Unit 10 Discussion Topic: Insider Trading Throughout this course, many discussio
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Unit 10 Discussion Topic: Insider Trading Throughout this course, many discussion opportunities come up where you need to respond to other people's opinions and comments. Then, respond to your Discussion topic after you have completed your Reading CARDWARE Inc. plans to take over First Class Purses& Accessories (FCPA) in an effort to coordinate elegant CARDWARE professional attire with items from FCPA that will complement CARDWARE's fashion designs. Darla, owner of Darla's Dummies, a mannequin manufacturer whom CARDWARE had used on numerous occasions happened to be delivering mannequins to CARDWARE's principal place of business in Silkadonia. As she was bringing the last of the dummies down the hall to the room where the dummies are dressed, she paused to listen to a conversation coming from one of the open doors of the hallway she was using. Realizing that a profit could be made from FCPA's stock, Darla called her broker and indicated that she wanted to purchase 50 % of the outstanding stock that was available for FCPA Darla bought 2,000 shares of stock at $30 a share CARDWARE offered S50 a share and ultimately ended up paying $65 per share for FCPA stock Darla was no dummy, as she made a $70,000 profit on her stock purchase The Securities and Exchange Commission (SEC) filed a suit in a federal district court against Darla and others for alleged violations of, among other things, SEC Rule 10b-5. [SEC v. Falbo 14 F.Supp.2d 508 (S.D.N.Y. 1998)] Discuss the following, justifying your response using information from your Reading 1. Under what theory might Darla be liable? 2. Do the circumstances of this case meet all of the requirements for liability under that theory? Explain. 3. Examine the SEC Rule 10b-5 4. Discuss whether or not Darla was liable under the misappropriation theoryExplanation / Answer
When conducting business, there are set certain rules that are supposed to be followed by the management and the employee to avoid going against the terms and conditions the business follows. In the case of Darla, the terms and conditions revolving around the operation of the business do not allow her to conduct business without the consent of the other business people. Darla may be liable in the theory which prohibits fraud, misinterpretation, and deceit in the sale and purchase of securities (O’Leary-Kelly, et al. 2014). Darla was supposed to deliver the dummies to the company without getting involved in any business. When she decided to purchase those dummies as she discovers, they will bring profits. The company may be in convinced since they may be in another contract with another buyer which may lead to a breach of a contract.
2. Do the circumstances of this case meet all of the requirements for liability under that theory? Explain.
The circumstances of this case do not meet all the requirements for liability. The reason behind this is because the theory provides that there is no consent of misinterpretation and deceit. This is not the case because Darla transacts with the dummies but the company makes profits (O’Leary-Kelly, et al. 2014). This may not be fraud since there is no loss in the company but there is a breach of the contract that was between Darla and then the company.
3. Examine the SEC Rule 10b-5
The SEC rule provides that an employee should not employ any device or scheme of fraud (Payne, et al. 2015). Making of untrue statements of material should not be allowed, but the employee or anyone transacting a business should act to bring light under which the circumstances were made. The rule also prohibits that no party should engage in any act or course of business which operates as a fraud or deceit upon any person in connection with the purchase or sale of any security. The rule works to avoid the cases where a breach of contracts may occur favouring one side and not the other (Payne, et al. 2015).
4. Discuss whether or not Darla was liable under the misappropriation theory.
Darla is liable under the misappropriation theory. In this case, she would be considered a business outsider who obtains inside information wrongfully and trades on it for her personal gain. This means that she has stolen information which should only belong to the company. Darla cannot be considered as an inside worker in the company and should therefore not get access to any information whatsoever. Eavesdropping to listen to the conversation held by the workers was, therefore, a violation and she should be held liable.
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