This Document Contains Chapters 19 to 20 Chapter 19 Antitrust Law and Promoting Competition True/False 1. Antitrust legislation was created because of the belief that competition leads to higher prices and less product information. A. True B. False Answer: False 2. The basic purpose of antitrust law is to reduce economic competition. A. True B. False Answer: False 3. The Sherman Act, the Clayton Act and the Federal Trade Commission Act are all examples of legislation designed to curb anticompetitive business practices. A. True B. False Answer: True 4. A restraint of trade is an agreement between firms that has the effect of reducing competition in the marketplace. A. True B. False Answer: True 5. An act must substantially affect interstate commerce to violate antitrust law. A. True B. False Answer: True 6. An agreement that is deemed a per se violation will be examined by a court to determine whether the agreement’s benefits outweigh its anticompetitive effects. A. True B. False Answer: False 7. A price-fixing agreement is an agreement among competitors to fix prices. A. True B. False Answer: True 8. A price-fixing agreement is a per se violation of antitrust law. A. True B. False Answer: True 9. A group boycott is not a per se violation of antitrust law. A. True B. False Answer: False 10. A market division by class of customer between rival firms violates antitrust law. A. True B. False Answer: True 11. Territorial and consumer restrictions are analyzed under the rule of reason. A. True B. False Answer: True 12. Resale price maintenance agreements are subject to analysis under the rule of reason. A. True B. False Answer: True 13. A trade association practice or agreement that restrains trade is analyzed under the rule of reason. A. True B. False Answer: True 14. Section 1 of the Sherman Act condemns monopolization. A. True B. False Answer: False 15. Predatory pricing involves selling a product at prices substantially above the fair market value. A. True B. False Answer: False 16. A firm may not be deemed a monopoly unless it is the sole seller in a market. A. True B. False Answer: False 17. Size alone determines whether a firm is a monopoly. A. True B. False Answer: False 18. Monopoly involves the power to affect prices. A. True B. False Answer: True 19. The primary measure of monopoly power is a competitor’s assessment of the acts of a firm under review. A. True B. False Answer: False 20. For products that are sold nationwide, the relevant geographic market encompasses the entire United States. A. True B. False Answer: True 21. The possession of monopoly power alone constitutes the offense of monopolization. A. True B. False Answer: False 22. The Internet has no effect on the notion of the size and limits of a relevant geographic market. A. True B. False Answer: False 23. The offense of monopolization requires the intent to monopolize. A. True B. False Answer: True 24. A single seller acting unilaterally is free to deal, or not to deal, with anyone it chooses. A. True B. False Answer: True 25. The Clayton Act prohibits certain classes of price discrimination. A. True B. False Answer: True 26. Charging different prices to different buyers for identical goods is price discrimination. A. True B. False Answer: True 27. Under an exclusive-dealing contract, a seller promises a buyer a certain territory in which the buyer will have no direct competition. A. True B. False Answer: False 28. Conditioning the sale of one product on the purchase of another is an tying arrangement. A. True B. False Answer: True 29. In determining the legality of a merger, a crucial consideration is market concentration. A. True B. False Answer: True 30. Market concentration refers to the number of firms in the market. A. True B. False Answer: False 31. No person may be a director for two competing corporations at the same time. A. True B. False Answer: False 32. A divestiture is an order to a company to cease, or divest itself of, its anticompetitive conduct. A. True B. False Answer: False 33. Labor unions can organize and bargain without violating antitrust law. A. True B. False Answer: True 34. Insurance companies are exempt from antitrust laws whenever state regulation exists. A. True B. False Answer: True 35. Cooperative research by small-business firms is exempt from antitrust law. A. True B. False Answer: True Multiple Choice 36. Sunrich Company can process solar energy into an inexpensive fuel for internal combustion engines. As an innovator in its market, Sunrich currently has the power to affect the price of its product. This is A. market power. B. predatory pricing. C. price discrimination. D. price-fixing. Answer: A 37. North Mining Company and South Excavation Company agree to abide by the decisions of East Coast Financial Corporation as to their respective levels of production, markets, and prices, effectively reducing competition and increasing profits. This is most li A. a common, legal, time-honored type of business arrangement. B. an illegal restraint on trade. C. an innovative, legally efficient approach to doing business. D. an outdated, but legal business trust. Answer: B 38. To fall under the Sherman Act, an activity must A. substantially affect interstate commerce. B. involve monopolization. C. promote competition. D. involve international trade. Answer: A 39. Thermo Gas, Inc., and Uno Oil Corporation refine and sell gasoline