What is insider trading and why is it forbidden

| March 14, 2016

Question
. 1. What is insider trading and why is it forbidden? (5 points).

Insider trading refers to the buying and selling of a company’s stock with knowledge that could

only be known by someone who works “inside” the company. Usually this is done by an

employee. However, employees are required to report significant trades they make with the

shares of their own company, so there is a watchdog. For example, Martha Stewart’s friend

realized that the price of his company’s stock was going to drop, so he warned Martha to sell her

shares. That landed Martha Stewart in federal prison. When an employee buys or sells stock for

the company he works for, an inside trade has occurred. It’s a common strategy that happens

frequently, according to the Securities and Exchange Commission (SEC). The strategy was

created on fairness. If someone has the ability to get information for a company that isn’t

available to everyone else trading on the market gives the insider an advantage. The concept is

created on fairness; having information that isn’t available to everyone else trading on the market

gives the insider, well, an inside advantage. Section 10b5 of the Securities Exchange Act of 1934

defines precisely what constitutes illegal insider trading.

Q. 2. What certification requirements does the Sarbanes-Oxley Act impose on corporate

executives? (5 points)

The route of the Sarbanes-Oxley Act and actions by the U. S. Securities and Exchange Commission

imposed new requirements on auditors, corporate boards and management. The Board must adopt an

audit standard to implement the internal control review required by section 404(b). This standard must

require the auditor evaluate whether the internal control structure and procedures include records that

precisely and fairly reflect the transactions of the issuer, provide sensible assurance that the transactions

are recorded in a manner that will permit the preparation of financial statements in accordance with

generally accepted accounting principles (GAAP), and a description of any material weaknesses

in the internal controls.

The Act’s provisions ensures that corporate executives are kept on their toes as they have to make

periodic certifications that:

• The signing officers have reviewed the report

• The report does not contain any material untrue statements or material omission or be considered

misleading

• The financial statements and related information fairly present the financial condition and the results in

all material respects

• The signing officers are responsible for internal controls and have evaluated these internal controls

within the previous ninety days and have reported on their findings

• A list of all deficiencies in the internal controls and information on any fraud that involves employees who

are involved with internal activities

• Any significant changes in internal controls or related factors that could have a negative impact on the

internal controls

Q. 3. What are the four major provisions of the Clayton Act and what types of activities do these

provisions prohibit? List all four and describe the activities each prohibits (8 pts total) An Act to

supplement existing laws against unlawful restraints and monopolies, and for other purposes. Be

it enacted by the Senate and House of Representatives of the United States of America in

Congress assembled, That “antitrust laws,” as used herein, includes the Act entitled “An Act to

Adrian Garcia

Business Law II

4/10/14

protect trade and commerce against unlawful restraints and monopolies,” approved July second,

eighteen hundred and ninety; sections seventy-three to seventy-seven, inclusive, of an Act

entitled “An Act to reduce taxation, to provide revenue for the Government, and for other

purposes,” of August twenty-seventh, eighteen hundred and ninety-four; an Act entitled “An Act

to amend sections seventy-three and seventy-six of the Act of August twenty-seventh, eighteen

hundred and ninety-four, entitled ’An Act to reduce taxation, to provide revenue for the

Government, and for other purposes,’ ” approved February twelfth, nineteen hundred and

thirteen; and also this Act.

“Commerce,” as used herein, means trade or commerce among the several States and with

foreign nations, or between the District of Columbia or any Territory of the United States and

any State, Territory, or foreign nation, or between any insular possessions or other places under

the jurisdiction of the United States, or between any such possession or place and any State or

Territory of the United States or the District of Columbia or any foreign nation, or within the

District of Columbia or any Territory or any insular possession or other place under the

jurisdiction of the United States: Provided, That nothing in this Act contained shall apply to the

Philippine Islands.

The word “person” or “persons” wherever used in this Act shall be deemed to include

corporations and associations existing under or authorized by the laws of either the United

States, the laws of any of the Territories, the laws of any State, or the laws of any foreign

country.

Section 2. That it shall be unlawful for any person engaged in commerce, in the course of such

commerce, either directly or indirectly to discriminate in price between different purchasers of

commodities, which commodities are sold for use, consumption, or resale within the United

States or any Territory thereof or the District of Columbia or any insular possession or other

place under the jurisdiction of the United States, where the effect of such discrimination may be

to substantially lessen competition or tend to create a monopoly in any line of commerce:

Provided, That nothing herein contained shall prevent discrimination in price between purchasers

of commodities on account of differences in the grade, quality, or quantity of the commodity

sold, or that makes only due allowance for difference in the cost of selling or transportation, or

discrimination in price in the same or different communities made in good faith to meet

competition: And provided further, That nothing herein contained shall prevent persons engaged

in selling goods, wares, or merchandise in commerce from selecting their own customers in bona

fide transactions and not in restraint of trade.

