BUSA311 - Exam 3 Study Guide 72 Questions with Complete Solutions

Question: Sandy is about to graduate from Excellent University with an MBA . . . and piles of debt. But he has a brilliant idea: He will sell shares in his career. For only $1,000, an investor can obtain a small percentage of his future earnings. Is Sandy's plan legal? Strategy: Sandy is selling a security. Buyers would be investing in him, hoping that they can earn a profit from his efforts. So he must comply with securities laws. - Correct Answer Sandy can do an offering himself. He might consider Rule 147A, if he is only selling to friends and family who all live in his state, or Regulation D if he wants to sell stock in more than one state. Crowdfunding is also a possibility. Question: Events occurred in the following order: Halliburton made a series of statements about its potential liabilities and expected revenue. Erica purchased Halliburton stock on the open market. The company corrected its prior disclosures. Its stock price fell, causing Erica to lose money. Erica filed suit against Halliburton, alleging that the company's initial statements had violated Rule 10b-5. Will Erica win? Strategy: Under Rule 10b-5, Erica must show reliance. Can she do so with these facts? Who carries the burden of proof? - Correct Answer In cases involving open-market trades, the court assumes that the plaintiff did rely on the false statements, unless the defendant proves otherwise. Here, the court ruled that Erica had relied. Question: Paul was an investment banker who sometimes bragged about deals he was working on. One night he told a bartender, Ryanne, about an upcoming deal, without revealing his connection to it. Ryanne bought stock in the company Paul had mentioned. Both were prosecuted for insider trading. Ryanne was acquitted but Paul was convicted, even though Ryanne was the one who made money. How is that possible? Strategy: Note that there are different standards for tippers and tippees. - Correct Answer Paul is liable if he knew the information was confidential and he benefited directly or indirectly. A gift counts as personal gain. Ryanne was not liable because she did not know the information was confidential and that it came from an insider who was violating his fiduciary duty. Question: Jonah bought 12 paintings from Theo's Art Gallery at a total cost of $1 million. Theo told Jonah that the paintings were a safe investment that could only go up in value. (If anyone ever tells you that, run!) The gallery permitted purchasers to trade in a painting in return for any other artwork the gallery owned. In the trade-in, the purchaser would get credit for the amount of the original painting and then pay the difference if the