and other petroleum products. To limit the supply of gas on the market and thereby raise prices, Thermo Gas and Uno Oil agree to buy “excess” supplies from dealers and “dispose” of it. This A. a deal that neither restrains trade or harms competition. B. a legal restraint of trade. C. a per se violation of the Sherman Act. D. subject to analysis under the rule of reason. Answer: C 40. When applying the rule of reason to determine whether an agreement violates Section 1 of the Sherman Act, a court will not consider A. the purpose of the agreement. B. the parties’ market ability to implement the agreement. C. the effect of the agreement on international trade. D. the potential effect of the agreement on competition. Answer: C 41. A court deems an agreement between Silver Saddles Saddlery and Time Tested Tack, Inc. to be a per se violation of the Sherman Act. The court is A. prevented from determining whether the agreement’s benefits outweigh its anticompetitive effects. B. required to unanimously decide whether the agreement’s benefits outweigh its anticompetitive effects. C. required to apply the rule of reason. D. required to issue a formal complaint against Silver Saddles and Time Tested Tack. Answer: A 42. Bodycare Pharma Corporation makes and sells ChemMed, the most prescribed name-brand blood pressure-lowering medication. Deja Vu Drugs, Inc., has the potential to make a generic version of the same drug. Bodycare pays Deja Vu not to sell its product. This is A. a market division. B. a joint venture. C. an exclusive-dealing contract. D. a price-fixing agreement. Answer: D 43. Excavators & Haulers, Inc., is the major wholesale distributor of heavy equipment in the state of Georgia. Its closest competitor is Forklifts & Tractors Company, an-other Georgia firm. The two firms agree that Excavators will operate in southern Georgia and Forklifts will operate in northern Georgia. This is A. an exclusive-dealing contract. B. a market division. C. a price-fixing agreement. D. a joint venture. Answer: B 44. Edgy Engine Components, Inc., a maker of vehicle parts, refuses to sell to Fidgety Fix-It, Inc., a national vehicle service firm. Edgy Engine convinces Greasy Motor Parts Company, a competitor, to do the same. This is A. a group boycott. B. a market division. C. a joint venture. D. an exclusive-dealing contract. Answer: A 45. Which of the following is not a per se violation of Section 1 of the Sherman Act? A. A price-fixing agreement B. A group boycott C. A trade association D. A market division Answer: C 46. Rugged Bikes, Inc., makes Rugged-brand bicycles and accessories, which are distributed to authorized dealers, including Super Sports Equipment, Inc. Super Sports operates dealerships in several locations. Rugged Bikes imposes restrictions on Super Sports to limit the area in which it sells bikes and thereby insulate other dealers from direct competition. This is A. a territorial restriction. B. a resale price maintenance agreement. C. a unilateral refusal to deal. D. a price-fixing agreement. Answer: A 47. Organic Cheeses, Inc., Fine & Fresh Foods Company, and Healthy Whole Foods, Inc. organize together to exchange information and share advertising. This is an example of a A. trade association. B. resale price maintenance agreement. C. monopoly. D. territorial restriction. Answer: A 48. Vineyard owners and wine producers join together to form Vino Veritas, a trade association. This A. is a per se violation of Section 1 of the Sherman Act. B. may be legal if it is sufficiently beneficial to both the association and the public. C. is an innovative, legally efficient approach to doing business. D. creates illegal territorial or customer restrictions. Answer: B 49. Pads & Pods Corporation requires all distributors of its products to sell the products at specified minimum prices. This resale price maintenance agreement is A. a per se violation of antitrust law. B. a legal restraint of trade. C. subject to evaluation under the rule of reason. D. not subject to antitrust law. Answer: C 50. Spa Selectiva Company makes and sells beauty salon supplies. By selling its product at prices substantially below the normal cost of production, Spa Selectiva hopes to drive its competitors from the market. This is A. market power. B. predatory pricing. C. price discrimination. D. price-fixing. Answer: B 51. Marvin starts Marvin’s Bike Company in Wheatland, South Dakota. There is one other bike store in Wheatland. Through good business management, Marvin’s Bike Company obtains a great deal of market power in Wheatland. This is A. a per se violation of Section 1 of the Sherman Act. B. an illegal restraint on trade. C. not an antitrust violation. D. a per se violation of Section 2 of the Sherman Act. Answer: C 52. Listen Up! Corporation books and promotes concerts and other entertainment events, for which Listen Up! also sells tickets. In weighing a challenge to Listen Up!’s “monopolistic” ticket prices, a court looks at the relevant geographic market. This encompasses A. only areas in which Listen Up! does not have monopoly power. B. only areas in which Listen Up! has monopoly power. C. the area in which Listen Up! and its competitors sell, and their customers buy, the tickets. D. entire United States in all cases. Answer: C 53. Imperio Caffeine Corporation makes and sells coffee under a variety of brand names. Imperio wants to merge with Java