Florida International University Insider Trading Case Study

Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity serving portions of Montana and North Dakota. Reliant was in the final stages of planning a takeover of Dakota Gasworks, Inc., a natural gas distributor that operated solely within North Dakota. On a weekend fishing trip with his uncle, Ernest Wallace, Emerson mentioned that he had been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. When he returned from the fishing trip, Wallace purchased $20,000 worth of Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57 percent of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72 percent before leveling out. Wallace sold his Reliant stock for a gross profit of $14,400. Using the information presented in the chapter, answer the following questions.

1. Would registration with the SEC be required for Dakota Gasworks securities? Why or why not?
2. Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Why or why not?
3. What theory or theories might a court use to hold Wallace liable for insider trading?
4. Under the Sarbanes-Oxley Act, who would be required to certify the accuracy of the financial statements Reliant filed with the SEC

Debate This:Insider trading should be legalize

865
CHAPTER 36: Investor Protection, Insider Trading, and Corporate Governance
Certification and Monitoring Requirements Section 906 requires that chief executive
officers (CEOs) and chief financial officers (CFOs) certify that the information in the corporate financial statements “fairly represents in all material respects, the financial conditions and results of operations of the issuer.” This requirement makes officers directly
accountable for the accuracy of their financial reporting and avoids any “ignorance defense”
if shortcomings are later discovered.
The act also includes requirements to improve directors’ monitoring of officers’ activities.
All members of the corporate audit committee for public companies must be outside directors. The audit committee must have a written charter that sets out its duties and provides
for performance appraisal. At least one “financial expert” must serve on the audit committee,
which must hold executive meetings without company officers present. In addition to reviewing the internal controls, the committee also monitors the actions of the outside auditor.
Learning Objective 4
What certification
requirements does the
Sarbanes-Oxley Act impose
on corporate executives?
Practice and Review
Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of
electricity serving portions of Montana and North Dakota. Reliant was in the final stages of planning
a takeover of Dakota Gasworks, Inc., a natural gas distributor that operated solely within North
Dakota. On a weekend fishing trip with his uncle, Ernest Wallace, Emerson mentioned that he had
been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. When he
returned from the fishing trip, Wallace purchased $20,000 worth of Reliant stock. Three weeks later,
Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57 percent of Dakota
Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72 percent before leveling
out. Wallace sold his Reliant stock for a gross profit of $14,400. Using the information presented in
the chapter, answer the following questions.
1. Would registration with the SEC be required for Dakota Gasworks securities? Why or why not?
2. Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5?
Why or why not?
3. What theory or theories might a court use to hold Wallace liable for insider trading?
4. Under the Sarbanes-Oxley Act, who would be required to certify the accuracy of the financial
statements Reliant filed with the SEC?
Debate This
Insider trading should be legalized.
Key Terms
accredited investor 847
corporate governance 861
free-writing prospectus 844
insider trading 852
investment company 848
30301_ch36_hr_841-870.indd 865
investment contract 842
mutual fund 848
prospectus 843
SEC Rule 10b-5 852
securities 841
short-swing profits 855
stock option 862
tippee 854
8/30/18 1:55 PM