CHAPTER-1 INSIDER TRADING What is insider trading? Insider trading: Insider trading is nothing but trading in securities listed in various stock markets by individuals or financial institutions with potential access of non-public information about companies related to corporate. By accessing the non-public information which is price sensitive information for their own benefit to get advantage is illegal in most of the countries in the world to protect the interest of investors. Ex: A CFO of company sells his shares in open market because of accessing non-public information i.e., accessing price sensitive is insider trading. Now let us know what are securities and price sensitive information. Who is an insider? Insider is a person, who has access to price sensitive information. Let us know the types of insiders: Types of Insiders Primary Insiders Secondary Insiders Classic Constructive Tipee Accidental
Transcript
CHAPTER-1
INSIDER TRADING
What is insider trading?
Insider trading:
Insider trading is nothing but trading in securities listed in various stock markets by individuals or financial institutions with potential access of non-public information about companies related to corporate. By accessing the non-public information which is price sensitive information for their own benefit to get advantage is illegal in most of the countries in the world to protect the interest of investors.
Ex: A CFO of company sells his shares in open market because of accessing non-public information i.e., accessing price sensitive is insider trading.
Now let us know what are securities and price sensitive information.
Who is an insider?
Insider is a person, who has access to price sensitive information. Let us know the types of insiders:
2. Constructive insider:Constructive insiders are persons who are not employed by the organization but receive confidential information from a corporation while providing services to the organization.Ex: professional advisors, investment bankers, lawyers.
Secondary insiders: 1) Accidental insiders:
Not liable for insider trading unless their behavior proves.2) Tipee:
While talking about Tippee we also come across another word i.e. Tipper
TIPPEE TIPPER
Tipeee assumes a fiduciary duty to the share holders of a corporation not to trade in securities. If the tippee knows or should have known that the tipper has breached fiduciary duty.
What is the meaning of securities?
Securities are the negotiable instruments representing financial value and securities like bonds, dentures, shares etc.
What is price sensitive information?
'Price Sensitive Information' means any information, which relates directly or indirectly to a company and which if published, is likely to materially affect the price of securities of company.That is what insider trading, securities and price sensitive information.
Price sensitive information defined by SEBI:
Periodical financial results of a company .Intended declaration of dividends (both interim and final)
Issue of securities or buy back of securities any major expansion plans or execution of new projects.
Amalgamation, mergers or takeovers and disposal of whole or substantial part of the business.
Any significant change in the policies, plans or operations of the Company.
Price sensitive information in US:
Information of such a nature that someone who has inside knowledge of it could be expected to trade successfully in the securities in question and make a profit or avoid loses
How insider trading defined by India and USA regulators?
Insider trading is defined by two stock market regulators are as follows:
SEBI on insider trading:
According to Sec.2(e),2(e)(i), 2(e)(ii) of SEBI act 1992.
“Insider” means any person who,(i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or(ii) has received or has had access to such unpublished price sensitive information.”According to the view of SEBI the person related to a company in present or in past got the benefit by accessing unpublished price sensitive information in respect of trading in stock markets.
SEC on insider trading:
SEC defines both legal and illegal insider trading. Let us know what is trading according to SEC.
Insider Trading
"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct.
LEGAL INSIDER TRADING:
The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. And a corporate insider means not only companies officers and directors and also the beneficial persons. When corporate insiders trade in their own securities, they must report their trades to the SEC.
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
Examples:
Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments;
Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information;
Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
Government employees who learned of such information because of their employment by the government; and
Other persons who misappropriated, and took advantage of, confidential information from their employers.
The above are some of examples by SEC taken from various cases.
Most of the countries banned insider trading to make investors feel secure to carry their trades.
Let us know prohibition of insider trading in two countries those are:
1) INDIA2) USA
Before that let us know when insider trading mainly identified:
U.S. insider trading prohibitions are based on English and American common law prohibitions against fraud. In 1909, well before the Securities Exchange Act was passed, the United States Supreme Court ruled that a corporate director who bought that company’s stock when he knew it was about to jump up in price committed fraud by buying while not disclosing his inside information.
