1. Customized by Professor Ludlum December 6, 2016
Unit X
Customized by Professor Ludlum
December 6, 2016
Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

2. Introduction
Historical Background: stock market crash of 1929 showed the need for:
More disclosure from issuers.
Prohibition of deceptive, unfair and manipulative practices in the purchase and sale of securities.

3. Introduction The Securities Act of 1933 and
Securities Exchange Act of 1934
designed to protect investors from deceptive, unfair and manipulative practices when buying or selling securities.

4. § 1: The SEC
The Securities and Exchange Commission is an independent federal regulatory agency that enforces federal securities laws.

5. Registration Statement
Security must be registered with the SEC and state securities agencies before offered to the public.
Corporation must file a registration statement and prospectus with the SEC.
Prospectus is later distributed to investors.

6. Example of Prospectus What’s Inside: Financial Statements
Products and Markets
List of Officers
List of Risks & Required Disclosures

7. Contents of Registration Statement
Financial statement certified by an independent accounting firm.
Description of pending lawsuits.
“Red Herring” prospectus.

8. Contents of Registration Statement
Tombstone ads.
Just an announcement of a sale

9. §3: The Securities Exchange Act of 1934
Requires continuous disclosure system for corporations with securities sold on national exchanges or assets in excess of $5 million and 500 or more shareholders (Sec. 12 companies or 1934 companies).

10. Insider Trading: Section 10(b) and Rule 10b-5
Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC.

11. Insider Trading: Section 10(b) and Rule 10b-5
Occurs when persons buy or sell securities on basis of information that is not available to the public. 10b-5 applies to anyone involved with the transaction. (Lawyers, Accountants. . .)

12. A Long Time Ago . . . Kenneth Lay Sweetheart of Wall Street
$2m to Bush/Cheney
On Bush’s White House Transition
Handpicked appointed regulators in energy
Harvard Business School
Enron Field (Houston Astros Park)

13. Enron’s Dubious Accounting
Fraudulent accounting with Arthur Anderson Dummy Transactions & Bonuses Self-Dealing and Travel office

14. The Sarbanes-Oxley Act of 2002
Attempts to increase corporate accountability:
Imposes stricter disclosures.
Harsher penalties for violations.
Requires CEO’s to take (personal liability) responsibility for accuracy of financial statements filed with SEC.
Creates new private civil actions.

15. The Sarbanes-Oxley Act of 2002
Creates Public Company Accounting Oversight Board regulates public accounting firms.
Certification and Monitoring Requirements also gives directors more powers to monitor officer’s activities.

16. The Sarbanes-Oxley Act of 2002
Key Provisions:
Certification Requirements.
Loans to Officers and Directors.
Protections for Whistleblowers.
Enhanced Penalties.
Statute of Limitations for Securities Fraud.

17. What do you think?
John Yates, fisherman, stopped in Gulf of Mexico for illegally harvesting small fish (law states must be > 20 inches) Fish and Wildlife raided the boat and ordered them to keep some smaller fishes for evidence Yates threw fish overboard (keep them alive)

18. SOX creates crimes for destroying records What does that mean?
New Application:
SOX creates crimes for destroying records
What does that mean?
Are fish “records”?
Wall Street Journal, April 28, 2014

19. § 5: State Securities Laws
State securities laws are called “blue sky” laws.

20. § 6: Online Securities Fraud
The SEC is aggressively prosecuting internet fraud using traditional laws.
Investment Scams.
Pumping and Dumping.