LEGL 2700 FINAL EXAM- TRIPP

Administrative Agency

A board, bureau, commission, or organization set up by a federal state gov't

Creates rules or regulation and enforce laws that impact the legal environment of business

Examples include FDA, EPA, and the Federal Reserve Board

How do administrative agencies get their power?

Legislative, Executive, and Judicial Branches

Reasons for Administrative Agencies

Specificity

Expertise

Protection

Regulation

Services

Functions of Agencies

Rule Making

Adjudicating

Advising

Investigating

Agencies: Rule Making

Quasi-legislative power

Regulations have the force and effect of law (MUST ALLOW FOR PUBLIC COMMENT AFTER PROPOSING REGULATIONS)

Guidelines are advisory but do not have the force and effect of law

Agencies: Adjudicating

Quasi-Judicial Function: involves fact-finding and applying the law to the facts, as well as making decisions like courts do

Tools include Cease and Desist Order & Consent Order

Cease and Desist Order

ruling requiring a company to stop an unfair business practice that reduces or limits competition

Consent Order

Order entered by the agency that is agreed upon by the accused and requires the accused to waive rights to judicial review

Settlement Agreement: business agrees to comply with the rules and waiving rights to judicial review (Fines can be $10,000 a day)

Agencies: Advising

Reporting to the President

Recommending legislation to Congress

Reporting to the general public

Issuing Advisory Opinions to Businesses or Individuals

Not binding

Agencies: Investigating

Investigate activities and practices that may be illegal

Subpoena powers to require reports, examine witnesses under oath and examine documents

Organization of Agencies

Agencies, Boards, or Commissions consist of 5-7 members (One member is appointed as chairperson)

Appointments require Senate confirmation

Appointees are not permitted to engage in other employment during the terms

Agencies have distinctive organizational structure to meet its responsibilities

Chairperson

presiding officer at meetings, most visible, usually belongs to same political party as the president

Secretary

responsible for the minutes and records, signs orders and official correspondence

Advisory Council

Not employed by the agency

Provide interaction between regulators and those being regulated

General Counsel

Chief law officer and legal advisor

Director of Operations

Duties may vary across agencies

Quasi-Judicial Staff

Administrative Law Judges: perform the adjudicative fact finding functions

ALJ's hear cases of alleged law violations and apply law to the facts

Immunity

protection of judges from liability for damages based on decisions

don't want them to have liability when making decisions

Lucia v. SEC

Are these ALJ's officers of the United States?

Plaintiff filed lawsuit challenging the use of the SEC's ALJ's under the Appointments Clause of the Constitution

Ultimately, they decided ALJ's ARE officers of the United States

Used a test if they exercise significant authority

Influencing Agency Decisions

Agencies give public notice of proposed rules and hold public hearings

Interested parties present evidence in support or opposition to the regulation

Agencies react to the force of public opinion

Each branch of government has control over the administrative process

Review of Agency Decisions: Standing to Sue

Judicial review of any administrative agency's decision requires standing to sue

In order to establish standing, challenging party must address two issues.... Reviewability and Aggrieved Party

Reviewability

Is the action or decision of the agency subject to judicial review?

Does the state preclude review?

Is the agency action committed to agency discretion by law?

Aggrieved Party

Person suffered legal wrong because of agency action

OR

Adversely affected or aggrieved by agency action

Review of Agency Decisions: Rulemaking

Administrative agency must proposes rules and regulations within its power

Unwise rule adopted by an agency is corrected by legislature

Basic issues challenging the validity of the rule...

1. Is delegation valid? Must be definite, must be limited

2. Has the Agency exceeded its authority? Look at rule and regulation and decide intent

Brown and Williamson Tobacco

FDA after the Food and Safety Act....

Typically, we allow agencies to have control, BUT ruled Congress would keep control so that the FDA could not OVER REGULATE

Review of Agency Decisions: Adjudications

Judicial review of agencies' adjudications is limited

Courts exercise restraint and resolve doubtful issues in favor of an agency

Agencies develop own rules of procedure

Allows agencies to design rules peculiar to the industry and the tasks of the agency

Courts lack the authority to substitute judgment for agency

Exhaustion of Remedies

Limits when courts can review administrative decisions

Courts refuse to review administrative actions until a complaining party has exhausted all the administrative remedies and procedures available to him or her

Primary Jurisdiction

applies when a claim is originally filed in the courts

invoked when referral to the agency is preferable due to its expertise (judicial process is suspended pending referral to the administrative agency)

If you have a complaint...

