Facts of the Case:
Aquaman, the president of a research company, delays the announcement of a great new product that the research company has invented so he can buy up all of the company's stocks that he can get his hands on and sure enough after the announcement, shares soar from $10 to $50 a share.
Issue:
What law if any did Aquaman violate and what remedy should the shareholders seek?
Rule of Law:
Securities and Exchange Act of 1934 17 C.F.R. § 240.10b-5 Employment of manipulative and deceptive devices. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,(a) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
SEC v. Antar, 15 F. Supp. 2d 477 (D.N.J. 1998) dealt with whether corporate insiders traded in the securities of his corporation on the basis of material and nonpublic information. The defendants participated in multifaceted fraud schemes for the purpose of artificially inflating the price of stock, selling their substantial stock holdings to an unwitting public, and profiting in excess of $20 million. The court stated that shareholders of a corporation and those insiders who obtain confidential information by reason of their position with the corporation have a relationship of trust and confidence and that trading on such information qualifies as a "deceptive device" under § 10(b). The Securities Act was designed to protect investors against fraud by providing investors with full disclosure of material information concerning public offerings of securities in commerce. The court did rule in favor of the plaintiff's in this matter.
SEC v. Ferrero, 1992 U.S. Dist. LEXIS 13575 (D. Ind. 1992) dealt with unlawful insider trading that occurred after a corporate director tipped inside information about the negotiation of an acquisition. The court stated that a violation of § 10(b), Rule 10b-5, and/or § 17(a) can be found if trading in securities is based on nonpublic, material information without first disclosing the nonpublic, material information. "Information is material if there is a 'substantial likelihood' that the information would be significant to a 'reasonable investor' in making his or her investment decisions." One of the remedies was to disgorge the profits derived from their activities and additionally a prejudgment interest on the amount to be surrendered was ordered. The court found that paying the profits and a prejudgment interest on the amount disgorged was necessary in order to prevent any unjust enrichment as a result of unlawful acts by the defendant's.
In re Cardinal Health, Inc. Sec. Litigs., 426 F. Supp. 2d 688, 748 (D. Ohio 2006) dealt with insider trading an elaborate accounting scheme designed to artificially inflate the corporate earnings and conceal debt. The court stated “insider trading at a suspicious time or in an unusual amount comprises one of the 'fixed constellations of facts that courts have found probative of securities fraud." An inference of fraudulent intent to mislead the market for personal gain is noted when insider selling is done at an opportunistic time. Courts have classified stock sales as unusual or suspicious based on a number of factors, including "the amount of profit from sales," "the portion of stock holdings sold," "the change in volume of insider sales," "and the number of insiders selling."
Analysis:
As a fiduciary and an insider of "Underwater Leagues, Inc," Aquaman can obtain confidential information by reason of his position with the corporation and he has a relationship of trust and confidence, so any trading on such information qualifies as a "deceptive device" under § 10(b).SEC v. Antar 10(b) and Rule 10b-5 were violated when Aquaman traded in the securities of his corporation on the basis of material, nonpublic information. The information Aquaman used was material because it was significant material that an investor would look at when making an investment. See SEC v. Ferrero. The stock purchase and sales were unusual in scope and timing and it was Aquaman's fraudulent intent to mislead the market for his personal gain. Aquaman's stock trades satisfy what the courts look for when determining if the trades are unusual or suspicious, the amount of profit from sales, the portion of stock holdings sold, the change in volume of insider sales and the number of insiders selling. See Cardinal Health, Inc. Sec. Litigs.
Conclusion:
Aquaman violated that Securities Exchange Act of 1934 by using insider information to trade corporate securities for his own personal gain.