1. Legal Issues in Finance

2. Securities Act of 1933
Securities Exchange Act of 1934
Theft Theft by deception
Theft by misappropriation
Fraud
Racketeer Influenced and Corrupt Organizations Act. (1970)

3. Regulation FD
Sarbanes-Oxley Act of 2002
Corporate Directors and Officers Duties
(Business Judgment Rule)

4. Securities Act of 1933
Objective: To provide prospective investors with accurate, complete, and detailed information about new offerings of securities.

5. Securities Act of 1933
Requires that all new issues of securities sold in interstate commerce must be registered with the SEC before sale, unless exempted. Registration includes certified financial statements and prospectus. Prospectus must also be given to each new purchaser.

6. Civil and Criminal Penalties for Violation
a.       Criminal – fine and/or imprisonment. Fines up to $10,000 and/or imprisonment up to five years.
b.       Civil – Monetary damages to investors if there is a failure to register, registration statement or prospectus contained materially false, misleading factual information, or omitted material factual information.

7. Civil and Criminal Penalties for Violation
Liability extends to Issuer, under writer, directors/partners, all signers, and experts (accountants and attorneys) who prepared or certified part of registration statement.
Plaintiff need not prove reliance.

8. Securities Exchange Act of 1934
Regulates ongoing trading of securities after issuance.
1. Prohibits Fraud
2. Requires Corporate Reports to SEC
3. Prohibits short-swing profits

9. Reports Reporting companies must file: 1. Annual report, Form 10-K
2. Quarterly report, Form 10-Q
3. Early warning report, 8-K
Also Reports to SEC concerning
1. Tender offers
2. Proxy Solicitation

10. Securities Exchange Act of 1934 Anti-Fraud (Section 10b and Rule 10b-5)
Condemns any device, scheme, or artifice to defraud.
1. Trading on inside information
2. Giving or receiving tips based on inside information
3. Spreading false rumors
4.falsely creating the appearance of increased trading volume.

11. Insider Trading Rule 10b-5
person with nonpublic confidential, inside information, may not use that information when trading with a person who does not possess that information.
Insider: Officers, directors and anyone who is entrusted with corporate information for a corporate purpose.
(Consultant, lawyer, auditor)

12. Insider Trading
Tippees: Recipients of inside information from insiders.
Requires:
Breach of fiduciary duty
Benefit to tipper
Tippee aware of breach

13. PENALTIES
Criminal Penalties for violation. Fines up to 1$ million and /or imprisonment up to 10 years
Civil. Monetary damages. SEC can sue for violation of insider trading regulations and seek triple the amount of profits gained or loss avoided by the guilty party

14. Short Swing Profits
Directors, officers and persons owning 10% or more of stock may not make profits or avoid losses by trading within six-month period of time.

15. Racketeer Influenced and Corrupt Organizations Act (1970
Federal Crime to engage in racketeering activity in the acquisition, maintenance or conduct of the affairs of a business enterprise or to conspire to do any racketeering activities.
Incorporates by reference 26 federal crimes and 9 state felonies, including: securities fraud, mail fraud and wire fraud.
Requires two or more offenses.

16. Racketeer Influenced and Corrupt Organizations Act (1970
Penalties
Criminal - $25,000 per violation
Up to twenty years imprisonment
Civil – Government : Divestiture or dissolution of business
Private: Treble damages Attorneys fees

17. Regulation FD (Fair Disclosure)
Prohibits senior company officials and others who regularly communicate with investors or analysts from privately disclosing to a few outsiders material nonpublic information.
Outsiders: In general, securities market professionals or holders of securities who may trade on the basis of the information
Material Information: Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision.

18. Regulation FD (Fair Disclosure)
Disclosures to news organization, suppliers, strategic partners and customers would not be covered.
Private investor cannot sue under the Regulation. Only SEC can bring an action for noncompliance.

19. Regulation FD (Fair Disclosure)
If disclosure takes place issuer must make public disclosure of same information:
(a) simultaneously (for intentional disclosures),
(b) promptly (for non-intentional disclosures)
Methods of disclosure:
8-k
Any method reasonably designed to provide broad nonexclusionary distribution to the public

20. Sarbanes-Oxley Act of 2002
The Board will have five financially-literate members, appointed for five-year terms. Two of the members must be or have been certified public accountants, and the remaining three must not be and cannot have been CPAs.
Members of the Board are appointed by the Securities and Exchange Commission, "after consultation with" the Chairman of the Federal Reserve Board and the Secretary of the Treasury.