And USA is the first country which enacted regulations on insider trading. And also most of the developed countries recognized insider trading few decades back.
1) http://www.sec.gov/answers/insider.htm , visited on 19/12/2009,20:10pm2) http://www.sec.gov/answers/form345.htm ,visited on 19/12/2009,20:15pm
Now let us know the prohibition on insider trading in INDIA and USA.
Prohibition on insider trading in INDIA by SEBI:
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,1992, does not directly define the term "insider trading". But it defines the terms-
"insider" or who is an "insider; who is a "connected person"; What are "price sensitive information"
Obviously an insider, who has deep insight into the affairs of the corporate body and holding knowledge about "price sensitive information" relating to the performance of the corporate body that could have a decided impact on the movement of the price of its equity, is at a vantage position with regards to a prospective trading in the shares of the company to the detriment of the common investors. Taking this fact into account the Regulation prescribes several "do-s" and "don'ts" with reference to these "insiders". The effect of the regulatory measure is to prevent the insider trading in the shares of the company to earn an unjustified benefit for him and to the disadvantage of the bonafide common shareholders.
According to the Regulations "insider" means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information;
The above definition in turn introduces a new term "connected person". The Regulation defines that a "connected person" means any person who-1. (i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956(1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or
2. (ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company;
.
SEBI INSIDER DEFINATION:
CONNECTED PERSON DEEMED TO BE CONNECTED PERSON1) Director 1) Companies under the same
management
2) officer 2)specified officers
3) professional related to company 3)Director/Employee of public financial institution.
4) Official employee of an SRO
5) Banker to the company
6) Relatives of the above and also relatives of connected persons
7) Entities where connected persons/deemed to be connected persons > 10% stake in company.
SEBI PROHIBITION ON INSIDER TRADING:
SEBI has imposed prohibition on insider trading according to sec.12A which says prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities control.
Sec.12A says about persons who can be directly and indirectly involve to insider trading.
Sec.12A (d) says engage in insider trading.
Before prohibition on insider trading:
The law of insider trading is one way society allocates the property rights to information produced by a firm. In the United States, early common law permitted insiders to trade in a firm’s stock without disclosure of inside information. Over the last three decades, however, a complex federal prohibition of insider trading emerged as a central feature of modern US securities regulation. Other countries have gradually followed the US trend, although enforcement levels continue to vary substantially from country to country. Prohibiting insider trading is usually justified on fairness or equity grounds. Predictably, these arguments have had little traction in the law and economics community. At the same time, however, that community has not coalesced around a single view of the prohibition; instead, competing economic arguments produced an extensive debate that is still active. Those law and economics scholars
who favor deregulation of insider trading typically argue that efficiency is the sole basis for analyzing a legal regime, and that the prohibition lacks any rational economic basis. Those who favor regulating insider trading typically respond either by rejecting the claim that efficiency is the controlling criterion or by attempting to show that the prohibition is justifiable on efficiency grounds. Most observers of the literature likely would conclude that neither side has carried the field, but that the argument in favor of regulation probably is winning at the moment.
Now let us discuss the prohibition on insider trading in USA by SEC:
Because the vast bulk of law and economics scholarship on insider trading refers to United States law, a brief overview of the current state of that law seems appropriate. Insider trading, generally speaking, is trading in securities while in possession of material nonpublic information. Under current United States law, three basic theories under which trading on inside information becomes unlawful. Disclose or abstain rule and the misappropriation theory were created by the courts under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 there under. Pursuant to its rule-making authority under Exchange Act Section 14(e), the Securities and Exchange Commission (SEC) adopted Rule 14e-3 to proscribe insider trading involving information relating to tender offers. (Insider trading may also violate other statutes, such as the mail and wire fraud laws, which are beyond the scope of this chapter.)
CHAPTER-3
IMPOSING LIABILITY
Now let us know the liability for insider trading:
Liability for insider trading violations cannot be avoided by passing on the information in an "I scratch your back, you scratch mine", as long as the person receiving the information knew or should have known that the information was company property.