Company, its main competitor. In weighing a challenge to the deal, a court looks at the relevant product market. This most likely includes coffee and A. no other products. B. products that are not identical but are related, such as spin-offs. C. products that are sometimes substituted for coffee. D. products with identical attributes only. Answer: C 54. A suit is filed against AgriSeeds Corporation, alleging that the firm commit-ted the offense of monopolization. To determine whether AgriSeeds has monopoly power requires looking at A. the company’s size alone. B. the marketing practices of the company’s competitors. C. production methods and marketing techniques. D. the relevant geographic market and the relevant product market. Answer: D 55. A suit is filed against Dormroom Furniture Unlimited, Inc., alleging that the firm has committed the offense of monopolization. To determine whether Dormroom has committed this offense, the court will consider the extent of Dormroom’s market power and A. how Dormroom acquired its power. B. how Dormroom makes its products. C. Dormroom’s customers. D. Dormroom’s suppliers. Answer: A 56. Healthcare Device, Inc., has exclusive control over the market for its product. Healthcare Device’s market power is most likely A. “an unfair or deceptive act or practice.” B. a per se violation. C. not a violation. D. subject to further evaluation. Answer: D 57. To acquire monopoly power in its market, Global Positioning Systems, Inc., sets its prices substantially below the normal costs of production. Under antitrust law, this is A. a per se violation. B. a violation if its competitors set similar prices. C. a violation if it thereby acquires monopoly power. D. not a violation. Answer: C 58. Rally Speedboat Corporation refuses to sell its products to Super Weekends, Inc., a recreational water products dealership. This is A. an exclusive-dealing contract. B. a horizontal market division. C. attempted monopolization. D. a unilateral refusal to deal. Answer: D 59. Fresh Vegetables, Inc., a wholesaler, refuses to sell its produce to Good Mart Stores, Inc., a re-tailer. This is A. “an unfair or deceptive act or practice.” B. a per se violation. C. not a violation. D. subject to analysis under the rule of reason. Answer: D 60. An antitrust action is brought against Tri-State Transport Company, alleging the offense of attempted monopolization. To be guilty of this offense, Tri-State’s attempt must have A. a dangerous probability of success. B. a deadly guaranty of success. C. a distant possibility of success. D. a distinct improbability of success. Answer: A 61. Holiday Baskets, Inc., refuses to buy products from GMO Farms. This can violate antitrust laws if the refusal A. is likely to have an anticompetitive effect on a particular market. B. results in lower prices for consumers. C. provides no economic benefits for consumers. D. is likely to increase competition. Answer: A 62. To drive its competitors out of a certain geographic segment of its market, Superior Piping, Inc., sets the prices of its products below cost for the buyers in that area. This is A. predatory pricing. B. business judgment. C. predatory bidding. D. price discrimination. Answer: D 63. Precious Metals Corporation, a raw materials vendor, sells its commodities in certain quantities to Quarry Refining Company for a certain price but charges Rich Assets, Inc., a Quarry competitor, a higher price. This is most likely a violation of A. the Clayton Act. B. the Federal Trade Commission Act. C. the Sherman Act. D. no antitrust law. Answer: A 64. To prevent its competitors from obtaining sufficient supplies to make their products, Continental Steel, Inc., uses its market power to increase the prices of those supplies. This is A. price discrimination. B. business judgment. C. predatory bidding. D. predatory pricing. Answer: C 65. City Manufacturing Corporation conditions shipments of its products to Exurb Stores, Inc., on Exurb’s agreement not to buy products from Regional Works Company, City’s competitor. This is A. an exclusive-dealing contract. B. a tying arrangement. C. price discrimination. D. a unilateral refusal to deal. Answer: A 66. Farmed Crops Corporation offers to sell its wheat substitute to Gluten-Free, Inc., only if Gluten-Free agrees to buy all of the wheat substitute that it needs from Farmed Crops, even though there are other sellers from whom Gluten-Free could buy. This is A. an exclusive-dealing contract. B. a tying arrangement. C. price discrimination. D. business acumen. Answer: B 67. Silicon Corporation, which controls 40 percent of the computer-chip market in the United States, merges with Micro Processors, Inc., which controls 15 per-cent of the same market. This merger is a violation A. only if the result more clearly concentrates the market. B. only if the result makes it more difficult for potential competitors to enter the market. C. if the result more clearly concentrates the market and makes it more difficult for potential competitors to enter the market. D. under no circumstances. Answer: C 68. Global Services Corporation engages in trade practices that may violate antitrust law. The Federal Trade Commission has the power to act against unfair trade practices under A. the Clayton Act. B. the Federal Trade Commission Act. C. the Sherman Act. D. no law. Answer: B 69. Mango Corporation believes that Melon Corporation