it is not a final decision and you cannot get an outside court to look at it

Review of Agency Decisions: Factual Determination

Courts presume the agency was right

Evidence is assessed by analyzing the record of the agency's proceedings

Courts do not....
1. Reweigh the evidence
2. Make independent determinations of facts
3. Substitute tier view of evidence

The Standard: Courts determine if there is substantial evidence to support the action taken. If so, the agency's findings and conclusions are upheld

Criticism of Administrative Agencies

Personnel

Procedures

Substance

Cost to Business

Cost to Society

Criticism of Administrative Agencies: Personnel

Difficulty in hiring and retaining the most qualified people

Difficult to discharge unsatisfactory employees

Personnel in top positions are selected for political reasons

Criticism of Administrative Agencies: Procedures

Delay in the decision-making process

Administrative process is overwhelmed with paperwork and meetings

Rules and regulations are written in complex legal language

Dictatorial in nature

Criticism of Administrative Agencies: Substance

Rules and regulations overlap and conflict

Actions for illegal conduct end only with consent orders

Enforcement of law varies over time

Cost to Business

Regulation increases the cost of doing business

Consumer pays both direct in taxes and indirect cost of regulation

Companies are forced to create an internal bureaucracy to deal with the agency

Cost of paperwork: additional cost to the business community

Cost to Society

Public is forced to pay for things that are not needed

Inefficient regulatory process increases the cost significantly

Agencies are required to publish guidelines and rules in the Federal Register

Securities Act of 1933

The first major federal law regulating the securities industry. It requires firms issuing new stock in a public offering to file a registration statement with the SEC.

What is a Security?

Any interest or instrument that offers the right to subscribe to or purchase, stock, bond, or any certificate of interest

Covers much more than corporate stocks and bonds

Notes, stock, treasury stock, investment contract

Involves an investment in a common enterprise with profits to come solely from the efforts of persons other than the investor

The Howey test

An investment of money in a common business activity with a reasonable expectation of profit based on the efforts of someone other than the investor

Not just stocks

You can invest in orange trees in FLA

Securities and Exchange Commission (SEC)

Responsible for administering the federal securities laws

Consists of five commissioners appointed by the President for 5 year terms

Possess quasi-legislative and quasi-judicial powers

The '33 Act (Securities Act of 1933)

Applies only to the INITIAL SALE of the security to the public

Requires the disclosure of information to the potential investors (Registration Statement & Prospectus)

Information must not be false or misleading

Sanctions for violations (Criminal punishments, civil liability, equitable remedy of injunction)

Parties Regulated under the '33 Act

Issuer: individual or business offering a security for sale to the public

Underwriter: anyone who participates in the original distribution of securities by selling securities for the issuer or guaranteeing their sale (Investment Bank or Securities Brokerage Firms)

Controlling Person: is one who controls or is controlled by the issuer (Major Stockholder of a corporation)

Seller: anyone who contracts with a purchaser or who is a motivating influence that causes the purchase transaction to occur

Documents Required Under the '33 Act

Registration Statement (Form S-1): detailed disclosure of financial information about the issuer and controlling individuals filed with the SEC

Prefiling period - issuer may only engage in preliminary negotiations and agreements with underwriters

Waiting period - accuracy of the registration statement is assessed. Issuer may only solicit buyer or receive offers (but cannot accept yet)

Post Effective period (20 days after registration is filed) - issuer may sell securities​

Prospectus - Contains key information contained in the company's registration statement

Prospectus Con'td

Provided to interested investor

Company has to describe important information about its business operations, financial conditions, results of operations, risk factors, and management

Includes audited financial statements

Criminal Liability (Section 24 of the '33 Act)

Willful violation of the act or fraud in the initial offer or sale of securities​

Fraud? Any material fact is omitted or misrepresented that causes a statement to be misleading

Punishable by fines and/or imprisonment

Actions are brought by the Department of Justice (DOJ)

Fraud under the '33 Act

Individual investors may sue under:​
1. Section 11 - for false or misleading registration statement
2. Section 12(a)(2) - For false or misleading prospectus or oral communications

SEC may bring an civil enforcement action under:​
1. Section 17 - for fraud during the initial sale or issuance

DOJ may bring criminal charges under:​
Section 24 - willful fraud during the initial sale or issuance ​

Civil Liability Sections under the '33 Act

Section 12(a)(1) - Liability for failure to file registration statement

Section 11 - Liability for false or misleading registration statement (Anybody involved can be held liable)

Section 12(a)(2) - Liability for false or misleading prospectus or other interstate communication (by mail, telephone internet)

Civil Liability Section 17 ('33 Act)

imposes civil liability for using any device, scheme, or artifice of fraud in the initial sale of security​ (A catchall for the fraud not picked up by the other sections we've covered)

More specifically, you can't use any instrument of interstate communication in the offer or sale of any security when the result is: ​

1. To defraud (Have to prove intent_

2. To obtain money or property by means of an untrue or misleading statement,

3. To engage in a business transaction or practice that may operate to defraud or deceive a purchaser.

T/F?

