LEGL 2700 - Unit 4

What classifies broadly as a “security” for the purposes of federal regulation?

Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing, agreement...(security = “owning an interest in a business managed by others”)

Why is there security regulation?

Coming out of Great Depression – designed to give potential investors sufficient information to make intelligent investment decisions based on factual information

Who at Federal Level?

Securities and Exchange Commission (SEC) (main federal regulatory agency in charge of securities and their markets):

• Responsible for administering the federal securities laws

Are there state level security laws?

"Blue Sky Laws"

Securities Act of 1933

• Applies to the initial sale of the security

• Requires the disclosure of information to the SEC and potential investors

• Information must be true and not misleading

• Sanctions for violations:

  • Criminal punishment

  • Civil liability

  • Equitable remedy of an injunction

Issuer

The business organization offering a security for sale to the public

Underwriter

• Anyone who participates in the original of securities

• Sells securities for issuer or guarantees the sale (generally the larger investment banks)

• Helps issuer through process

Seller

Anyone who contracts with a purchaser causing the purchase to occur

What documents are required for an initial sale of securities?

Registration Statement and Prospectus

Who are the players involved in the sale of securities?

Issuer, Underwriter and Seller

Registration statement

Detailed disclosure of financial information about the issuer and controlling individuals (comprehensive document filed with the SEC that discloses detailed information about a company and its securities offering)

Prospectus

Contains financial information related to issuer and controlling person (specific part of that registration statement, serving as the offering document delivered to potential investors):

• Provided to interested investor

• Just conform to the statutory requirements

  • Does not mean it is a good investment! Could actually be a worthless investment!

Securities Exchange Act of 1934 (ongoing reporting obigations)

• Regulates transfers of securities after the initial sale

• Created the Securities and Exchange Commission (SEC): deals with regulation of securities exchanges, brokers, and dealers in securities

• Rule 10b-5

• CANNOT TRADE ON MATERIAL NON-PUBLIC INFORMATION!

Rule 10b-5

• Principal anti-fraud rule on secondary market fraud issues

• Civil action for people who are misled and injured

• Criminal sanctions as well

• Applies even if not a registered security

Sarbanes-Oxley Act (SOX) of 2002

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

• Revitalization of SEC

• Greater Regulation of Accounting Firms

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

• The law enacted to correct inadequacies in the law that existed and allowed numerous examples of corporate fraud. In essence, through increased criminal sanctions and specific requirements, this law attempts to make corporate CEOs more responsible. It aims to protect investors by improving the accuracy and reliability of corporate financial reporting and disclosures. It was enacted in response to major accounting scandals

Revitalization of SEC

• Increased SEC Budget

• Increased power over governance issues

• Congress empowered the SEC to increase corporate accountability

Greater Regulation of Accounting Firms

• Public Company Accounting Oversight Board (PCAOB)

  • Monitors accounting firms that audit public companies

  • Requires auditing firms to refrain from conducting non-auditing services

• Changes to reporting structure for external auditors

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

• Addresses many issues of financial reform

• Congress authorized the creation of new administrative agencies to achieve the goals of Dodd-Frank Act

• Solve the "too big to fail" issue (i.e., bailouts)

• A U.S. federal law aimed at reforming financial regulation after the 2008 financial crisis. It sought to improve accountability, transparency, and stability in the financial system, protect consumers from abusive practices, and prevent future bailouts.

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

• Title III

Title II

Allows companies to advertise that they are seeking investments

• Must be accredited investor

Title III

• Allows a company to raise up to ~$1 million by selling securities

• Crowdfunding

  • Raising small amounts of money from a large number of people

Who are we protecting with criminal law?

Wrongs against society

Where are the laws published?

• Authority in federal and state codes (criminal sections or sometimes referred to as penal codes)

• Section 16 for Georgia

Who brings case?

Government is the party prosecuting

What is the standard of proof?