engages in anticompetitive behavior in an attempt to drive Mango and its other competitors out of the market. Antitrust laws can be enforced against Melon by A. Mango and its competitors only. B. Mango, its competitors, and the Federal Trade Commission only. C. Mango, its competitors, the Federal Trade Commission, and the U.S. Department of Justice. D. the Federal Trade Commission and U.S. Department of Justice only. Answer: C 70. Big U.S. Oil Company joins with a foreign cartel to control the price of oil. If the cartel has a substantial effect on U.S. commerce A. both Big U.S. Oil and the foreign cartel can be sued for violation of U.S. antitrust laws. B. neither Big U.S. Oil nor the foreign cartel can be sued for violation of U.S. antitrust laws. C. only Big U.S. Oil can be sued for violation of U.S. antitrust laws. D. only the foreign cartel can be sued for violation of U.S. antitrust laws Answer: A Essay 71. Java Bean Company imports coffee beans and sells them under two-year contracts to Mellow Roast, Inc., and other coffeemakers. The contracts require that during the two-year term a coffeemaker not buy beans from Java Bean’s competitors. The contracts do not limit the coffeemakers’ purchase of tea or other beverage ingredients from other suppliers, how-ever. In the second year of the contract, Mellow Roast protests that this arrangement violates antitrust law. Is Mellow Roast correct? If not, why not? If so, under which antitrust statute, or statutes, could these con-tracts be held illegal? Answer: Java Bean’s contracts are exclusive-dealing contracts. These contracts may be held illegal under the Sherman Act or the Clayton Act. Section 1 of the Sherman Act prohibits any agreement that is an unreasonable restraint of trade. Under this prohibition, a contract is subject to the rule of rea-son. A court would consider the purpose of the arrangement, the powers of the parties, and the effect of their actions in restraining trade. If the anticompetitive effects outweigh the competitive benefits, the contracts would be held un-lawful. Section 3 of the Clayton Act specifically prohibits exclusive-dealing contracts when their effect is to substantially lessen competition or tend to create a monopoly. If these contracts are held to be otherwise illegal under one of these statutes, that the contracts are limited to two-year terms and do not pro-scribe the coffeemakers’ purchase of tea and other beverage ingredients from other suppliers are not factors that would make them legal. 72. Bubbly Bottling Company is engaged in the soft-drink bottling and distribution industry in the states of New York and New Jersey. The firm currently has about 40 percent of the market for these products and related services. Carbonate Distribution Corporation competes with Bubbly in the same states. Carbonate has about 35 percent of the market. If Bubbly were to acquire the stock and assets of Carbonate, would Bubbly be in violation of any of the antitrust laws? If so, which one? Discuss fully. Answer: The Clayton Act prohibits the type of action by Bubbly suggested in this question—a merger that would increase market concentration. Other factors include the overall concentration of the relevant market, that market’s history of tending toward concentration, and whether the merger is apparently designed to establish market power or restrict competition. Based on the facts stated in the question, most of these factors are present. Thus, the major antitrust law being violated is the Clayton Act. The law prohibits any person or business organization from acquiring the stock or assets in an-other business where the result would be a significantly increased market share and the effect would most likely be to substantially lessen competition. The removal of a competitor who controls 35 per-cent of the market (Carbonate) combined with the 40 percent held by the acquiring company (Bubbly) definitely could drive out the remaining small competitors and be a barrier to future entrants into this market. Either the U.S. Department of Justice or the Federal Trade Commission could file for di-vestiture of the resulting firm if these parties were to merge. Chapter 20 Investor Protection and Corporate Governance True/False 1. The definition of security in the Securities Act of 1933 does not include instruments commonly known as securities. A. True B. False Answer: False 2. A registration statement must include a financial statement certified by an independent public accounting firm. A. True B. False Answer: True 3. A registration statement must state how a corporation plans to use the proceeds from the sale of the securities. A. True B. False Answer: True 4. Securities can be sold after the effective date of the registration statement without restrictions. A. True B. False Answer: True 5. If a security does not qualify for an exemption from registration, an issuer cannot offer it to the public. A. True B. False Answer: False 6. Generally, stock offerings that are made in a limited manner during any twelve-month period are exempt from the registration requirement. A. True B. False Answer: True 7. A free-writing prospectus may be used before the Securities and Exchange Commission completes its review of a related registration statement. A. True B. False Answer: True 8. A corporation whose security does not qualify for an exemption can avoid the cost and complexity