sInsideTrade(50p) - Insider trading There are three sources...

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Insider trading There are three sources of insider trading law: Section 16 Rule 10b-5 Williams Act - Rule 14e-3
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Section 16 Insiders -- officers, directors and shareholders who own 10% or more of the firm's equity class -- are required by law to file any trading activity with the SEC Insiders are prohibited from reversing positions in the stock and/or derivative securities for a six month period Insiders are not allowed to short sell the security If an insider violates Section 16, s/he may be sued by a shareholder
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Rule 14e-3 Rule 14e-3 makes it a crime to trade on inside information about a tender offer even if the defendant is not violating a fiduciary duty in making the trade
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Section 10(b) Section 10(b) of the 1934 Securities Exchange Act states in part: It is unlawful to use or employ, in connection with the purchase or sale of any registered or unregistered security, any manipulative device or contrivance
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Rule 10b-5 According to Rule 10b-5 it is unlawful: To employ any device, scheme, or artifice to defraud To make any untrue statement of a material fact, or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security A fact is material if there is substantial likelihood that a reasonable shareholder would consider it important
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Types of 10b-5 cases Garden variety fraud in face to face transactions between buyers and sellers False or misleading statements made by insiders or other parties Cases where insiders traded on material nonpublic information
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Who can pursue insider trading cases? SEC Private parties must show damages Justice Department
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Penalties for insider trading SEC and private parties have powers to enforce Rule 10b- 5 with civil actions Only Justice Department may impose criminal fines and jail terms Insider Trading Sanctions Act of 1984 Gave SEC authority to seek from a court a civil money penalty up to three times the amount of profit gained or loss avoided Maximum fine for a criminal violation was increased from $10,000 to $100,000
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Insider Trading and Securities Fraud Enforcement Act of 1988 Allowed the SEC to pay bounties to an informant of up to 10% of insider trading profits Also created the concept of controlling person which held top management responsible for the insider trading violations of an employee Maximum jail sentence for violators was set at 10 years in prison and the maximum criminal fines raised from $100,000 to $1,000,000
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Classical theory of insider trading The ninth circuit defines the classical theory as a person violates Rule 10b-5 by buying and selling securities on the basis of non-public information if he owes a fiduciary or similar duty to the other party to
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This note was uploaded on 04/02/2009 for the course DEPARTMENT FIN 4320 taught by Professor Sherwoodbishop during the Spring '08 term at Southwestern.

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sInsideTrade(50p) - Insider trading There are three sources...

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