Beyond a reasonable doubt

White-collar crime

Any illegal offense that occurs in a business or professional setting 

• Committed to harm the business, personal gains, or even competing business gain 

Civil v Criminal Law

• Focused on types of penalties

  • Civil: damages or equitable relief

  • Criminal: fines, prison sentences, probation, community service, restitution, etc.

Felony v Misdemeanors

• Felony —> Indictment (Grand Jury) —> Fine or Imprisonment >= 1 year

• Misdemeanor —> Information (Government Charge) —> Fine or Jail < 1 year

Intent - some level

Willfully, knowingly, recklessly, negligently, strict liability...

Ignorantia juris non excusat

• Ignorance of the law is no excuse

• A lot of laws to know about

  • Mistake of fact: misunderstanding or misbelief about a factual matter that leads a person to act in a way that would otherwise be criminal

  • Mistake of law: someone incorrectly understands or misinterprets the law, leading to a misunderstanding of the legal consequences of their actions 

Pleas in Criminal Cases

• Guilty

• Not Guilty

• Nolo Contendere ("no contest")

• Criminal conviction may be basis for civil damages suit

Trends in White Collar Crime

• Increase in prosecution of white-collar criminals and legislative efforts to protect the public from fraud

  • E.g., Sarbanes-Oxley Act

• Investigation of illegal activities by top management

  • Plea bargaining with mid-level employees in exchange for testimony against top-level employees

• Prosecutors capitalize on high-profile prosecutions

4th Amendment

• Protect individuals and businesses from unreasonable searches and seizures by the government 

  • Usually (but not always) requires the police to obtain a search warrant 

• Expectation of privacy 

  • Warrantless inspection of: 

    • Commercial premises is reasonable in certain circumstances 

    • Higher likelihood a search of a private residence is unconstitutional 

Part of the 5th Amendment

• Grand Jury 

• Double Jeopardy 

• Right Against Self-Incrimination 

Grand Jury

• Fifth Amendment to the U.S. Constitution 

  • Before a trial for a capital, or otherwise infamous crime, there must be presentment or an indictment by a grand jury 

• Comprised of 16 to 23 citizens; unanimity is not required 

• Determine whether probably cause a crime has occurred and accused committed the crime 

  • Still have presumption of innocence: Presuming that an indicted person is innocent until found guilty by a petit (trial) jury 

• Serve as an investigative body 

• Functioning depends upon the secrecy of the proceedings 

 

Double Jeopardy

• Individuals cannot be tried twice by the same governmental entity for the same offense 

• Does not prevent two prosecutions – federal and state 

• On civil side, you can think of doctrine of res judicata 

  • Prohibits subsequent civil actions involving the same parties, claims and causes of action 

• Protects the accused from being compelled to testify against self 

• Does not protect: 

  • Against being required to produce physical evidence 

  • A person who is required to produce business records 

6th Amendment

Provides multiple protections that offer the right to:

• Speedy and public trial

• Trial by jury

• Be informed of the charge against oneself

• Confront the accuser

• Subpoena witnesses in one's favor

• Have the assistance of an attorney

Key takeaway: 6^th Amendment gives more rights to defendants 

8th Amendment

Prohibits government from imposing excessive bail, excessive fines, and cruel and unusual punishment 

• Supreme Court determined test if punishment is cruel and unusual (Furman v Georgia (408 U.S. 238, 1972)); Gregg v Georgia (1976) reinstated death penalty 

Specific crimes

Fraud, Conspiracy, Cyber Crimes

Fraud

• Creates criminal liability 

• Fines and/or imprisonment are exerted on individuals who knowingly and willfully defraud another 

• Scheme to defraud: Plan designed to take from a person the tangible right of honest services – usually multiple victims 

• Theft by deception - taking another's property under false pretenses (words or conduct that create a false impression) 

Conspiracy

• Willful agreement or a partnership for criminal purposes (two or more people)

