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last updated 26 Aug 02
 
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CLASS NOTES

 
 
VI. Shareholder Liquidity
     B. Trading on Insider Information
          3. Federal Regulation: Rule 10b-5
                b. Duty to "Abstain or Disclose" / Tipping
 
  • Insider trading - Rule 10b-5 
    • Duty to "abstain or disclose" 
      • equalize access to information 
      • ensure integrity of market 
      • protect proprietary information
    • federal enforcement of fiduciary duties
  •    Elements (from deceit law) 
    • misinformation 
      • silence by one with fiduciary duty 
      • materiality of nonpublic, confidential information
    • defendant's scienter  
      • knowledge of material information 
      • use of information - Rule 10b-5-1
    • presumption of plaintiff's reliance (trading in face of silence) 
    • cause of plaintiff's loss  
      • required in private suits 
      • not enforcement or criminal suits)
  • Sanctions 
    •  private recovery 
      • contemporaneous traders - 1934 Act § 20A 
      • SEC recovery fund 
      • bidder sues for losses from price increase
    • civil penalties 
      • 3 times trading gains (or losses avoided) 
      • employer can be fined up to $1 million
    • criminal penalties 
      • 10 years in jail 
      • up to $10 million in fines
  • Mail/wire fraud
    		•
    Daily Thoughts

    Why did the chicken cross the road?

     
    Problems

    Agassiz, the president and director of Cliff Mining Corporation, learns that the corporation's mining engineers have struck a rich copper deposit in the Upper Peninsula of Michigan.  He relays the information to the company’s board, whose members are delighted.  They hold a special meeting and resolve that news of the strike should not be disclosed publicly.  They then consider rewarding Agassiz.  The company does not have any authorized shares to grant him, so the directors give Agassiz a large cash bonus “for a job well done.”  The resolution also states, “The directors urge Mr. Agassiz to acquire shares in the Company before the stock price rises.”  Agassiz takes this advice and tells his broker to "buy as many shares as become available."  The broker buys some shares at about the time a fellow broker, Goodwin, is selling.  When news of the copper strike is revealed, Goodwin is furious.

    Party A (Goodwin) Argue Agassiz has violated Rule 10b-5.  Explain what should be made of the board’s resolution.

    Party B (Agassiz) Argue Agassiz has not violated Rule 10b-5.  Explain what should be made of the board’s resolution.
    Readings