Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity
serving portions of Montana and North Dakota. Reliant was in the final stages of planning a takeover of
Dakota Gasworks, Inc. a natural gas distributor that operated solely within North Dakota. Emerson went
on a weekend fishing trip with his uncle, Ernest Wallace. Emerson mentioned to Wallace that he had
been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. On returning
from the fishing t rip, Wallace met with a broker from Chambers Investments and purchased $20,000 of
Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and
purchased 57% of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72%
before leveling out. Wallace then sold his Reliant stock for a gross profit of $14,400.
Using the information presented in our reading material, answer the following questions:
1. Would registration with the SEC be required for Dakota Gasworks securities? Why or why not?
2. Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5?
Why or why not?
3. What theory or theories might a court use to hold Wallace liable for insider trading?
4. Under the Sarbanes-Oxley Act of 2002, who would be required to certify the accuracy of financial
statements filed with the SEC?
Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity
serving portions of Montana and North Dakota. Reliant was in the final stages of planning a takeover of
Dakota Gasworks, Inc. a natural gas distributor that operated solely within North Dakota. Emerson went
on a weekend fishing trip with his uncle, Ernest Wallace. Emerson mentioned to Wallace that he had
been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. On returning
from the fishing t rip, Wallace met with a broker from Chambers Investments and purchased $20,000 of
Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and
purchased 57% of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72%
before leveling out. Wallace then sold his Reliant stock for a gross profit of $14,400.
1. Registration with the SEC would not be required for Dakota Gasworks securities because it operates solely within North Dakota. The registration requirement under the Securities Act of 1933 applies to securities that are offered or sold through interstate commerce or in connection with a national securities exchange. Since Dakota Gasworks operates only within North Dakota, its securities offering would likely not fall within the scope of the Securities Act's registration requirements.
2. It is possible that Emerson violated Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. These provisions prohibit fraudulent activities in connection with the purchase or sale of securities. Emerson disclosed non-public material information about the planned takeover of Dakota Gasworks to his uncle, who then traded on that information. This could be viewed as a breach of Emerson's duty as a corporate insider and a violation of the prohibition on insider trading.
3. A court might hold Wallace liable for insider trading based on the theory of "misappropriation." This theory suggests that someone who misappropriates or improperly obtains material non-public information and trades on it violates securities laws. In this case, Wallace received insider information from Emerson, who owed a duty to Reliant Electric Company not to disclose such information to others. By trading on that information, Wallace could be held liable for insider trading under the misappropriation theory.
4. Under the Sarbanes-Oxley Act of 2002, the certification of the accuracy of financial statements filed with the SEC is the responsibility of the company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO). These individuals are required to certify that the financial statements fairly present the company's financial condition, comply with applicable accounting standards, and include any necessary disclosures. The CEO and CFO must also certify that they are responsible for establishing and maintaining internal controls to ensure the accuracy of financial reporting.
To answer these questions, we need to refer to the reading material. However, as an AI text-based bot, I don't have access to specific reading material. I can provide you with a general guidance on how you can approach finding the answers to these questions.
1. Finding the answer to whether registration with the SEC is required for Dakota Gasworks securities requires understanding the criteria for registration. You can start by researching the requirements for registration with the SEC and identify if Dakota Gasworks fulfills those requirements.
2. To determine if Emerson violated Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, you can review the provisions of those regulations. Identify the elements and conditions that need to be met to violate those rules, and then analyze if Emerson's actions meet those criteria.
3. Analyzing the theories a court might use to hold Wallace liable for insider trading requires understanding the different theories of insider trading and their applicability in this case. Research the various legal theories, such as classical theory, misappropriation theory, tipper-tippee theory, and analyze which theory would likely apply to hold Wallace liable.
4. Research the Sarbanes-Oxley Act of 2002 to understand the provisions related to financial statement certification. Identify which individuals are required to certify the accuracy of financial statements filed with the SEC based on the provisions outlined in the Act.
By following these steps and utilizing reliable and relevant sources, you should be able to find the answers to the questions posed.