Omitting immaterial facts in filing a securities registration statement is a basis for liability

FALSE

Defenses to avoid Civil Liability under the '33 Act

Materiality

Statute of Limitations

Due Diligence

Materiality Defense

Argument that the false or misleading information is not material and therefore should not have had an impact on the purchaser's decision making process. ​

Statute of Limitations Defense

Purchaser must bring action within certain timeframe.​

Basic period is 1 year (1 year does not start to run until the discovery of the untrue statement or omission OR it does not start to run until the time such discovery would have been made with reasonable diligence) ​

In no event may a suit be brought more than 3 years after the sale​

Also a defense to criminal liability

Due Diligence Defense

Defense for experts

Must prove: ​

A reasonable investigation of the financial statements of the issuer & controlling persons was conducted, AND​

as a result of that investigation an expert exercising due diligence must prove that there was no reason to believe any of the information in the registration statement or prospectus was false or misleading.

Securities & Exchange Act of 1934 (The '34 Act)

Regulates transfers of securities after the initial (secondary distribution)

Created the Securities and Exchange Commission (SEC)

Illegal to sell unregistered securities on national securities

Registration requires filing prescribed forms with the applicable stock exchange and SEC

Section 10b of the '34 Act and Rule 10b-5 of the SEC

Primary anti fraud law and rule relating to the secondary distribution of securities

Unlawful to use interstate commerce or national securities to defraud any person in connection with the purchase or sale of any security.

Allows investors to sue

Section 10b of the '34 Act Con't

Who is liable?

Parties directly connected to a fraudulent scheme in the sale of securities are liable

To win, a plaintiff must prove:
Material misrepresentation or omission by defendant

Scienter (intent)

Connection between misrepresentation/omission and the transaction

Reliance on the misrepresentation/omission

Economic loss (Damages)

Loss causation

Materiality under '34 Act Section 10b and Rule 10b-5

A plaintiff seeking damages must establish the existence of:

a material misrepresentation or omission made in connection with the purchase or sale of a security and

the culpable of the defendant

Liability requires proof of the defendant's intent to deceive.

Simple negligence isn't enough

Must establish the defendant's practice is manipulative and not merely corporate mismanagement.

Includes not only untrue statements of material facts but also the failure to state material facts necessary to prevent statements from being misleading.

Materiality depends on the significance a reasonable investor would place on the withheld or misrepresented information

Case Under 10b-5

Issue: Whether a person who is not a "maker" of statement (3rd party), but disseminates false or misleading info with intent to defraud, can be liable under Rule 10b-5

Holding: Even though you aren't the maker or creator of the info, you can be held liable under Rule 10b-5 if you send out the information if you know it's false

Insider Trading (Fraud under 10b and Rule 10b-5)

the sale or purchase of securities by individuals privy to non-public, material info based upon his/her special relationship with the corporation

Who is an insider?

Insiders include officers, directors, employees, and professionals in fiduciary relationship with the firm

AND tippees (a person who learns nonpublic info from an insider)

Tippees are only liable if...

Tippees are only liable if the tipper breaches a fiduciary duty to the business organization or fellow shareholders AND if that tippee knows that the tipper breached that duty to the company.

Insider Trading Case

Issue: SEC filed suit against O'Hagan alleging that he defrauded his law firm and client by using non-public info for his own trading purposes

Misappropriation Theory...

A person (AKA temporary insider) commits fraud in connection with a securities transaction (thereby violating 10(b) and 10(b)5 when he misappropriated/ conveys nonpublic confidential info for securities trading purposes, in breach of a duty owed to the source of the information

He owed a duty of trust and confidence to his law firm and its client

Section 16 Insider Trading

Who is an insider?

Person who owns more than 10% of any security AND is a director or officer of the issuer of the security.

Insider trading is prohibited to prevent the use of information available to an insider but not to the general public

Difference between Insider Trading vs Misappropriation Theory

Insider Trading happens INSIDE a company

Misappropriation happens OUTSIDE of a company

Misappropriation Theory

Committed by individuals outside a company

The outsider uses access to non-public classified or insider information about the company for securities trade, thereby committing fraud/misappropriation.

Usually, outsiders get access to nonpublic information of a company through a source

This information is used during a securities trade, thereby betraying the trust of the source resulting in securities fraud.