associated with registration. A. True B. False Answer: False 9. Generally, stock offerings that involve a small dollar amount are exempt from the registration requirement. A. True B. False Answer: True 10. Securities of nonprofit, educational, and charitable organizations are not exempt from the registration requirement of the 1933 Securities Act. A. True B. False Answer: False 11. Private offerings of securities in unlimited amounts can be exempt from the registration requirement of the Securities Act of 1933. A. True B. False Answer: True 12. Most securities can be resold without registration. A. True B. False Answer: True 13. Accredited investors include banks, but not investment companies. A. True B. False Answer: False 14. Willful violations of the Securities Act of 1933 may be subject to civil liability, but not criminal prosecution. A. True B. False Answer: False 15. Against a charge of a violation of the Securities Act of 1933, only an issuer of stock can assert the due diligence defense. A. True B. False Answer: False 16. Private parties can sue violators of the Securities Act of 1933. A. True B. False Answer: True 17. Any corporation with less than $10 million in assets and fewer than five hundred shareholders must register their securities with the Securities and Exchange Commission. A. True B. False Answer: False 18. The Securities Exchange Act of 1934 is a “one-time” disclosure law. A. True B. False Answer: False 19. SEC Rule 10b-5 prohibits the commission of fraud in connection with the purchase or sale of any security. A. True B. False Answer: True 20. Section 10(b) of the Securities Exchange Act of 1934 covers only corporate officers and directors. A. True B. False Answer: False 21. SEC Rule 10b-5 applies to almost all cases involving the trading of securities. A. True B. False Answer: True 22. The key to liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 is whether undisclosed inside information is material. A. True B. False Answer: True 23. Buying or selling securities on the basis of non public information is illegal only if the profit from the transaction is unreasonable. A. True B. False Answer: False 24. Anyone who wrongfully obtains inside information and trades on it for his or her personal gain can be liable under SEC Rule 10b-5. A. True B. False Answer: False 25. A corporation can recapture any profits realized by an insider on any purchase or sale of the firm’s stock within any six-month period. A. True B. False Answer: True 26. “Forward-looking” financial forecasts that turn out to be wrong are not protected against liability for securities fraud. A. True B. False Answer: False 27. Violations of the Securities Exchange Act of 1934 may be subject to criminal prosecution, but not civil liability. A. True B. False Answer: False 28. Private parties may sue violators of Section 10(b) and Rule 10b-5. A. True B. False Answer: True 29. State securities laws apply mainly to interstate transactions. A. True B. False Answer: False 30. Exemptions from federal securities law are not exemptions from state laws. A. True B. False Answer: True 31. State corporation statues set up the legal framework for corporate. A. True B. False Answer: True 32. Corporate governance can be defined as the relationship between a corporation and its directors. A. True B. False Answer: False 33. Willful violations of the Sarbanes-Oxley Act of 2002 may be subject to harsh penalties. A. True B. False Answer: True 34. Under the Sarbanes-Oxley Act of 2002, chief executive officers no longer need to certify the accuracy of information in corporate financial statements. A. True B. False Answer: False 35. The antifraud provisions of the securities laws apply in the online environment. A. True B. False Answer: True Multiple Choice 36. Cotton Products Corporation is a public company whose shares are traded in the public securities markets. The Securities Act of 1933 requires Cotton to disclose financial and other significant information concerning its securities in order to A. increase corporate accountability by imposing responsibility on chief corporate executives. B. prevent insiders from trading among themselves. C. protect investors. D. provide a “safe harbor” for companies that make forward-looking statements. Answer: C 37. Frothy Beverage Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Frothy is required to A. contribute to the operations of national stock exchanges. B. disclose financial and other information about its securities. C. engage in market surveillance to deter undesirable practices. D. solicit proxies for voting. Answer: B 38. RingTone Corporation is a public company whose securities are traded among investors. Under the Securities Act of 1933, a security is A. almost any stake in the ownership or debt of a company. B. an investment that is guaranteed to make a profit. C. only such common forms of debt and equity as bonds and stocks. D. whatever a company represents to the public as a security. Answer: A 39. Readmore Bookstore Corporation files a registration statement with the Securities and Exchange Commission and provides a prospectus describing the securities to investors. These items are intended to provide sufficient information so that the financial risks involved can be evaluated by A. market professionals to explain to all investors. B. government regulators to disclose to the general public. C. sophisticated