Penalty by SEBI:
Sec.11 describes the powers of SEBI board
a) Regulating the business in stock exchanges and any other securities markets:
Prohibiting fraudulent and unfair trade practices relating to securities markets by sec.11(e)
SEBI prohibiting insider trading in securities according to 11(g).
Sec.11A gives Board to regulate or prohibit issue of offer document or advertisement soliciting for issue of securities.
Sec.11B gives to powers to issue to directions
Sec.11C gives powers to investigate. In order to protect investors.
Sec.11D ceases and desist proceedings.
SEBI’s regulations apply to listed companies, SEBI-regulated entities such as asset management companies, self regulatory organizations and stock exchanges. Current laws specify that if SEBI finds a person or entity guilty of insider trading, it can impose a fine of Rs25 crore or three times the gains made from the insider trading. It can also initiate criminal action against the person or entity, resulting in imprisonment up to 10 years. The circular says that these penalties, including imprisonment, will stay.
The above words reflect the amendment to the 1992 insider trading and amendment was passed in 2008.
There regulator investigate and impose civil penalities:
In USA
Section 21A(e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78u-l(e)] authorizes the Securities and Exchange Commission ("Commission") to award a bounty to a person who provides information leading to the recovery of a civil penalty from an insider trader, from a person who "tipped" information to an insider trader, or from a person who directly or indirectly controlled an insider trader. This pamphlet is designed to provide interested persons with information on bounties and the Commission's rules for making a bounty application. Section 21A(e) of the Exchange Act and the Commission's bounty rules are set out at the end of this pamphlet.
How Much May be Paid as a Bounty?
Insider trading may result in enforcement action by the Commission or in criminal prosecution by the Department of Justice. The Exchange Act permits the Commission to bring suit against insider traders to seek injunctions, which are court orders that prohibit violations of the law under threat of fines and imprisonment. The Commission may also seek other relief against insider traders, including recovery of any illegal gains (or losses avoided) and payment of a civil penalty. The amount of a civil penalty can be up to three times the profit gained (or loss avoided) as a result of insider trading.
The Commission is permitted to make bounty awards from the civil penalties that are actually recovered from violators. With minor exceptions, any person who provides information leading to the imposition of a civil penalty may be paid a bounty. However the total amount of bounties that may be paid from a civil penalty may not exceed ten percent of that penalty.
How Will the Commission Make Bounty Determinations?
All Commission determinations regarding bounties including whether to make a payment, to whom a payment shall be made, and the amount of a payment (if any), are in the sole discretion of the Commission. Any such determination is final and not subject to judicial review. Nothing in the Commission's rules or in this pamphlet is intended to limit the Commission's discretion with respect to bounties.
In making determinations regarding bounty applications the Commission will be guided by the purposes of the bounty provisions. These purposes include the intent of the United States Congress to encourage persons with information about possible insider trading to come forward. The Commission will also consider other factors that it deems relevant. Examples of other factors that may be relevant are: the importance of the information provided by an applicant; whether the information was provided voluntarily; the existence of other applications in the matter; and the amount of the penalty from which bounties may be paid.
Normally, the Commission will not make any determination on a bounty application until a payment of a penalty is both ordered by a court and recovered. A person who files an application
meeting the requirements of the Commission's rules will be notified of the Commission's determination on the application.
How and When Do You Apply for a Bounty?
An application must be clearly marked as an "Application for Award of a Bounty," and must contain the information required by the Commission's rules. The application must give a detailed statement of the information that the applicant has about the suspected insider trading.
Any person who desires to provide information to the Commission that may result in the payment of a bounty may do so by any means desired. The Commission encourages persons having information regarding insider trading to provide that information in writing, either at the time they initially provide the information to the Commission or as soon as possible afterwards. Providing information in writing reduces the possibility of error, helps assure that appropriate action will be taken, and minimizes subsequent burdens and the possibility of factual disputes. In any event, a written application for a bounty must be filed within 180 days after the day on which the court orders payment of the civil penalty.
