Transcript Legal Issues in Finance

Legal Issues in
Finance
Securities Act of 1933
Securities Exchange Act of 1934
Theft
Theft by deception
Theft by misappropriation
Fraud
Racketeer Influenced and Corrupt Organizations
Act. (1970)
Regulation FD
Sarbanes-Oxley Act of 2002
Corporate Directors and Officers Duties
(Business Judgment Rule)
Securities Act of 1933
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Objective: To provide prospective
investors with accurate, complete, and
detailed information about new offerings of
securities.
Securities Act of 1933
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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.
Civil and Criminal Penalties for
Violation
a.
Criminal – fine and/or imprisonment. Fines
up to $10,000 and/or imprisonment up to five
years.
b.
Civil – Monetary damages to investors if
there is a failure to register, registration
statement or prospectus contained materially
false, misleading factual information, or omitted
material factual information.
Civil and Criminal Penalties for
Violation
Liability extends to Issuer, under writer,
directors/partners, all signers, and experts
(accountants and attorneys) who prepared
or certified part of registration statement.
Plaintiff need not prove reliance.
Securities Exchange Act of 1934
Regulates ongoing trading of securities after
issuance.
1. Prohibits Fraud
2. Requires Corporate Reports to SEC
3. Prohibits short-swing profits
Reports
a.
Reporting companies must file:
1. Annual report, Form 10-K
2. Quarterly report, Form 10-Q
3. Early warning report, 8-K
Also Reports to SEC concerning
1. Tender offers
2. Proxy Solicitation
Securities Exchange Act of 1934
Anti-Fraud (Section 10b and Rule 10b-5)
Condemns any device, scheme, or artifice to
defraud.
1. Trading on inside information
2. Giving or receiving tips based on inside
information
3. Spreading false rumors
4.falsely creating the appearance of
increased trading volume.
Insider Trading
Rule 10b-5
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person with nonpublic confidential, inside
information, may not use that information when
trading with a person who does not possess that
information.
Insider: Officers, directors and anyone who is
entrusted with corporate information for a
corporate purpose.
(Consultant, lawyer, auditor)
Insider Trading
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Tippees: Recipients of inside information from
insiders.
Requires:
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Breach of fiduciary duty
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Benefit to tipper
Tippee aware of breach
PENALTIES
Criminal Penalties for violation. Fines up to
1$ 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
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.
Racketeer Influenced and Corrupt
Organizations Act (1970
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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.
Racketeer Influenced and Corrupt
Organizations Act (1970
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Penalties
Criminal - $25,000 per violation
Up to twenty years imprisonment
Civil – Government : Divestiture or dissolution
of business
 Private:
Treble damages
Attorneys fees
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.
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.
Regulation FD (Fair Disclosure)
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If disclosure takes place issuer must make public
disclosure of same information:
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(a) simultaneously (for intentional disclosures),
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(b) promptly (for non-intentional disclosures)
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Methods of disclosure:
8-k
 Any method reasonably designed to provide broad
nonexclusionary distribution to the public
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Sarbanes-Oxley Act of 2002
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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.
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)
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Standard Setting
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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,
Section 104: Inspections of Registered Public
Accounting Firms
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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.
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;
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;
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.
Section 203: Audit Partner Rotation.
The lead audit or coordinating partner and the
reviewing partner must rotate off of the audit
every 5 years.
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."
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Section 401(a): Disclosures In Periodic Reports;
Disclosures Required.
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Each financial report that is required to be prepared in
accordance with GAAP shall
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reflect all material correcting adjustments . . . that have been
identified by a registered accounting firm . . . ."
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"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.
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.
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.
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statute of limitations on securities fraud claims
is extended to the earlier of five years
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A new crime for securities fraud that has
penalties of fines and up to 10 year
imprisonment.
Title IX: White Collar Crime Penalty
Enhancements
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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.
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
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.