Section 3. That it shall be unlawful for any person engaged in commerce, in the course of such

commerce, to lease or make a sale or contract for sale of goods, wares, merchandise, machinery,

supplies or other commodities, whether patented or unpatented, for use, consumption or resale

within the United States or any Territory thereof or the District of Columbia or any insular

possession or other place under the jurisdiction of the United States, or fix a price charged

therefor, or discount from, or rebate upon, such price, on the condition, agreement or

understanding that the lessee or purchaser thereof shall not use or deal in the goods, wares,

merchandise, machinery, supplies or other commodities of a competitor or competitors of the

lessor or seller, where the effect of such lease, sale, or contract for sale or such condition,

agreement or understanding may be to substantially lessen competition or tend to create a

monopoly in any line of commerce.

Adrian Garcia

Business Law II

4/10/14

Section 4. That any person who shall be injured in his business or property by reason of anything

forbidden in the antitrust laws may sue therefor in any district court of the United States in the

district in which the defendant resides or is found or has an agent, without respect to the amount

in controversy, and shall recover threefold the damages by him sustained, and the cost of suit,

including a reasonable attorney’s fee.

Q. 4. What agencies of the federal government enforce the federal antitrust laws? (2 points)

3 paragraphs

In the U.S. you have a variety of agencies (both federal and state) which play a role in the

enforcement of antitrust laws.

Both the FTC and the U.S. Department of Justice (DOJ) Antitrust Division enforce the federal

antitrust laws. In some respects their authorities overlap, but in practice the two agencies

complement each other. Over the years, the agencies have developed expertise in particular

industries or markets. For example, the FTC devotes most of its resources to certain segments of

the economy, including those where consumer spending is high: health care, pharmaceuticals,

professional services, food, energy, and certain high-tech industries like computer technology

and Internet services. Before opening an investigation, the agencies consult with one another to

avoid duplicating efforts. In this guide, “the agency” means either the FTC or DOJ, whichever is

conducting the antitrust investigation.

Q. 5. Super Sweet Soda is engaged in the soft-drink bottling and distribution industry in the

states of New York and New Jersey. The firm currently has about 40 percent of the market for

these products and related services. Carbonate Distribution Corporation competes with Super

Sweet Soda in the same states. Carbonate has about 35 percent of the market. If Super Sweet

Soda were to acquire the stock and assets of Carbonate through a horizontal merger, would Super

Sweet Soda be in violation of any of the antitrust laws? If so, which one? Discuss fully. (10

points)

Yes they would definitely be in violation of the antitrust laws. They would be violation of the

Federal law known as the Clayton Act, which specifically prohibits these kind of mergers from

happening. This is because such a market environment would create a market as they would

aquire more than 50% of the market in their sector. Under the Clayton Act courts have the power

to stop these sort of business affairs or mergers from ever occurring and perhaps even fine them a

substantial amount for these illegal practices. These fines can go as high as $100 million for

corporations in our case.

Since these companies also deal within New York then they would also be in violation of the

Donnelly Act, sections 340-347, which specifically prohibits these kind of monopolies of the

market. The penalties for corporations in our case can go as high as $1,000,000.

Adrian Garcia

Business Law II

4/10/14

Q. 6. When will advertising be deemed deceptive? (5 points)

Advertising that makes false claims or misleading statements, as well as advertising that creates

a false impression. If retailers systematically advertise merchandise at low prices to get

customers into their stores and then fail to have the merchandise, they are guilty of deceptive

advertising. Deceptive practices can take many other forms as well, such as false promises,

unsubstantiated claims, incomplete descriptions, false testimonials or comparisons, small-print

qualifications of advertisements, partial disclosure, or visual distortion of products. Anyone

including the manufacturer of a product, the advertising agency preparing the advertisement, the

retailer, or even a celebrity who endorses a product-can be prosecuted for making

unsubstantiated claims about a product or service. As a matter of fact, any advertising that leads

the consumer to make purchase decisions based on false assumptions about the price and quality

of competitive products is considered deceptive practice and is punishable by law. Responsibility

for enforcement of the laws dealing with unfair and deceptive advertising comes under the

jurisdiction of the federal trade commission.