CHAPTER-4
CORPORATE GOVERNANCE
Before getting to know malady in corporate. Let us know about Corporate Governance
1. Schedule regular meetings of the non-executive board members from which you and theother executives are excluded. Non-executives are there to exercise “constructive dissatisfaction” with the management team. They need to discuss collectively and frankly their views about the performance of the executives, the strategic direction of the company and worries about areas where they feel inadequately briefed.2. Explain fully how discretion has been exercised in compiling the earnings and profitFigures. These are not as cut and dried as many would imagine. Assets such as brands are intangible and with financial practices such as leasing common, a lot of subtle judgments must be made about what goes on or off the balance sheet. Don’t hide these, but use disclosure to win trust.3. Initiate a risk-appetite review among non-executives. At the root of most company failures are ill-judged management decisions on risk. Non-executives need not be risk experts. But it is paramount that they understand what the company’s appetite for risk is—and accept, or reject, any radical shifts.4. Check that non-executive directors are independent. Weed out members of the controlling family or former employees who still have links to people in the company. Also raise awareness of “soft” conflicts. Are there payments or privileges such as consultancy contracts, payments tofavourite charities or sponsorship of arts events that impair non-executives’ ability to rock the boat?5. Audit non-executives’ performance and that of the board. The attendance record of nonexecutives needs to be discussed and an appraisal made of the range of specialist skills. The board should discuss annually how well it has performed.6. Broaden and deepen disclosure on corporate websites and in annual reports. Websites should have a corporate governance section containing information such as procedures for getting a motion into a proxy ballot. The level of detail should ideally include the attendance record of non-executives at board meetings. If you have global aspirations, an English-language version must be available.7. Lead by example, reining in a company culture that excuses cheating. Don’t indulge in sharp practice yourself—others will take this as a green light for them to follow suit. If the company culture has been compromised, or if you are in an industry where loose practices on booking revenues and expenditure are sometimes tolerated, take a few high-profile decisions that signal change.8. Find a place for the grey and cautious employee alongside the youthful and visionary one.Hiring thrusting MBAs will skew the culture towards an aggressive, individualist outlook. Balance this with some wiser, if duller heads—people who have seen booms and busts before, value probity and are not in so much of a hurry.
9. Make compensation committees independent. Corporate bosses should be prevented from selling shares in their firms while they head them. Share options should be expensed in established companies—cash-starved start-ups may need to be more flexible.10. Don’t avoid risk. No doubt corporate governance would be a lot simpler if companies were totally risk averse. But in the words of Helmut Maucher, honorary chairman of Nestlé, “You have to accept risks. Those who avoid them are taking the biggest risk of all.”
The above things should be taken care of CEO.
CHAPTER-5
EXAMPLES OF INSIDER TRADING AND DECSIONS BY REGULATORS AND SIGNIFICANCE OF MALADY IN CORPORATES:
DECISION ON INSIDER TRADING BY SEBI:
The Case of insider trading (HLL-BBLIL Merger)
CASE DETAILS:
Case Code : FINC014
Case Length : 8 Pages
Period : 1995 - 1998
Pub. Date : 2002
Teaching Note: Available
Organization : HLL, BBLIL, SEBI, UTI
Industry : Diversified
Countries : India
The case study analyses the issues related to the insider trading charges against HLL with regard to its merger with Brooke Bond Lipton India Ltd. The case focuses on the legal controversy surrounding these charges. The controversy involved HLL's purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of the two companies (HLL and BBLIL). SEBI, suspecting insider trading, conducted enquiries, and after about 15 months, in August 1997, SEBI issued a show cause notice to the Chairman, all Executive Directors, the Company Secretary and the then Chairman of HLL. Later in March 1998 SEBI passed an order charging HLL with insider trading.
SEBI directed HLL to pay UTI compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL. Later HLL filed an appeal with the appellate authority, which ruled in its favor. Through a description of the legal causes surrounding the SEBI's charges against HLL, this case, is designed to enable students to understand and appreciate the role of the legal framework under organizations function.
It also stimulates the students to understand the legal implications of decisions made by an organization and provides an insight into how a typical legal case proceeds. At the end of the
case-discussion, students should have grasped the following issues: A general understanding of the legal framework covering the securities market in India. An understanding of the role and importance of a regulating agency in checking financial crimes such as insider trading. An understanding of the responsibilities of organizations. And also SEBI announced criminal prosecution of five HLL directors for insider trading and asked it to pay Rs. 3.04 crores to UTI as compensation.