Goal is to upkeep the integrity of the stock market

Short Swing Profits by Insiders under Section 16

Section 16 prohibits short-swing profits (profits made within a six month time period)

Based on the assumption that insiders have material, nonpublic information during this period.

As such, any trades during this period are per se illegal (regardless of the insiders' state of mind)

Any profits derived from the sale are forfeited to the corporation or to the investor

Not prohibited by the SEC

Civil Liability Under the '34 Act

Securities Enforcement Remedies Act

Section 18 of the Securities Exchange Act

Securities Enforcement Remedies Act

Provides civil fines of up to $500,000 per organization and $100,000 per individuals

Prohibits convicted individuals from serving as officer or director of a business organization

Section 18 of the Securities Exchange Act

Imposes liability on persons who shall make false and misleading statements of material fact

Must prove the defendant knowingly made a false statement, that plaintiff relied on it and suffered damage.

Defendant's good faith is a defense

Criminal Liability under the '34 Act

Securities Exchange Act, 1934
Provides for criminal sanctions for willful violations

Imposed for false material statements in applications, reports, registration statements, and documents

Renders fines of up to $5,000,000 per individual and $25,000,000 per organization

Provides imprisonment up to 20 years (individual) and 25 years (business organization)

State Blue Sky Laws

Blue Sky Laws = state statutes designed to protect the public from the sale of fraudulent stocks and bonds

Protect the potential investor from buying risky securities without financial and other information

Apply to securities subject to federal laws and securities exempt from federal statutes

Uniform Securities Act, 1956
Provides a model for blue sky laws

3 Types of Registration Requirements under State Blue Sky Laws

Registration by Notification:
allows issuers to offer securities for sale automatically after a stated time period expires (unless the administrative agency takes action to prevent the offering).

Registration by Qualification:
requires a detailed disclosure by the issuer
A security can't be offered for sale until administrative agency grants the issuer a license or certificate to sell securities

Registration by Coordination:
For issuers who must register with the SEC, state registration becomes effective when the federal registration is deemed effective.

Exemptions from Blue Sky Laws

Isolated transaction

Limited offer to a limited number of offerees within a stated time period

Private offering

Sale in which the number of holders after the sale does not exceed a specific number

Blue Sky Example

Assume a security is exempt from Blue Sky Registration Requirements if the issue sells (or offers to sell) securities to no more than 35 investors during any 12 month period. Assume the below transactions occur with each investor being a different person or entity.

2/1/13 issuer sells to 5 investors
6/1/13 issuer sells to 10 investors
9/1/13 sells to 10 investors
12/1/13 sells to 5 investors
3/1/14 sells to 5 investors
5/1/14 sells to 10 investors

NOT EXEMPT! LOOK AT THE WHOLE PICTURE!

Sarbanes-Oxley Act of 2002 (SOX)

Primary Purpose: To ensure accuracy and integrity in the financial reporting of public companies.

Applies to all public companies in the U.S. and international companies registered with the SEC

This Act Revitalized the SEC...
- Increased power over governance issues
- Congress empowered the SEC to increase corporate accountability

Created the Public Company Accounting Oversight Board (PCAOB)
- Monitors accounting firms that audit public companies
-Requires auditing firms to refrain from conducting non-auditing services
-Non Auditing services include bookkeeping, system designs and implementation, appraisals and valuations, actuarial services, human resources functions, and investment banking.

Corporate Governance under SOX

SOX increases the independence of the auditors

Members of public company's audit committee must be independent from the control of the company
- Public Companies can no longer place its finance officer or other employee on the audit committee.
-Minimum one member should be financial expert

Auditors should report to the audit committee

Audit records must be preserved for 7 years

Financial Statements & Controls Under SOX

Section 302 of SOX
- Requires CEOs and CFOs to certify the accuracy of the quarterly and annual financial statements filed with the SEC

Section 404 of SOX
- Mandates the certification of internal financial controls

Decline in restatements of financial reports indicate the positive impact of Sarbanes-Oxley Act

Whistleblower Protection under SOX

Encourages individuals to report the corruption

Whistleblowers can recover civil damages for retaliation

Improperly terminated employees can be reinstated

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Addresses many issues of financial reform

Required safety and soundness measures (stress testing, liquidity requirements, etc.) for large financial institutions

Congress authorized the creation of new administrative agencies to achieve the goals of Dodd-Frank Act
- Consumer Financial Protection Bureau (CFPB)
- Financial Stability Oversight Council (FSOC)
- Federal Insurance Office (FIO)
-Office of Housing Counseling (HUD)
- Office of Credit Ratings (SEC)
- Investment Advisory Committee (SEC)
- Office of Investor Advocate (SEC)

