LAP: QS-050

Objectives Explain how legislation protects investors and promotes market stability. Describe common investment scams.

Explain how legislation protects investors and promotes market stability. Objective

October 29—Black TuesdayOctober 29—Black Tuesday Millions lost life savings.Millions lost life savings. Country sank into depression.Country sank into depression. People lost faith in the stock market.People lost faith in the stock market. The Stock Market Crash of 1929 BLACK TUESDAY

The government’s response to the crash and lack of investor confidenceThe government’s response to the crash and lack of investor confidence Sometimes called the “truth in securities” lawSometimes called the “truth in securities” law Basic premises:Basic premises:  Public companies must tell the truth about their finances.  Anyone who sells securities must behave honestly. The Securities Act of 1933

Created the Securities and Exchange Commission (SEC)Created the Securities and Exchange Commission (SEC)  To monitor and enforce the Securities Act  To promote stability in the market  To protect investors  Operates on the belief that all investors should have access to certain facts about potential investments The Securities Exchange Act of 1934

Occurs when a company’s “insiders” (such as officers and board members) trade its securitiesOccurs when a company’s “insiders” (such as officers and board members) trade its securities Legal when reported to the SECLegal when reported to the SEC Illegal when trades are made with information that is not disclosed to the publicIllegal when trades are made with information that is not disclosed to the public Insider Trading

EnronEnron WorldcomWorldcom Martha StewartMartha Stewart TycoTyco Once again, investor confidence was eroded.Once again, investor confidence was eroded. Corporate Scandals MARTHA STEWART

The Sarbanes-Oxley Act of 2002 The government’s response to the corporate scandals and lack of investor confidenceThe government’s response to the corporate scandals and lack of investor confidence Also known as the Public Company Accounting Reform and Investor Protection ActAlso known as the Public Company Accounting Reform and Investor Protection Act Highlights:Highlights:  CEOs and CFOs must certify financial reports.  Compensation and profits must be made public.  Stiffer penalties and jail time for violations  Internal controls for financial reporting

Describe common investment scams. Objective

Pump and dumpPump and dump Pyramid schemePyramid scheme Ponzi schemePonzi scheme Affinity fraudAffinity fraud PhishingPhishing Investment Scams

Be skeptical.Be skeptical. Consider the source.Consider the source. Independently verify claims.Independently verify claims. Beware of high-pressure pitches.Beware of high-pressure pitches. Research the company.Research the company. Confirm registration (on EDGAR).Confirm registration (on EDGAR). SEC Recommendations for Investor Protection

Quick Case A single investor can manipulate market sentiment.A single investor can manipulate market sentiment. 15-year-old Jonathan Lebed did so.15-year-old Jonathan Lebed did so. He ran a pump-and-dump scheme over the Internet.He ran a pump-and-dump scheme over the Internet. The youngest person to be charged with securities fraudThe youngest person to be charged with securities fraud Stick With the Facts!

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