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Securities Regulation
Rutgers University, Newark School of Law
Guseva, Yuliya

Securities Regulation, Guseva (Spring 2016)
Put = Sell; Call = Buy
“PUT” Option = “an option that conveys to its holder the right, but not the obligation, to sell a specific asset at a predetermined price until a certain date… Investors purchase puts in order to take advantage of a decline in the price of the asset.”
“CALL” Option =
Exchange Act Rule 10b-5 – Anti-Fraud liability covers disclosure filed with SEC, AND voluntary disclosures such as press releases by the company and interviews provided by the CEO.
(1) “any untrue statement of a material fact”; AND
(2) omitting “to state a material fact necessary in order to make the statements mad, in the light of the circumstances under which they were made, not misleading.”
NO Duty to Disclose   (Any Duty to Disclose comes from SEC Regulations)
UNLESS Corp. provided incomplete or misleading information. (i.e. Half-Truths)
EXCEPT – insider trading where officers & Dirs. of a company have duty to disclose all material facts before buying or selling the company’s securities.
Regulation S-K
Disclosures mandated by SEC required ONLY IF they are “material.”
Item 101(a) of Regulation S-K requires ISSUERS to disclose Info on the general development of their business over the past 5-years as well as Info pertaining to earlier periods IF “MATERIAL to an understanding of the general development of the business.”
It is Optional IF information is beyond the 5-year period.
SEC filings Requiring DISCLOSURE… (SEC filing Requirements = Regulation S-K)
Form 10-K (annual): 
Form 10-Q (quarterly):
Exchange Act Rule 12b-20 requires:  (MUST include material information so statements in reports are NOT misleading.)
Rule 408  of Securities Act… says SAME THING
Talks about additional information.
Must NOT be misleading.
Affirmative statements should be ACCURATE and COMPLETE
TSC Industries =Information is MATERIAL if there is a “substantial likelihood that the disclosure… would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”
MATERIALITY is determined on a “fact-specific inquiry.”
NO Categorical Rule/Standard.
“The determination of Materialityrequires delicate assessments of the inferences a ‘reasonable shareholder’ would draw from a given set of facts and the significance of those inferences to him…”
What if Disclose too much information?
Flooding market with information that will hide the MATERIAL information.
“BURIED FACTS” DOCTRINE = disclosure can be misleading if it contains material information that is inaccessible or difficult to assemble. (Kohn v. American Metal Climax – finding proxy statement to be materially misleading for prominently disclosing an investment adviser’s favorable opinion, BUT burying in an appendix that the adviser had failed to evaluate the firm’s assets.)
II. FORWARD-LOOKING INFORMATION (disclosures regarding event that may or may not come to pass.   AKA – “soft” information)
Basic = An OMITTED statement is MATERIAL IF its knowledge would have significantly altered the ‘total mix’ of information made available.
MATERIALITY – 3 Factors… (1) Substantial Likelihood; (2) Reasonable Investor; AND (3) Significant Alteration of “Total Mix” of information
TEST APPLIED to Contingent/Speculative events – Texas Gulf Sulphur Probability/Magnitude Approach for MATERIALITY – (fact dependent)
FACT INTENSIVE INQUIRY:  BALANCE the probability of the event occurring AND the anticipated magnitude of the event in light of the totality of the company activity.
Merger is definitely → merger has great magnitude, changes the corp as we know it
To Assess the …
Look at “indicia of interest” in the transaction.(i.e. =HOW SERIOUS)
Board resolutions, bd meetings, financial bank involved/investment bankers, and actual negotiations with bd.
To Assess the (money) of the transaction to the Issuer of the securities allegedly manipulated…
Consider size of the 2 corp. entities & potential premiums over mrkt value.
NO , BUT then officers have to stay silent – can NOT make any statements that are MISLEADING OR false
i.e., can NOT say ‘NO’, BUT CAN say ‘NO comment’
: IF info of Merger does leak AND effects market, THEN there is a Duty to Disclose information on the corp.
– “Fraud-On-the-Market” Theory… P MUST SHOW
(1) an efficient market
(2) a public statement
(3) that the stock was traded after the statement was made but before the truth was revealed; AND
(4) the materiality of the statement
5% RULE OF THUMB = treat misstatements & omissions that account for less than 5% of earnings as presumptively immaterial for purposes of a motion to dismiss.
SEC Staff Accounting Bulletin No. 99 (SAB No. 99) = (5% Rule of Thumb)
In context of misstatements of a financial statement… ‘total mix’ includes the size in numerical OR percentage terms of the misstatement.
ALSO includes the factual context in which the user of financial statements would view the financial statement item.
MUST consider both “quantitative” and “qualitative” factors in assessing MATERIALITY.
= Materiality determination… QUALITATIVE Factors.  INFO NOT disclosed on statements made/reported at the time of corp. IPO.
5% Rule of Thumb is NOT determinative.  Statement may be MATERIAL EVEN IF it is “quantitatively” small.
Low quantitative Materiality can be overcome if the statement/omission plays a part in an important segment of the corporation
SAB No. 99 – Relevant Qualitative Factor
IF the omissions “mask a change in earnings or other trends.”
Qualitative Factors (from District Court)
Do the omissions conceal unlawful transactions or conduct?
Do the alleged omissions relate to a significant aspect of business operations?  (Change in Earnings **important** )
Was there any significant market reaction to the public disclosure of the alleged omissions?
Did the alleged omission hide a failure to meet analysts’ expectations?
Did the alleged omission have the effect of increasing the Management’s compensation?)
Required Disclosures under Item 3

“total mix” Standard = Contextual Inquiry
Contextual inquiry may reveal in some cases that reasonable investors would have viewed reports of adverse events as material EVEN THOUGH the reports did NOT provide statistically significant evidence of a causal link.
IV. The “Total Mix”
Food Lion = “Puffery” Doctrine = Statements that are immaterial puffery are NOT actionable under the securities laws.  “are the kind of PUFFERY and generalizations that reasonable investors could NOT have relied upon when deciding whether to buy stock…”
Market knew about charges = The market had full opportunity to evaluate these claims and to reflect their risk in the market price
FALSE statement or Omission of Material fact… TO Establish this Element…
P MUST (1)point to a factual statement or omission – one that is demonstrable as being true or false – (2)the statement must be false or the omission MUST render the public statements misleading; AND (3)any statement or omission of fact MUST be MATERIAL.
“Bespeaks Caution” Doctrine (Judicial): forward-looking statements are rendered immaterial as a matter of law IF they are accompanied by disclosure of risks that may preclude the forward-looking projection from coming to fruition.
Kaufman v. Trump’s Castle Funding – (3d Cir. 1993) = “Cautionary language, if sufficient, renders the alleged omissions/misrepresentations immaterial.”
– “Safe Harbor” for forward-looking statements
REGULATION S-K (Subpart 400) relating to COMPETENCE & INTEGRITY of management.
Item 401 provides for biographical information on Ds and Officers, including business experience for the past five years.
Item 402 requires Disclosure of executive compensation (including stock options).
Item 404 details Disclosures for transactions between the issuer and certain related parties, including family members of any Dir. or officer.
NOW requires DISCLOSURE of transactions in excess of $120,000 between the issuer and Ds, officers, 5% stockholders and the family members of any of those classes.
Item 406 (p.265) = Code of Ethics
§ 402 of Sarbanes-Oxley Act – prohibits loans by public companies to their executive officers and Ds.
§ 402 of Sarbanes-Oxley Act – requires DISCLOSURE of whether the company has a code of ethics for its CEO, CFO, and controller.  If the company does NOT have such a code of ethics, it is required to explain why not.