AGENCY 1. Agency a. Intro i.

Agency is a legal relationship in which one person or entity (the principal) appoints another person or entity (the agent) to act on his behalf. Requisites for Creation i. Principal with capacity and consent 1. Principal must have contractual capacity (not a minor and not incompetent) 2. Writing generally not required- Unless LAND or greater than 1 YEAR 3. Agent need not have capacity- Minors can be agents 4. Consideration NOT required ii. Power of Attorney- Written Authorization of Agency 1. A power of attorney is a written authorization of agency 2. The agent has the power to act on behalf of the principal 3. Generally only the principal is required to sign the power of attorney. There is no requirement that the agent sign the instrument 4. The agent s authority is normally limited to specific transactions Rights and Duties Between Principal and Agent i. Duties of Agent to Principal 1. Duty of Loyalty- Act solely in the Principal s interest a. No kickbacks or self dealing b. Avoid conflicts c. Do not disclose confidential information 2. Duty of Obedience- Do not exceed authority and obey reasonable instructions rd 3. Duty of Reasonable Care- Liable if Negligent- to principal and/or 3 party 4. Duty to Account a. Unless otherwise agreed, the agent has a duty to account to the principal for all property and money received and paid out when acting on behalf of the principal. The agent CANNOT commingle the principal s property with the agent s property. 5. Subagent a. If a subagent is authorized to hire a subagent, the subagent owes a duty of care to both agent and the principal. ii. Principal s Remedies 1. If the agent breaches the duties he owes to his principal, the principal can recover damages from the agent a. Tort damages- civil wrong b. Contract damages- breach of contract c. Recovery of secret profits d. Withhold compensation- If the agent committed an intentional tort or intentionally breached her duty to her principal, the principal may refuse to pay the agent. iii. Duties of Principal to Agent 1. Compensationa. Unless the agent has agreed to act gratuitously (free),

b.

c.

2.

The principal has an IMPLIED DUTY to give the agent REASONABLE COMPENSATION 2. Reimbursement- The principal also has an implied duty to reimburse the agent for all expenses incurred in carrying out the agency. 3. Remedies of the agent a. If the principal breaches her duties to the agent, the agent can bring an action against the principal for any damages caused b. The agent has a duty to mitigate damages iv. Power to Terminate Relationship- Generally Terminable at Will 1. Since an agency relationship is consensual, either party generally has the POWER to terminate the relationship at any time, but not necessarily the RIGHT. 2. EXCEPTION a. The principal cannot terminate an agency coupled with an interest. ONLY an agent can terminate an agency coupled with an interest. (Agent is a creditor of the principal) Agent s Power to Contractually Bind Principal a. Actual Authority i. Actual authority ( real authority , simply Authority ) is the authority the agent reasonably believes he possesses because of the principal s communications to the agent. Agent s with actual authority has the POWER and RIGHT to bind his principal. 1. Express Actual Authority a. Oral or written instructions 2. Implied Actual Authority a. Agent has Right and Power b. This includes the authority to do things reasonable necessary to carry out the agency. 3. Termination of Actual Authority can Occur By: a. Act of the parties i. Termination can occur through the acts of either the principal (a revocation) or the agent (a renunciation) ii. Exception- If the agency is coupled with an interest, only the agent, not the principal, has the power to terminate. b. Accomplishment of Objective or Expiration of Stated Period c. Termination of Actual Authority i. Death of principal or agent ii. Incapacity of principal iii. Discharge in bankruptcy of principal iv. Failure to acquire a necessary license (agent) v. Destruction of subject matter vi. Subsequent illegality b. Apparent Authority i. Agent has the POWER BUT NOT RIGHT to bind the principal. (either because the rd principal s conduct has caused 3 parties to reasonably believe the agent had authority or because the principal was negligent and so will be stopped from denying that the agent had authority.

b.

1.

2.