Q. 7. What act created the first comprehensive scheme of regulation over matters concerning

consumer safety? (5 points)

Consumer Protection Act, 1957.

Q. 8. Dave receives an unsolicited credit card in the mail. Before he can check the mail, the

credit card is stolen from his mailbox. The thief uses Dave’s credit card and charges exactly

$1,252.76 before the credit card company notices the suspicious activity and deactivates the

card. How much of those unauthorized charges is Dave liable for? (5 points)

Dave is liable for nothing. He was not even informed that credit card has arrived and was not

aware of any such suspicious activity. In this case consumers are protected and bank has to bear

the loss. This is the reason why bank should personally deliver it to client hand.

Q. 9. What is the employment-at-will doctrine? What are the exceptions to this doctrine? (5

points)

Forty-nine states in the U.S. implement the Employment-at-Will Doctrine to varying degrees.

Montana is currently the only state that requires all non- public sector employers to have just

cause when terminating an employee. According to the doctrine, unless an employee has an

employment contract, the employer can terminate him at any time and without cause

Purpose

The Employment-at-Will Doctrine is supposed to have the best interest of the employer and the

employee in mind. Meaning, the employee is free to end their employment any time they choose,

for any reason or without cause, just as the employer is free to terminate an employee at any time

Adrian Garcia

Business Law II

4/10/14

without cause. The majority of employers may request that employees give them notice before

quitting their jobs, but it is not a legal requirement.

Termination

Under the Employment-at-Will Doctrine, an employer can terminate an employee for any

reason. An employer can also fire an employee for unjustifiable reasons. For example, to

cut labor costs, an employer can fire all of its higher paid, experienced employees who do not

have contracts , in favor of hiring less experienced employees whose wages are lower. Doing so

does not violate any type of employment or labor laws.

Illegal Termination

Even though the Employment-at-Will Doctrine allows employers to terminate employees at

their discretion, employers cannot terminate an employee for illegal reasons or in violation of

their civil rights. For example, employers cannot fire anyone based on their ethnic race,

disability, gender or religion. Some states have also adopted statutes that prohibit employers

from firing anyone based on their sexual orientation. However, if an employee suspects this is

the reason for their termination, he will typically have to hire a labor lawyer and successfully

sue his employer to recover any damages.

Public Policy Violations

Employers also cannot fire employees if it violates a public policy or statutes. This often

referred to as the public policy exception to the Employment-at-Will Doctrine. For example, if

an employee injures herself at work and files a workman’s compensation claim , the employer

may not fire her for that reason alone. Another example of a violation of public policy is if the

employer terminates the employee because she refused to engage in illegal activities on behalf of

her employer. The public policy exception is a state and not federal statute. Not all states have

adopted a public policy exception to the Employment-at-Will Doctrine.

Q. 10. Couch Potato Cable Co. is subject to mandatory workers’ compensation laws in the states

in which it does business. Justin and Phil work for Couch Potato Cable Co. as part of a crew that

installs and repairs cable lines. While installing new cable lines at a job site, Justin is injured in

an accident that is entirely Phil’s fault. Justin files a claim for workers’ compensation. Should the

claim be granted? Why or why not? (5 points)

If Justin files the claim within 30 days of the injury it should be granted. Since it was an accident

on Phil’s part the injury is still considered an on the job related injury and thus it can be covered.

What happens next after the claim is filled is that the injured worker would tell his medical

provider that the injury is work related. They must also visit the employer’s designated physician

for an examination of how serious the injury is. Afterwards the insurance carrier will contact the

employer to determine the amount of pay the injured worker will receive will out of the job.

What type of visa would a foreign worker performing agricultural labor of a seasonal nature have

to obtain to be able to legally work in the United States? (5 points)

One of the benefits of learning English is gaining an advantage in the competitive job scene.

Those who come to the united states , whether for a short time or on a longer term basis, will

often be quizzed on their knowledge of the language and their ability to use it while performing

Adrian Garcia

Business Law II

4/10/14

daily tasks. If you’ve decided to move forward learning English, you may have already thought

about the types of careers you’d be interested in pursuing in the United States. In order to legally

obtain work, you’ll need to get the appropriate visa or status. Here’s a look at the most common

visa options available.

Employment Authorization Document / work permit :

foreign workers may get temporary permission to work in the U.S. by obtaining this permit,

which lasts for one year and can be renewed annually. Those who are eligible to apply include

students seeking specified types of employment, refugees, asylees and asylum seekers, foreigners

who are in the final stage of pursuing permanent residence, and several other specific groups.