And let us know a recent case, where SEBI issued to notice:
This notice include under which sections of SEBI Act has
“Reliance Industries has always abided by all rules and regulations of SEBI and hence, has neither violated any provisions of insider trading nor has acted in any manner so as to attract provisions under Section 11(i), 11 (B) and 11(4) of SEBI Act 1992."
Under the above sections RIL (reliance industries limited) received notice from SEBI.
Now let us an example from USA:
Texas Gulf Sulphur Company, a Texas Corporation, and Charlesf. Fogarty, Petitioners, v. the Honorable Willis W. Ritter, Chief Judge of the Unitedstates District Court for the District of Utah,and George Gordon Reynolds, Respondents
United States Court of Appeals Tenth Circuit. - 371 F.2d 145
Jan. 3, 1967
This original action was filed pursuant to our Rule 28, seeking to prohibit respondent from proceeding to try an action pending in the District of Utah, and to compel him to transfer the case to the Southern District of New York under 28 U.S.C. Section 1404(a); and, to either dismiss the action as to a named defendant, Charles F. Fogarty and to quash the service of summons as to him or to transfer the case, as to him, to the above named district under either of sections 1406(a) or 1404(a) of 28 U.S.C.
2) A brief summary of the uncontroverted facts of the pending action is necessary for a proper consideration of questions presented here.
3) George Gordon Reynolds filed the action under the provisions of section 27 of the Securities Exchange Act (15 U.S.C. 78aa) alleging violations of 15 U.S.C. 78i(a) and (e) and 78j and Rule
10b-5 of the Securities Exchange Act. He also alleges residence in Utah; that he is a former stockholder of defendant company, Texas Gulf Sulphur Company; that defendant company is a Texas Corporation qualified to do business in Utah, with its principal business office at Mohab, Utah; that defendant Fogarty is a resident of Rye, New York, and a director and executive vice president of defendant company; that he sold his stock in the company through a local Utah brokerage house on April 16, 1964, after reading a press release dated April 12, 1964, which was released to the news media by the defendants in New York and appeared in an issue of the Wall Street Journal received by him in Salt Lake City; that statements contained in the press release misrepresented relevant facts concerning mineral prospecting activities of the company near Timmons, Ontario, Canada; and that such misrepresentations were violations of the S.E.C. Act.
4) Writs of mandamus and prohibition are drastic and extraordinary remedies and should be issued sparingly by appellate courts. When used against a trial court, there must be a clear showing of abuse of discretion by the trial court and the right to such relief must appear clear and undisputable.1 It may fairly be stated that this court has 'been extremely reluctant to find an abuse of discretion by the district court' and we are not convinced this is an appropriate case for the granting of such extraordinary relief.
5)The transfer of pending civil cases from one district to another is governed by 28 U.S.C. 1404(a) which provides '(a) for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.' The burden of establishing that the suit should be transferred is upon the movant and unless the evidence and the circumstances of the case are strongly in favor of the transfer the plaintiff's choice of forum should not be disturbed. The transfer lies within the sound judicial discretion of the trial judge and his determination should not be rejected unless the appellate court can say there has been a clear abuse of discretion. The circumstances of each particular case must be examined by the trial judge in the exercise of his discretionary power under section 1404(a) to order a transfer. Among the factors he should consider is the plaintiff's choice of forum; the accessibility of witnesses and other sources of proof, including the availability of compulsory process to insure attendance of witnesses; the cost of making the necessary proof; questions as to the enforceability of a judgment if one is obtained; relative advantages and obstacles to a fair trial; difficulties that may arise from congested dockets; the possibility of the existence of questions arising in the area of conflict of laws; the advantage of having a local court determine questions of local law; and, all other considerations of a practical nature that make a trial easy, expeditious and economical.