Principal s conducta. Giving the agent title or position b. Agent cannot give themselves apparent authority Common Apparent Authority Situations a. Apparent Authority From Position/ Title i. The principal s secret limiting instructions- while effective to limit the agent s actual authority- are not effective to limit the agent s apparent authority (unless 3rd party is given notice of the limit) ii. General Agent- agent engaged to perform a series of transactions involving continuity of service iii. Secret Agent- perform one or more transactions not involving a continuity of service b. Notice Generally Required to Terminate Apparent Authority i. Actual Notice- given to old customers ii. Constructive Notice- not actual notice or knowledge, but rather notice imputed by law 1. must be given to new customers (i.e. publication in a magazine) c. Termination of Apparent Authority by Operation of Law ( Exception) NO NOTICE i. As a general rule, to terminate an agent s apparent authority, there must be some act that prevents the third party in question from reasonably believing that the agent had authority.

c.

d.

Ratification i. Ratification allows a principal to choose to become bound by a previously unauthorized act of his agent. 1. Requirements a. The agent must have indicated that he or she was acting on behalf of the principal b. All material facts must be disclosed to the principal c. The principal must ratify the entire transaction- NO PARTIAL RATIFICATION 2. May Ratify Expressly or Impliedly 3. Cannot be Ratified a. Performance would be illegal b. 3rd party withdraws 4. Only disclosed principal may ratify Contractual liability rd i. Agent s Liability- 3 party for contract duties (obligations) 1. Disclosed principal- Agent NOT liable if authorized a. If the agent discloses the existence and identity of the principal, the 3rd party cannot hold the authorized agent liable

If in fact the agent has no such authority, the 3 party can hold the agent liable for any damages caused based on breach of this implied warranty (agent wrong, liable for fraud, breach of implied warranty) 2. Partially Disclosed and undisclosed Principal- Agent Liable for contract a. If the principal s identity is NOT disclosed to the 3rd party or neither the existence nor the identity of the principal is disclosed to the 3rd party, the agent is liable on the contract to the 3rd party. i. The 3rd party can hold either the principal or the agent liable, but NOT both. ii. NO APPARENT AUTHORITY with an undisclosed principal- & No ratifying iii. No Effect on actual authority- The fact that the principal is undisclosed has no effect on the agent s actual authority. rd ii. 3 Party s Liability 1. Generally only principal can hold 3rd party liablea. As a general rule, only principal (not the agent) can hold the third party liable on a contract the agent entered into on the principal s behalf. 3. Tort Liability a. In General- Respondeat Superior i. As a general rule a principal is NOT LIABLE for the torts committed by his agent- ONLY THE AGENT IS LIABLE ii. EXCEPTIONS: 1. Under the doctrine of respondeat superior, an employer can be liable for an employee s torts committed within the scope of employment. iii. This does not relieve the agent of liability. The injured person may sue both the employer under respondeat superior and the agent. b. Employer- Employee Relationship i. An employer is liable only for torts of an employee and is usually not liable for torts of independent contractors. ii. What constitutes Employer-Employee Relationship 1. Control 2. Who provides tools/ facilities 3. Length of employment 4. Degree of supervision c. Scope of Employment i. An employer is not liable to an injured party merely because an employee caused the injury the injury must also have occurred within the SCOPE OF THE EMPLOYMENT 1. The injury must have occurred while the employee was working for the employer within the time and geographic area in which the employee was to work. ii. Activities 1. Conduct must be: a. Of the same general type the employee was hired to perform b. Actuated, at least in part, by a desire to serve the employer 2. Intentional Torts

b.

rd

a.

b. 3.

The employer usually is liable only for an employee s negligence and is not liable for intentional torts, since intentional torts are seldom within the scope of employment. EXCEPTION: Where tort is authorized or use of force is authorized (Bouncer at a bar)

Crimes a. An employer generally is not liable in tort for an employee s conduct that constitutes a serious crime (carrying an illegal weapon) iii. Time and Geographic Area 1. The conduct must also have occurred within usual employment time and space limits. iv. Cannot Limit Liability by Agreement with Employee 1. An agreement between the employer and employee that the employer will not be liable for employee torts does not prevent a third party from holding an employer liable. The employer can seek reimbursement from the employee.

