Author Question: The Dodd-Frank Wall Street Reform and Consumer Protection Act gave regulators expanded power to ... (Read 139 times)

melina_rosy · **on:** Jun 24, 2018

The Dodd-Frank Wall Street Reform and Consumer Protection Act gave regulators expanded power to intervene in securities markets in case of a major meltdown.
a. True
b. False
Indicate whether the statement is true or false

Question 2

SEC Rule 10b-5. Louis Ferraro was the chairman and president of Anacomp, Inc In June 1988, Ferraro told his good friend Michael Maio that Anacomp was negotiating a tender offer for stock in Xidex Corp Maio passed on the information to Patricia Ladavac, a friend of both Ferraro and Maio. Maio and Ladavac immediately purchased shares in Xidex stock. On the day that the tender offer was announcedan announcement that caused the price of Xidex shares to increaseMaio and Ladavac sold their Xidex stock and made substantial profits (Maio made 211,000 from the transactions, and Ladavac gained 78,750). The Securities and Exchange Commission (SEC) brought an action against the three individuals, alleging that they had violated, among other laws, SEC Rule 10b-5. Maio and Ladavac claimed that they had done nothing illegal. They argued that they had no fiduciary duty either to Anacomp or to Xidex, and therefore they had no duty to disclose or abstain from trading in the stock of those corporations. Had Maio and Ladavac violated SEC Rule 10b-5? Discuss fully.

jaygar71 · **Reply #1 on:** Jun 24, 2018

Answer to Question 1

TRUE

Answer to Question 2

SEC Rule 10b-5
The federal district court in which the case was brought found that Maio and Ladavac violated SEC Rule 10b-5 (and Section 10(b) of the Securities Exchange Act of 1934) when they pur-chased stock in Xidex on the basis of the material nonpublic information misappropriated from Anacomp by Ferrero. On appeal, the U.S. Court of Appeals for the Seventh Circuit affirmed. The appellate court explained that nder the misappropriation theory a person violates Sec-tion 10(b) and Rule 10b-5 by misappropriating and trading upon material information entrusted to him by virtue of a fiduciary relationship. . . . Ferrero breached his fiduciary duty to Anacomp by his misappropriation and disclosure of material non-public information concerning Anacomp's tender offer to Maio. Maio and Ladavac knew this and traded in Xidex stock on the basis of the information. Thus, they violated SEC Rule 10b-5.