6) Petitioners point out that nearly 100 cases arising from the same factual background from which Reynolds' case arose are now pending in the state and federal courts in New York City; that more than half of that number are in the federal district court in the Southern District of New York, some having been originally filed there and others having been transferred there from
other federal courts; all of these cases in that court have been assigned to a single judge for discovery and trial; the principal office of Texas Gulf is in New York City and its officers reside there; the files and records of the company are kept there; and Texas Gulf and the anticipated witnesses in its behalf would suffer great inconvenience and unnecessary expense if the action is tried in Utah.
7)On the other side of the scale the facts show that Reynolds, a man seventy years of age, is a resident of Utah and selected that forum; Texas Gulf has substantial operations in Utah, including a plant where the Canadian minerals taken from core drills were assayed; the expert witnesses for Reynolds and other witnesses to be used by him to prove many of the circumstances surrounding his sale of stock reside in Utah; the receipt in interstate commerce of the press release and the publication of it relied upon by Reynolds were in Utah; New York City, as a place of trial, would be inconvenient and expensive to Reynolds and his witnesses; and, from the record it is apparent to us that this case is not a complicated case likely to result in a prolonged trial involving new or novel legal theories or requiring any unusual or extensive discovery procedures.
8) Some discussion is appropriate here concerning the sufficiency of the affidavit of William D. Conwell filed in the trial court in support of the motion to transfer. In view of the heavy burden imposed upon the movant, the factual content of a supporting affidavit is very important. In Chicago, Rock Island & Pacific Ry. Co. v. Hugh Breeding, Inc., 10 Cir., 232 F.2d 584, this court held such an affidavit insufficient because it contained only conclusions about the inconvenience to witnesses and did not fully set out the testimony of the proposed witnesses so as to enable the trial judge to pass on the materiality of such proposed testimony. A careful reading of the affidavit filed in this case reveals the same defect with respect to the testimony of proposed witnesses who, it is alleged, would have to be brought to Utah for the trial. The same is true as to documents referred to in the affidavit. It also refers to the numerous pending actions in New York to support the transfer and contains only the bare conclusion that such actions are similar to this case. We believe before the trial judge should be required to give credence to the affidavit's allegation of similarity of cases the facts alleged and relied upon and the legal theories espoused in the so-called similar cases should be before him. The affidavit also makes much of the importance of discovery, with all of the cases in one forum. Likewise, we are not impressed with this portion of the affidavit. It does not reveal the nature or extent of the present discovery procedure in New York or any benefit that might flow from it to Reynolds. As we view the lawsuit there will be little discovery necessary on the part of the plaintiff, as well as the defendants.
9) We are convinced the trial judge carefully weighed all the proper factors in ruling upon the motion and did not abuse his judicial discretion in denying the transfer. The record shows he gave consideration to the convenience of both the parties and the witnesses; the resulting
consequences if the plaintiff was deprived of his choice of forum and compelled to travel nearly across the continent to pursue his litigation; and, properly balanced those considerations against all of the other relevant factors favorable to the defendants' desire to have the litigation carried on at their own doorstep. Even if we could say the Conwell affidavit is factually sufficient to justify consideration by the trial court, we would not be persuaded that there has been an abuse of discretion.
10) We pass now to the attack by Fogarty upon venue in the District of Utah and his attempt to quash the service of summons.
11) The cause of action below is founded on acts of the defendants alleged to be violations of 15 U.S.C. 78j and venue of such civil suits must be determined in accordance with 15 U.S.C. 78aa. Such an action may be brought in the district where any act or transaction which constitutes the alleged violation occurred or in any district where the defendant is found or is an inhabitant or transacts business. In addition, service may be had upon the defendant in any district where he is an inhabitant or may be found.
12) Applying those legal conclusions to this case, venue as to both defendants will lie in the Utah District if any of the acts or transactions complained of took place in that district. If venue lies in Utah for that reason, valid process may be had on Fogarty personally 'in any other district of which the defendant is an inhabitant or wherever the defendant may be found.'5Venue and process are good as to the corporate defendant because, without dispute, it transacts business in Utah.