investors only. D. unsophisticated investors. Answer: D 40. Bild-It-Rite Corporation is a public company that is preparing to issue securities that do not qualify for an exemption from registration. This means that Bild-It-Rite must A. file a registration statement with the SEC. B. issue the securities through an online registration site. C. refrain from issuing the securities to unregistered investors. D. register the securities with a national stock exchange. Answer: A 41. Squeaky Clean Corporation wants to make an offering of securities to the public. This offering is not exempt from registration under the Securities Act of 1933. Before Squeaky sells its securities, it must provide investors with A. a forward-looking financial forecast. B. an investment contract. C. a prospectus. D. samples of its products. Answer: C 42. Celfone Corporation is required to file a registration statement with the Securities and Exchange Commission. This statement must contain A. a copy of prospectuses to be provided to investors. B. a description of securities being offered for sale. C. a record of pre-registration sales in securities. D. a sample of advertising to be used to attract investments in Celfone. Answer: B 43. Olive Grove Enterprises, Inc., completes its registration process and issues a free-writing prospectus. This tells prospective investors A. about investing freely. B. how to write their own prospectus. C. that they can “freely write their own ticket” to buy Olive’s securities. D. that they may obtain the prospectus at the SEC’s Web site. Answer: D 44. Sun & Ski Tours Corporation is poised to issue securities that, under the Securities Act of 1933, are “exempt.” This means that the securities can be sold A. only after registration. B. on the basis of non public information. C. within a six-month waiting period by certain insiders. D. without being registered. Answer: D 45. Hawaiian Shirts, Inc., wants to issue stock of $1 million in a single offering. The corporation must provide disclosure documents that generally are the same as those used in registered offerings to A. all investors and the Securities and Exchange Commission. B. the Securities and Exchange Commission. C. any accredited investors. D. any unaccredited investors. Answer: D Fact Pattern 20-1 (Questions 11–12 apply) Fresh Cream, Inc., wants to make an initial public offering of securities. Fresh believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933. 46. Refer to Fact Pattern 20-1. Fresh decides to sell its new securities via the Internet. This offering A. will avoid the payment of commissions to brokers or underwriters. B. is an investment scam. C. is a Ponzi scheme. D. constitutes insider trading. Answer: A 47. Refer to Fact Pattern 20-1. If Fresh is exempt from the federal registration requirement, Fresh is A. automatically exempt from any state registration requirement. B. not subject to any state securities laws. C. not necessarily exempt under a state registration requirement. D. automatically subject to all state registration requirements. Answer: C 48. To raise $20 million to expand operations, Premiere Movies Corporation makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. Premiere Movies plans to notify the SEC of sales. Under the Securities Act of 1933, this issue may qualify as an “exempt” transaction A. as is. B. if all of the investors are also given material information about the firm, C. if the offering is also made available to the general public. D. under no circumstances. Answer: B 49. Electric Cycles, Inc., wants to issue stock of $10 million in a single offering. Players must provide all investors with material in-formation about itself, its business, and its securities if A. all investors are accredited. B. under any circumstances. C. any investors are accredited. D. any investors are unaccredited. Answer: D 50. Adrian, the chief executive officer of Beds n’ Sofas, Inc., intentionally understates the amount of Beds n’ Sofas’s debts in information provided to investors as part of an issue of Beds n’ Sofas stock. Cassie buys the stock and suffers a loss. Adrian may be subject to A. government prosecution and Cassie’s suit. B. negative publicity but no criminal prosecution or civil suit. C. only government prosecution. D. only Cassie’s suit. Answer: A 51. Fresh Seasonal Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries, Inc., has assets of more than $50 mil-lion and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to A. Fresh Seasonal Fruit and Gourmand Pastries. B. Fresh Seasonal Fruit only. C. Gourmand Pastries only. D. neither Fresh Seasonal Fruit nor Gourmand Pastries. Answer: C 52. Global Resources Corporation, and its officers, directors, and share-holders, buy and sell securities. Section 10(b) of the Securities Ex-change Act of 1934 applies to the purchase or sale of a security A. only by an investment company. B. only involving short-swing profits. C. only involving a tipper and tippee. D. in almost any circumstances. Answer: D 53. Luke, a salesperson for Mountaintop Coffee, Inc., learns that Mountaintop will in-crease the dividend it pays to shareholders. Luke buys 10,000 shares of Mountaintop stock. When the dividend is announced to the public and the price of the stock increases, Luke sells his shares for a profit. Luke would not be liable for insider trading if the information about the dividend