Contents. Next Chapter. Understand the functions of the Securities and Exchange Commission and the penalties for violations of the securities laws. Understand which companies the Securities Exchange Act of covers. Unfortunately, Congress has not provided clear, specific guidelines with respect to these issues. Therefore, it has been left to the federal courts to attempt to develop some parameters in this area.