Jumpstart Our Business Startups (JOBS) Act of 2012

Goals
- Ease burdensome federal regulations
- Allow individuals to invest in start-ups through relaxed rules

Title II
- Allows companies to advertise that they are seeking investments

Title III
- Allows a company to raise up to $1 million by selling securities

Title VII of the Civil Rights Act of 1964

Prohibits job discrimination based on race, color, religion, sex, or national origin

Applies to employers with 15 or more employees (KNOW THE NUMBER!)
- Includes both public and private employers

PROCESS
- Aggrieved party must first report the discrimination to the Equal Employment Opportunity Commission (SEC)
- Employee must file charges of illegal discrimination within 180 days
- If the employee first filed with a state fair employment practices commission, the law extends the time for filing with the EEOC to 300 days.

Protected Classes Under Title VII

Race, Color, Religion, Sex, and National Origin

What class is NOT protected under Title VII?

Disability

Discrimination is prohibited under:

Discharge

Refusal to hire

Compensation

Promotion

Terms, conditions, or privileges of employment

Additional exemptions
- Preferential treatment for veterans

Disparate Treatment

Employer intentionally discriminates against a protected class

Employer's policies, practices, or procedures are set up to intentionally eliminate a protected class

You can't intentionally single out or treat an individual in a protected class less favorably.

Employer Defense? Bona fide occupational qualification (BFOQ) relating to religion, sex, or national origin

Disparate Impact

Unintentional

Employer's policy, practices, or procedures are unbiased but end in a disproportionate impact on a protected class

Employer Defense? The challenged employment practice is job-related and consistent with business necessity

Disparate Treatment or Disparate Impact?

All-girls middle school with 50 employees seeks to hire a female only teacher

TREATMENT

Disparate Treatment or Disparate Impact?

Only African American applicants are required to take a pre-employment assessment test

TREATMENT

Disparate Treatment or Disparate Impact?

All applicants are required to take a pre-employment assessment test. Only whites are eliminated based on the results of the assessment

IMPACT

Pregnancy Discrimination Act

Employers with health or disability plans must cover pregnancy and childbirth and related medical conditions in the same manner as other conditions
Law covers unmarried and married women

Equal Pay Act

Prohibits an employer from discriminating on the basis of sex in paying wages performing the same work under similar conditions in the same establishment

Exception: Discrimination is allowed if it arises from a seniority or merit system

Sexual Orientation Discrimination

Ch. 20

Sexual Harassment Claims

Ch. 20

Age Discrimination in Employment Act (ADEA) of 1967

Prohibits employment discrimination against employees aged 40 and above

Applies to both private and public employers with 20 or more employees

Prohibits forced retirement

Does NOT apply to executives (CEOs, CFOs) or true occupational limitations (police officers, pilots)

Employer Defense:
Employers must establish that a reasonable factor other than age accounted for the discriminatory impact..

Americans with Disabilities Act

Prohibits both private and public employers with 15 or more employees from:
- Requiring a pre employment medical examination (First job has to be offered and employee is chosen, then ask if they are physically able to complete the job)

- Asking questions about the job applicant's medical history (First job has to be offered and employee is chosen, then ask if they are physically able to complete the job)

Requires employers to provide reasonable accommodations: Adjusting a job or work environment to fit the needs of disabled employees
- Employer can plead undue hardship

Applies only to the qualified disabled: those with a disability who with or without a reasonable accommodation, can perform the essential functions of a particular job position

Employers vs Employment Agencies

RULE: Employment agencies are prohibited from either failing to refer or from actually referring an individual for employment on the basis of race, color, religion, sex, or national origin

The above rule differs from the law binding employers, where it is unlawful only to fail or refuse to hire on discriminatory grounds.
- The affirmative act of hiring for a discriminatory reason is apparently not illegal for employers

Example of Employer vs Employment Agencies

Assume that a contractor with an American gov't contract seeks a qualified Black engineer to request an employment agency to refer one. The agency complies with the request.

Has the employer violated Title VII of the Civil Rights Act?
- NO

Has the employee agency violated Title VII of the Civil Rights Act?
- YES

What can I get if I've been Discriminated Against?

Congress amended the Civil Rights Act in 1991 to allow the recovery of compensatory and punitive damages of up to $300,000 per person depending on the size of the employer

These damages are in addition to other remedies such as job reinstatement, back pay, & front pay.

Discrimination in Health Insurance

Health Insurance Portability and Accountability Act (HIPAA)

Affordable Care Act

Health Insurance Portability and Accountability Act (HIPAA)

Prevents discrimination against individual employees in small businesses