1 / 47

Chapter 21 Investor Protection, Insider Trading, and Corporate Governance

Chapter 21 Investor Protection, Insider Trading, and Corporate Governance . Learning Objectives. What is meant by the term securities? What are the two major statutes regulating the securities industry? What is insider trading? Why is it prohibited?

keena
Download Presentation

Chapter 21 Investor Protection, Insider Trading, and Corporate Governance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 21 Investor Protection, Insider Trading, and Corporate Governance

  2. Learning Objectives • What is meant by the term securities? • What are the two major statutes regulating the securities industry? • What is insider trading? Why is it prohibited? • What are some of the features of state securities laws? 

  3. Learning Objectives • What certification requirements does the Sarbanes-Oxley Act impose on corporate executives?

  4. Securities Act of 1933 • The Securities Act of 1933 governs the initial sale of stocks by businesses. • Designed to protect investors from deceptive, unfair and manipulative practices when buying or selling securities. 

  5. Securities Act of 1933 • Securities are instruments such as corporate stock or limited partnership interests that evidence ownership or debt. 

  6. Securities Act of 1933 • What is a Security? • The Howey test: Any transaction in which a person: (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily from others’ managerial or entrepreneurial efforts. SEC v. Howey, (1946).

  7. Securities Act of 1933 • Registration Statement. • If a security does not qualify for an exemption under §5 of the Securities Act of 1933, the security must be registered with the Securities Exchange Commission (http://www.sec.gov) and state securities agencies before offered to the public. 

  8. Securities Act of 1933 • Registration Statement. • Corporation must file a registration statement and prospectus with the SEC. • The Prospectus is later distributed to investors.

  9. Securities Act of 1933 • Registration Statement: Contents. • (1) The securities being offered for sale, including their relationship to the issuer’s other capital securities. • (2) The corporation’s properties and business (including a financial statement certified by an independent public accounting firm). 

  10. Securities Act of 1933 • Registration Statement: Contents. • (3) The management of the corporation, including managerial compensation, stock options, pensions, and other benefits. Any interests of directors or officers in any material transactions with the corporation must be disclosed. 

  11. Securities Act of 1933 • Registration Statement: Contents. • (4) How the corporation intends to use the proceeds of the sale. • (5) Any pending lawsuits or special risk factors.

  12. Securities Act of 1933 • Registration Process. • Registration statement does not become effective until approval by SEC. • Prefiling Period: issuer cannot offer or sell securities. • Waiting Period: securities can be offered by not sold. 2005: Free-writing prospectus. 

  13. Securities Act of 1933 • Registration Process. • Registration statement does not become effective until approval by SEC. • Prefiling Period: issuer cannot offer or sell securities. • Waiting Period: securities can be offered by not sold. 2005: Free-writing prospectus. 

  14. Securities Act of 1933 • Registration Process. • Post-Effective Period: registration effective 20 days after approval. • Well-Known Seasoned Investors. • Firm that has issued $1 billion in securities during previous three years, with $700 million value outstanding.

  15. Securities Act of 1933 • Exempt Securities and Transactions. • Bank securities sold before 1933. • Commercial paper if maturity date does not exceed 9 months. • Charitable organizations. • Existing holders in reorganization, bankruptcy. • Financing railroad equipment. 

  16. Securities Act of 1933 • Exempt Securities and Transactions. • Any insurance, endowment, annuity contract or government-issued securities. • Securities issued by banks, savings and loan association, farmers' cooperatives. • Securities issued to existing securities holders, stock split, dividend (really a transaction exemption).

  17. Securities Act of 1933 • Exempt Securities and Transactions. • Regulation A Offerings. • Small offering up to $5 million in a 12 month period to “test the waters”; but requires a circular. • Companies have used the internet to raise money directly, bypassing traditional investment firms.

  18. Securities Act of 1933 • Exempt Securities and Transactions. • Small Offerings: Regulation D. • Rule 504: up to $1M during 12 months to accredited investors only. • Rule 505: private, up to $5M during 12 months to both accredited and unaccredited investors. 

  19. Securities Act of 1933 • Exempt Securities and Transactions. • Small Offerings: Regulation D. • Rule 506--Private Placement Exemption. unlimited amounts, no advertising, to accredited investors only. • Resales and Safe Harbor Rules. • Rule 144. • Rule 144a. 

  20. Securities Act of 1933 • Violations. • Intentional or negligent fraud of investors by misrepresenting or omitting material facts in the registration statement and/prospectus. • Remedies: • Criminal: up to 5 years in prison, $10,000 fine. • Civil: damages, refund of investment, injunction.