  • Each member becomes the agent or partner of every other member

• An offense occurs when one makes a conspiracy agreement and commits an overt act

  • Overt act: Any event knowingly committed by a conspirator to accomplish some object of conspiracy

Cyber Crimes

Person who intentionally accesses a computer without authorization or exceeds authorized access to obtain classified, restricted, or protected data, is subject to criminal prosecution 

• Electronic heft – Hackers steal money, trade secrets, personnel records, and customer lists 

• Identity theft 

Individual Job

• As a candidate/employee 

  • Knowing your rights 

• Interviewer 

  • How you make decisions, what you ask, etc. 

Business Community 

Value of diversity 

• Customers 

• Community 

• Firm level 

• Returns 

Society

• Importance of employment 

• Fairness  

• Ideals 

Title VII of Civil Rights Act of 1964

• Purpose

  • To eliminate job discrimination based on race, color, religion, sex, or national origin

• Note: only applies to employers with 15 or more employees

What does Discrimination Look Like? 

Discrimination (Disparate Treatment, Disparate Impact, and Retaliation) in:  

• Discharge 

• Refusal to hire 

• Compensation 

• Promotion 

• Terms, conditions, or privileges of employment 

Disparate Treatment

Employer intentionally discriminates (JE directly/obviously)

Disparate Impact

• Discriminatory effect (JE: indirectly/subtly) 

• Examples:

  • Biased personnel tests 

  • Denying employment to unwed mothers 

  • Poor credit rating 

  • Priority to relatives of present employees 

Retaliation

Adverse employment actions against employee 

What is a BFOQ and what is a “business necessity"?”

Discrimination allowed on the basis of bona fide occupational qualifications ("BFOQ" for disparate treatment) or "business necessity" (for disparate impact) (BFOQ permits discriminatory practices in employment if a person’s religion, sex, or national ­origin is reasonably related to the normal operation of a particular business. Business necessity: It’s raised to disparate impact claims and asserts that a facially neutral but discriminatory policy is job-related)

Categories

• Race 

• Color 

• National Origin (foreign language) 

• Religion (religious org exception; accommodations) 

• Sex (male/female) 

• Sexual Orientation 

Age Discrimination in Employment Act

Protects employees or applicants against discrimination based on age 

• Prohibits employment discrimination against employees aged 40 and above 

• Prohibits mandatory retirement – exception is high level employees (e.g., CEOs and sometimes when safety may be a concern (e.g., pilots, police officers, etc._ 

• Applies to private employers with 20 or more employees. 

Americans with Disabilities Act (ADA) 

• Disability: Any physical or mental impairment that substantially limits an individual's major life activities 

• Helps people with disabilities get work 

  • Prohibits employers from: 

    • Requiring a pre-employment medical examination 

    • Asking questions about the job applicant's medical history 

    • Need to make reasonable accommodations 

    • Applies to employers with 15 or more employees 

Sexual Harrassment

• Quid pro quo: this for that; a situation where someone in a position of authority, like a boss or supervisor, demands or implies that sexual favors or compliance with unwanted sexual conduct is a condition for maintaining a job, getting a promotion, or receiving other workplace benefits

• Hostile work environment 

Inside Information

Non-public, material information about a company that could influence an investor's decision to buy, sell, or hold securities. It is obtained by someone within the company (an "insider") and is not available to the general public. Trading on inside information is illegal and considered insider trading.

At-will Employment

Some people have employment contracts, but most do not...so the default rule is "employment at will" 

• Employer can fire at will 

• Employee can quit at will 

(An employer can generally terminate an employee for any reason, with or without cause, as long as the reason is not illegal)

What are the restrictions on at-will employment?

Not absolute

• Does not apply if federal, state, and/or local law prohibits (e.g., Title VII of Civil Rights Act of 1964, Age Discrimination in Employment Act, Clean Water Act, Labor-Management Relations Act, etc.), contract (I.e., not employee at will) or public policy