Which provisions of the 1934 Act, if any, have been violated?-Has Dirks violated Section 10(b) and Rule 10b-5? Explain Original Answers Only


Intercontinental Widgets, Inc., had applied for a patent for a new state-of-the-art widget, which, if patented, would significantly increase the value of Intercontinental’s shares. On September 1, the U.S. Patent and Trademark Office notified Jackson, the attorney for Intercontinental, that the patent application had been approved. After informing Kingsley, the president of Intercontinental, of the good news, Jackson called his broker and purchased one thousand shares of Intercontinental at $18 per share. He also told his partner, Lucas, who immediately proceeded to purchase five hundred shares at $19 per share. Lucas then called his brother-in- law, Mammon, and told him the news. On September 3, Mammon bought four thousand shares at $21 per share. On September 4, Kingsley issued a press release that accurately reported that a patent had been granted to Intercontinental. The next day Intercontinental’s stock soared to $38 per share. A class action suit is brought against Jackson, Lucas, Mammon, and Intercontinental for violations of Rule 10b-5. Who, if anyone, is liable?

7. Nova, Inc., sought to sell a new issue of common stock. It registered the issue with the Securities and Exchange Commission but included false information in both the registration statement and the prospectus. The issue was underwritten by Omega & Sons and was sold in its entirety by Periwinkle, Ramses, and Sheffield, Inc., a securities broker-dealer. Telford, who was unaware of the falsity of this information, purchased five hundred shares at $6 per share. Three months later, the falsity of the information contained in the prospectus was made public, and the price of the shares fell to $1 per share. The following week, Telford brought suit against Nova, Inc., Omega & Sons, and Periwinkle, Ramses and Sheffield, Inc., under the Securities Act of 1933.

a. Who, if anyone, is liable under the Act? If liable, under which provisions?

b. What defenses, if any, are available to the various defendants?

8. Tanaka, a director and officer of Deep Hole Oil Company, telephoned Romani for the purpose of buying two hundred shares of Deep Hole Company stock owned by Romani. During the period of negotiations, Tanaka concealed his identity and did not disclose the fact that earlier in the day he had received a report of two rich oil strikes on the oil company’s property. Romani sold his two hundred shares to Tanaka for $10 per share. Taking into consideration the new strikes, the fair value of the stock was approximately $20 per share. Romani sues Tanaka to recover damages. Is Tanaka liable? If so, under which provisions and for what amount of money?

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9. Venable Corporation has 750,000 shares of common stock outstanding, which are owned by 2,640 shareholders. The assets of Venable Corporation are valued at more than $10 million. In March, Underhill began pur- chasing shares of Venable’s common stock in the open market. By April, he had acquired 40,000 shares at prices ranging from $12 to $14. Upon discovering Underhill’s activities in late April, the directors of Venable had the corporation purchase the 40,000 shares from Underhill for $18 per share. Which provisions of the 1934 Act, if any, have been violated?

10. Dirks was an officer of a New York broker-dealer firm that specialized in providing investment analysis of insurance company securities to institutional investors. On March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarily engaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices. Dirks decided to investigate the allegations. He visited Equity Funding’s headquarters in Los Angeles and interviewed several officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporation employees corroborated the charges of fraud. Neither Dirks nor his firm owned or traded any Equity Funding stock, but throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. Some of these persons sold their holdings of Equity Funding securities, including five investment advisers who liquidated holdings of more than $16 million.
While Dirks was in Los Angeles, he was in touch regularly with William Blundell, The Wall Street Journal’s Los Angeles bureau chief. Dirks urged Blundell to write a story on the fraud allegations. Blundell did not believe, however, that such a massive fraud could go undetected and declined to write the story. He feared that publishing such damaging hearsay might be libelous. During the two-week period in which Dirks pursued his investigation and spread word of Secrist s charges, the price of Equity Funding stock fell from $26 per share to less than $15 per share. This led the New York Stock Exchange to halt trading on March 27. Shortly there after, California insurance authorities impounded Equity Funding’s records and uncovered evidence of the fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against Equity Funding. The SEC began an investigation into Dirks’s role in the exposure of the fraud. After a hearing by an administrative law judge, the SEC found that Dirks had aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by repeating the allegations of fraud to members of the investment community who later sold their Equity Funding stock. Has Dirks violated Section 10(b) and Rule 10b-5? Explain

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