  21. Securities Act of 1933 • Violations. • Defenses: Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true. • CASE 21.1 Litwin v. Blackstone Group, LP (2011). Were Blackstone’s omissions “material”?

  22. Securities Exchange Act of 1934 • Registration of securities exchanges, brokers, dealers, and national securities exchanges and associations.

  23. Securities Exchange Act of 1934 • Requires continuous disclosure system for corporations with securities sold on national exchanges or assets in excess of $10 million and 500 or more shareholders (Sec. 12 companies or 1934 companies).

  24. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC. 

  25. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Rule 10b(5) prohibits the commission of fraud in the connection with the purchase or sale of any security.

  26. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Insider Trading: advance information available to corporate officers and directors that can affect future value of stock. 10b(5) “Insiders” include officers, executives and directors).

  27. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Disclosure under SEC Rule 10b-5: • Material omission or misrepresentation may violate 1933 Act and antifraud provisions of 1934 Act and SEC Rule 10b-5. 

  28. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Disclosure under SEC Rule 10b-5: key is whether information is “material.” • CASE 21.2 SEC v. Texas Gulf Sulphur Co. (1968). Who were the insiders in this case and what should they have done differently? 

  29. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Outsiders and SEC Rule 10b-5. • Tipper/tippee theory--insider’s fiduciary duty must be breached. • Misappropriation theory -- one wrongfully obtains inside info and trades on it -- Courts still require fiduciary duty be breached, to employer, for instance.

  30. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Insider Reporting and Trading—16(b). • Recapture by corporation of profits during previous six months gained by insider trading. • Applies to stocks, warrants, options and convertible securities.

  31. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Private Securities Litigation Reform Act of 1995. • “Safe harbor” for publicly held companies that make forward-looking statements, such as financial forecasts.“ 

  32. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Private Securities Litigation Reform Act of 1995. • Meaningful cautionary statements” protect against securities fraud. • CASE 21.3 Dura Pharmaceuticals, Inc. v. Broudo (2005).

  33. Securities Exchange Act of 1934 • Section 10(b), SEC Rule 10b-5, and Insider Trading. • Regulation of Proxy Statements, Sect. 14(a). • Whoever solicits a proxy must fully disclose all of the facts and which shareholders must vote.

  34. Securities Exchange Act of 1934 • Violations of the 1934 Act. • Scienter Requirement. Proved by showing defendant made false statements or wrongfully failed to disclose material facts. • 16(b): strict liability -- no fault or scienter required.

  35. Securities Exchange Act of 1934 • Violations of the 1934 Act. • Criminal Penalties: Individuals-imprisonment up to 10 years, fines up to $5 million, $2.5 for partnership or corporation. • Civil Sanctions: up to triple profits.

  36. State Securities Laws • State securities laws are called “blue sky” laws. • Issuers must comply with federal and state securities laws and states do not allow the same exemptions as federal government. 

  37. State Securities Laws • States could require registration or qualification. • Uniform Securities Act has been adopted in part by many states.

  38. Corporate Governance • Corporate governance is essentially the relationship between a corporation and its shareholders. 

  39. Corporate Governance • Attempts at Aligning the Interests of Officers with Shareholders. • Stock Options. • “Outside” Directors?

  40. Corporate Governance • Goal is to Promote Accountability. • Involves, at minimum: • Audited reporting of financial progress, so managers can be evaluated. • Legal protections for shareholders, so violators of the law can be punished for misbehavior. 

  41. Corporate Governance • Goal is to Promote Accountability. • Benefits to the Company. • Governance and Corporation Law. • Board of Directors. • Audit Committee. • Compensation Committee.

  42. The Sarbanes-Oxley Act • Attempts to increase corporate responsibility by: • Stricter disclosure requirements. • Harsher penalties for legal violations. • Corporate officers take responsibility for financial statements and SEC reports. • CEO’s and CFO’s must personally certify reports. 

  43. The Sarbanes-Oxley Act • More Internal Controls and Accountability. • Direct federal corporate governance requirements. • Sections 302 and 404. • Exemptions for Smaller Companies.

  44. The Sarbanes-Oxley Act • Certification and Monitoring Requirements. • By CEOs and CFOs. • Avoids the “ignorance defense.”

  45. Online Securities Fraud • SEC is enforcing anti-fraud provisions of Securities Laws. • Online Investment Scams. • Fraudulent E-Mails. • Online Investment Newsletters and Forums. 

  46. Online Securities Fraud • “Ponzi” Schemes. • Offshore Fraud. • “Risk Free” Fraud: Michael Regan, Bernie Madoff.

More Related