was A. material when he sold the stock. B. available to the public after he bought the stock. C. available to the public before he bought the stock. D. forward-looking when he bought the stock. Answer: C 54. To raise capital to form Plasticity Corporation with Quinn, Rona sells bonds and stock in other companies, and plans to register an initial public offering under the Securities Act of 1933. SEC Rule l0b-5 covers A. most forms of securities. B. only bonds. C. only securities registered under the Securities Act of 1933. D. only stock. Answer: A Fact Pattern 20-2 (Questions 20–21 apply) Sid, a director of Tech Software Company, learns that a Tech engineer has developed a new, exciting video game. Sid buys Tech stock and tells his friend Uri, who also buys Tech stock. When the new game is released three weeks later, Sid and Uri sell their stock for a big profit. 55. Refer to Fact Pattern 20-2. Regarding Sid’s profits on the purchase and sale of Tech stock, under Section 16(b) of the Securities Exchange Act of 1934 Tech may recapture A. all of Sid’s profits. B. half of Sid’s profits. C. 10 percent of Sid’s profits. D. none of Sid’s profits. Answer: A 56. Refer to Fact Pattern 20-2. Under SEC Rule l0b-5, Sid would not be li-able if he had waited to buy Tech stock until A. after Sid told Uri of the new game. B. after Uri bought Tech stock. C. after the public release of the game. D. just before the game was released. Answer: C 57. Brianna, a salesperson for Cosmetics Corporation, learns that Cosmetics will in-crease the dividend it pays to shareholders. Brianna buys 10,000 shares of Cosmetics stock. When the price increases, Brianna sells the shares for a profit. If Brianna is liable for insider trading, it is because she A. bought and sold shares of stock for a profit. B. did not file a registration statement with the Securities and Exchange Commission. C. traded on information that was not available to the public. D. bought and sold shares of stock in her employer. Answer: C Fact Pattern 20-3 (Questions 23–26 apply) Dhani, an accountant for Eureka, Inc., learns of undisclosed company plan-s to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He reveals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu. Both Geoff and Hu buy 100 shares. They know that Fay got her information from Dhani. When Eureka publicly announces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit. 58. Refer to Fact Pattern 20-3. Under the Securities Ex-change Act of 1934, Fay is most likely A. liable for insider trading. B. not liable because Fay did not prevent others from profiting. C. not liable because Fay did not solicit information from Dhani. D. not liable because Fay does not work for Eureka. Answer: A 59. Refer to Fact Pattern 20-3. If Dhani is liable under the Securities Ex-change Act of 1934, it will be because the information on which he based his purchase of Eureka stock was A. a forward-looking forecast. B. not material. C. not yet public. D. not yet true. Answer: C 60. Refer to Fact Pattern 20-3. Under the Securities Ex-change Act of 1934, Hu is most likely A. liable for insider trading. B. not liable because Hu is only a tippee, not a tipper. C. not liable because Hu is too far down the chain of disclosure. D. not liable because Hu traded on the basis of a true fact. Answer: A 61. Refer to Fact Pattern 20-3. Under the Securities Ex-change Act of 1934, Geoff is most likely A. liable for insider trading. B. not liable because Geoff did not prevent others from profiting. C. not liable because Geoff did not solicit information from Dhani. D. not liable because Geoff does not work for Eureka. Answer: A 62. Riley, an engineer for Shur-2-Gro Seed Corporation, learns that Shur-2-Gro has developed a corn hybrid to triple the output of any farm. Riley buys 20,000 shares of Shur-2-Gro stock. He tells Tess, who buys 15,000 shares. After the new hybrid is announced publicly, the price of Shur-2-Gro stock in-creases. Riley and Tess sell their shares for a profit. Under the Securities Exchange Act of 1934, liability may be imposed on A. none of these parties. B. Riley and Tess only. C. Riley only. D. Riley, Shur-2-Gro, and Tess. Answer: B 63. Dee, an accountant, does not work for Emergent Company, but wrong-fully obtains inside information concerning Emergent. Based on the information, Dee buys and sells Emergent stock for personal gain. The Securities and Exchange Commission prose-cutes Dee, arguing that she is liable because she stole in-formation right-fully belonging to another. This argument is A. the blue-sky theory. B. the misappropriation theory. C. the red-herring theory. D. the tipper/tippee theory. Answer: B 64. Della, an officer for Energy Petrol Corporation (EPC), buys 100 shares of EPC stock. One week later, EPC announces that it will merge with a competitor, Fuel Oil Company, and the price of EPC stock increases. One month later, Della sells her shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Della would not be liable if, after buying the stock, she had waited A. less than fourteen days to sell it. B. more than six months to sell it. C. ninety days to sell it. D. two months to sell it. Answer: B 65. North American Properties, Inc., and its officers, directors, and share-holders, buy and sell securities. Section 16(b) of the Securities Exchange Act of 1934 covers A. all purchases and sales of securities. B. only