13) At the present stage of the case in the trial court, we must look first to the allegations of the complaint concerning venue of the action. The plaintiff alleges there 'Venue of this action lies with this court because various acts, or transactions constituting the offense herein, including the publication of news releases and acts incident to the sale of the stock referred to herein, occurred within the State and District of Utah.' The plaintiff also alleges the release of a false and fraudulent press release, upon which he relied after reading the same in the Wall Street Journal in Salt Lake City, which newspaper had been transmitted to him through the United States mails. In addition the plaintiff contends this press release came to Salt Lake City on the Dow-Jones broad tape. The case has not reached the evidentiary and fact-finding stage and we do not here make any final determination of the facts necessary to prove venue, but we believe the trial court, upon the allegations of the complaint and the statements of counsel in open court, was justified in overruling the motion attacking venue.
14 ) In conclusion, it should be recited that petitioners have moved to strike the affidavit attached to respondents' answer and the appendix to respondents' brief filed herein. We have not found it necessary to give consideration to either the affidavit or appendix, therefore, the motions to strike are granted.
15) Issuance of either a Writ of Prohibition or Mandamus, as prayed for, is denied, and the action is dismissed.
The above case says about how SEC Act 1934 has prominence.
Now let us know a new case where it says SEC Act 1934 should need much clarity:
A federal district court in the Northern District of Texas dismissed the SEC’s insider trading case against Dallas Mavericks owner Mark Cuban. While the celebrity of the defendant has undoubtedly contributed to the widespread publicity of the dismissal, the real news is that the SEC has, for the moment at least, lost a case on what might seem to have been slam-dunk facts:
Company shares material nonpublic information with its largest shareholder, who agrees to keep the information confidential.
The shareholder, upon learning the information, says “Well, now I’m screwed. I can’t sell”.
Shareholder nonetheless turns around and dumps all of his shares, sparing himself a $750,000 loss when the material nonpublic information is later disclosed.
What’s missing here? Mr. Cuban, abetted by a group of law professor amici, argued that Rule 10b-5 liability requires a fiduciary or fiduciary-like relationship with the provider of the information, and that a mere agreement cannot provide a basis for liability. The court rejected this view, but it also rejected the SEC’s long-held view, reflected in its adoption of Regulation FD and Rule 10b5-2, that third parties who accept material nonpublic information from a company on a confidential basis are precluded from trading on the information. The court held that Mr. Cuban’s oral agreement to maintain confidentiality, without an agreement not to trade, was not enough. What does this decision mean for potential providers and recipients of material nonpublic information? For providers—for example, companies interested in sharing information with potential investors or acquirers—the case says that if you want the recipient not to trade, you had better be specific. The safest approach, of course, is to seek a written contractual standstill from recipients. But agreements of this sort are often difficult to get parties to agree to, especially where, as in this case, the recipient would be asked to sign the agreement “blind”, without knowing the nature of the information. As a practical matter, providers may have to content themselves with a “sole use” provision, along the lines of “recipient agrees to use the information solely for the purpose of considering an investment”. Had such a provision been in place, the result in this case might well have been different. For recipients of material nonpublic information, our advice is not to rely on this decision. The case was decided at the trial court level, is not binding on other courts, and the SEC has been given the right to file an amended complaint. Whether or not the SEC chooses to replead the
case or to appeal the decision, we are certain that it will not accept the case as the final word and will continue to seek enforcement action on facts like these. Thus, while the decision will provide comfort to parties who have to defend themselves for what they have done, we would not use it as a basis for deciding what you should do. The prudent judgment continues to be that if you have agreed to keep information confidential, you should not use it as a basis for trading. Lastly, the case highlights the curious fact that, 75 years after the enactment of the Securities Exchange Act and the creation of the SEC, and after decades of judicial exegesis of the Delphic text of Section 10(b), we still don’t quite know when insider trading is illegal. See S.E.C. v. Cuban, No. 3:08-CV-2050-D (N.D. Tex. July 17, 2009)
The above examples from INDIA and USA say about the decisions taken by regulators and how people in corporate companies having a malady.
1) The regulations should be more stringent and need amend the regulations in order to make more effective.
2) The latest example from USA states that, there is a need to amend the SEC Act 1934.3) From Indian point of view, the maximum penalty should be capped to a certain amount.4) The ethical values of the corporate should be on par5) For that corporate governance should be maintained in an effective way.
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