21. Section 103: Auditing, Quality Control, And Independence Standards And Rules.
The Board shall:
(1) register public accounting firms;
(2) establish, or adopt, by rule, "auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers;"
(3) conduct inspections of accounting firms;
(4) conduct investigations and disciplinary proceedings, and impose appropriate sanctions
(etc)

22. Standard Setting
The Board would be required to "cooperate on an on-going basis" with designated professional groups of accountants and any advisory groups convened in connection with standard-setting,

23. Section 104: Inspections of Registered Public Accounting Firms
Annual quality reviews (inspections) must be conducted for firms that audit more than 100 issues, all others must be conducted every 3 years. The SEC and/or the Board may order
a special inspection of any firm at any time.

24. Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.
It shall be "unlawful" for a registered public accounting firm to provide any non-audit
service to an issuer contemporaneously with the audit, including:
(1)bookkeeping or other services related to the accounting records or financial statements of the audit client;
(2)financial information systems design and implementation;
(3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

25. (4) actuarial services; (5) internal audit outsourcing services;
Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.
(4) actuarial services;
(5) internal audit outsourcing services;
(6) management functions or human resources;
(7) broker or dealer, investment adviser, or investment banking services;

26. 8) legal services and expert services unrelated to the audit;
Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.
8) legal services and expert services unrelated to the audit;
(9) any other service that the Board determines, by regulation, is impermissible.
The Board may, on a case-by-case basis, exempt from these prohibitions any person, issuer, public accounting firm, or transaction, subject t review by the Commission.

27. Section 203: Audit Partner Rotation.
The lead audit or coordinating partner and the
reviewing partner must rotate off of the audit
every 5 years.

28. Section 302: Corporate Responsibility For Financial Reports.
The CEO and CFO of each issuer shall prepare
statement to accompany the audit report to certify the
appropriateness of the financial statements and disclosures contained in the periodic report, and
that those financial statements and disclosures fairly
present, in all material respects, the operations and financial condition of the issuer."

29. Section 401(a): Disclosures In Periodic Reports; Disclosures Required.
Each financial report that is required to be prepared in accordance with GAAP shall
reflect all material correcting adjustments that have been identified by a registered accounting firm "
"Each annual and quarterly financial report shall disclose all material off-balance sheet transactions" and "other relationships" with "unconsolidated entities" that may have a material current or future effect on the financial condition of the issuer.

30. Section 401(a): Disclosures In Periodic Reports; Disclosures Required.
The SEC shall issue rules providing that pro forma financial information must be presented so as not to "contain an untrue statement" or omit to state a material fact necessary in order to make the pro forma financial information not misleading.

31. Title VIII: Corporate and Criminal Fraud Accountability Act of 2002.
Felony to "knowingly" destroy or create
documents to "impede, obstruct or influence"
any existing or contemplated federal investigation.
Auditors are required to maintain "all audit
or review work papers" for five years.

32. statute of limitations on securities fraud claims is extended to the earlier of five years
A new crime for securities fraud that has penalties of fines and up to 10 year imprisonment.

33. Title IX: White Collar Crime Penalty Enhancements
Maximum penalty for mail and wire fraud increased from 5 to 10 years.
SEC may prohibit anyone convicted of securities fraud from being an officer or director of
any publicly traded company.
Maximum penalties for willful and knowing violations of this section are a fine of not more than $5,000,000 and/or imprisonment of up to 20 years.

34. Director’s Duties
Directors and Officers are considered to be in a fiduciary relationship with the Corporation which relationship imposes certain duties.
1. Obedience
2. Due care
3. Loyalty

35. BUSINESS JUDGMENT RULE
Directors and Officers are not liable for decisions which adversely affect the Corporation so long as they:
1. Engaged in a reasonable investigation prior to making the decision
2.  Had no conflicts of interest
3.  Had a rational basis for believing the decision was in the best interests of the company.