purchases and sales of securities involving misappropriation. C. only purchases and sales of securities involving short-swing profits. D. only purchases and sales of securities involving tippers and tippees. Answer: C 66. Hi-Five Aero Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 14(a) of the act regulates A. the declaration of dividends by Hi-Five’s board of directors. B. the later re-registration of Hi-Five’s securities. C. the short-swing activities of Hi-Five’s insiders. D. the solicitation of proxies from Hi-Five’s shareholders. Answer: D 67. Solder Welding Corporation is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, Solder Welding is subject to the direct corporate governance requirements of A. any other public company with which Solder Welding exchanges shares. B. any state in which Solder Welding does business. C. the federal government. D. the state in which Solder Welding incorporated. Answer: C 68. Heavy Hauling, Inc., is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that Heavy Hauling’s financial results are accurate and timely, the firm’s senior officers must set up and maintain A. internal “disclosure controls and procedures.” B. external “release and reveal timetables.” C. personal “peruse and review liability policies.” D. public “information and discussion forums.” Answer: A 69. Lyman is the chief financial officer of Moneysworth Corporation, which is re-quired to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Lyman must personally A. certify that the statements are accurate. B. delegate the responsibility for preparing the statements. C. deliver the statements to the appropriate SEC officer. D. prepare the statements. Answer: A 70. Viveca promises high returns to Waverly and other investors, who then agree to trust their funds to Viveca. She uses these funds to pay previous investors. This is A. a Ponzi scheme. B. a stock option. C. a forward-looking forecast. D. a short-swing profit. Answer: A Essay 71. In May, National Biotech Corporation generally advertises that it will make a $4 million offering of stock in June. National makes the offering as advertised and, ten days after the first sale, notifies the Securities and Exchange Commission (SEC). All buyers of the stock are given mate-rial information about the company, its business, and the stock. Before the end of the year, the offering is completely sold out. The buyers include forty unaccredited investors and fifty accredited investors. National does not register the offering. The SEC files a suit against National, seeking civil sanctions on the ground that this offering was not exempt from registration. National argues that the applicable exemption is Rule 505 of Regulation D of the Securities Act of 1933 and that because of this exemption, any resale of the stock is also exempt. Who is correct? Answer: The SEC is correct on both points. To be exempt under Rule 505 of Regulation D of the Securities Act of 1933, a private, noninvestment company offering for less than $5 million in any twelve-month period may be sold to any number of accredited investors but no more than thirty-five unaccredited investors, an offering must not be generally advertised or solicited, and the SEC must be notified of the sales. If a sale involves any unaccredited investor, all investors must be given material information about the offering company before the sale. Precautions must be taken against non exempt, unregistered resales. In this problem, National’s offering complies with all of the requirements except the following: the offering is generally advertised, and the stock is sold to forty unaccredited investors. This is enough to remove National’s offering from the exemption. Even if the offering were exempt from registration, however, resales might not be exempt. Securities initially exempt under Rule 505 are restricted securities. This means that they must be registered before resale unless they qualify under a Rule 144 or Rule 144A exemption. 72. Medico Corporation is a public company whose shares are traded in public securities markets. Medico’s officers want to set up and maintain a system of “good corporate governance.” What is “corporate governance”? What is its practical significance? What, at a minimum, should a “good” system of corporate governance include? Answer: Corporate governance is the relationship between a corporation and its shareholders: the system by which business corporations are directed and controlled. Corporate governance is the essential purpose of corporation law, which sets out the structure of a corporation. A “good” system of corporate governance involves, at a minimum, (1) the audited reporting of financial progress at the firm, so that its managers can be evaluated and (2) legal protection for shareholders, so that parties who violate the law to take advantage of shareholders can be punished for their misconduct and their victims can recover damages. Practically, good corporate governance in the form of accountability to investors provides the opportunity to enhance corporate wealth, because firms with expanded shareholder rights—a hallmark of good corporate governance—have been shown to have increased profits, sales growth, company value, and other economic advantages. Test Bank for Essentials of the Legal Environment Today Roger LeRoy Miller 9781305262676
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