H1-B Non – immigrant / skilled workers:

Most people who fall under this category are considered to be highly skilled or educated in a

specialized occupation. Permission to work under this status is for a designated amount of time

and for one specific employer, so you would need to know exactly where you’ll be working

when applying.

H2-B Temporary Non-Agricultural Worker:

Because the government recognizes an insufficient number of domestic laborers to fill all

positions, some immigrants can obtain this specific permission for employment. Positions must

be non-agricultural in nature, such as seasonal jobs at a tourist destination.

H2-A Seasonal Agricultural Worker:

Like the H2-B option, this visa allows foreigners to fill available positions due to lack of

domestic laborers. In this case, employment is related to agricultural work.

GREEN CARD permanent residency:

Can be obtained with a green card. If you are offered a job, the organization may be willing to

help you with this process. It may be necessary for you and the organization to obtain a type of

approval letter from the U.S. department of labor stating the position can not be filled by a U.S.

worker. Green cards are also granted to 50,000 immigrants each year through a lottery program.

Exchange Visitor:

This temporary status gives immigrants permission to come to the United States to participate in

a work- or study-related program, often one in which they are learning English and studying. If

you’re learning English in an approved exchange program , this is the type of visa you will most

likely be given by the U.S. government.

Adrian Garcia

Business Law II

4/10/14

Q. 11. What type of visa would a foreign worker performing agricultural labor of a seasonal

nature have to obtain to be able to legally work in the United States? (5 points)

One of the benefits of learning English is gaining an advantage in the competitive job scene.

Those who come to the united states , whether for a short time or on a longer term basis, will

often be quizzed on their knowledge of the language and their ability to use it while performing

daily tasks. If you’ve decided to move forward learning English, you may have already thought

about the types of careers you’d be interested in pursuing in the United States. In order to legally

obtain work, you’ll need to get the appropriate visa or status. Here’s a look at the most common

visa options available.

Employment Authorization Document / work permit :

foreign workers may get temporary permission to work in the U.S. by obtaining this permit,

which lasts for one year and can be renewed annually. Those who are eligible to apply include

students seeking specified types of employment, refugees, asylees and asylum seekers, foreigners

who are in the final stage of pursuing permanent residence, and several other specific groups.

H1-B Non – immigrant / skilled workers:

Most people who fall under this category are considered to be highly skilled or educated in a

specialized occupation. Permission to work under this status is for a designated amount of time

and for one specific employer, so you would need to know exactly where you’ll be working

when applying.

H2-B Temporary Non-Agricultural Worker:

Because the government recognizes an insufficient number of domestic laborers to fill all

positions, some immigrants can obtain this specific permission for employment. Positions must

be non-agricultural in nature, such as seasonal jobs at a tourist destination.

H2-A Seasonal Agricultural Worker:

Like the H2-B option, this visa allows foreigners to fill available positions due to lack of

domestic laborers. In this case, employment is related to agricultural work.

GREEN CARD permanent residency:

can be obtained with a green card. If you are offered a job, the organization may be willing to

help you with this process. It may be necessary for you and the organization to obtain a type of

Adrian Garcia

Business Law II

4/10/14

approval letter from the U.S. department of labor stating the position can not be filled by a U.S.

worker. Green cards are also granted to 50,000 immigrants each year through a lottery program.

Exchange Visitor:

This temporary status gives immigrants permission to come to the United States to participate in

a work- or study-related program, often one in which they are learning English and studying. If

you’re learning English in an approved exchange program , this is the type of visa you will most

likely be given by the U.S. government.

Q. 12. American Automobile Assemblers Union (“AAAU”) is a large union whose members

consist of various assembly line workers who put automobiles together. The AAAU is the

official labor union of the assembly line workers who work at Ford’s factory in Detroit. After a

large recall in Ford trucks, Ford decides that they will not give their workers a yearly raise and

they will raise their monthly premiums for healthcare. The enraged employees strike for better

wages and healthcare. During the strike, Ford hires workers to come in and replace the striking

workers. Ford hires exactly as many workers as those who were striking so they can keep

production constant. After two months of striking, Ford and AAAU come to an agreement about

wages and healthcare premiums which ends the strike. AAAU tells Ford that they must fire the

“scabs” who were hired during the strike so their union members can have their jobs back. Ford

says that they aren’t going to fire anyone and they don’t have to. Who is right and why? (6

points)

In this case Ford is right. Company hired someone so as not to stop production. After two months

of striking, Ford and AAAU come to an agreement about wages and healthcare premiums which

ends the strike. Now since the strike is over Ford does not want hired people to be sacked and

they are right doing that.

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