BANKRUPTCY 1. Intro 2. Types of Bankruptcy Cases a. Chapter 7 Liquidation- Individual, Partnership, Corporation i. A trustee is appointed. The trustee collects the debtor s assets liquidates them , and uses the proceeds to pay off creditors to the extent possible. ii. If the debtor is an individual, the debtor s debts are then discharged, with certain exceptions. (Preferred by debtor for this reason) iii. If the debtor is an artificial entity, it is dissolved. No discharge is given but the effect is the same, all debts are wiped out. b. Chapter 13 Adjustment of Debts of Individuals with Regular Income- Individuals (Voluntary) i. The debtor repays all or a portion of his debts over a THREE year period to a maximum of a 5 year period. (Not preferred for this reason) ii. Although there is no liquidation, a Ch. 13 trustee oversees the handling of the CH. 13 proceeding iii. At the conclusion of a Ch. 13 proceeding, the remaining debts of the debtor are discharged. c. Chapter 11 Reorganization- NO LIQUIDATION, Trustee Not Required ( individuals, partnerships, corporations) i. Reorganization case (usually used by businesses but also available to individuals), a trustee usually is NOT appointed. ii. The debtor remains in possession of his or her assets and a plan of reorganization (i.e. a plan to pay off debts at different time and/or different amount than originally due) is adopted. iii. Creditors are paid to the extent possible and the business continues.

2.

Dismissal of Conversion of a Ch. 7 (to Ch. 13) case- THE MEANS TEST a. A Chapter 7 case by an individual consumer debtor may be dismissed (or with the debtor s consent converted to a case under Ch. 13) upon finding that granting relief under Ch. 7 would constitute abuse. b. Step 1- Calculate Debtor s Income i. Current monthly income- AVERAGE OF 6 MONTHS PRECEDING FILING 1. If equal to or less than state median income- Ch. 7 permitted 2. If debtor s income exceeds state median income-> Step 2 Means Test c. Step 2- THE MEANS TEST i. The means test is designed to determine whether the debtor has sufficient income to repay debts using a Chapter 13 plan. 1. Current Net Monthly Income Mult. By 60 a. [ Average monthly income allowed expenses] x 60 2. If less than $7,025- Ch. 7 permitted 3. If less than $11,725 but more than $7,025- Abuse only if amount Equals 25% of non-priority claims 4. If $11,725 or more- Presumption of abuse- Ch. 13 or dismissed 4. Who may be a debtor a. Only a person who resides, or has a place of business, in the United States is eligible to be a debtor under the Bankruptcy Code. Person= Individual, Partnership, Corporation i. Limitation in CH. 7 Liquidations= NO RIBS 1. Railroads 2. Savings Institutions 3. Insurance Companies 4. Banks ii. Limitations on Ch. 11 Reorganizations= NO BIBS 1. Brokers 2. Savings Institutions 3. Insurance Companies 4. Banks Common Features of Ch 7 and Ch 11 Cases (Individual, Partnership, and Corporation) 1. Automatic Stay- Stops Collection Efforts a. When bankruptcy petition is filed in either a voluntary case or an involuntary case, an AUTOMATIC STAY become effective against most creditors b. The stay stops almost all collection efforts c. Does not apply to criminal prosecutions, paternity suits, and cases brought to establish spousal or child support obligations 2. Duties of the Debtor- Be open and honest- After a petition is files, a debtor must file: a. A list of creditors and their addresses b. A schedule of assets and liabilities (@ FMV) c. A schedule of current income and expenditures d. Copies of tax returns from the last tax year

3.

e.

NOTE: if an individual debtor in a voluntary Ch. 7 case fails to file any of the items specified within 45 days after filing the petition, the case is automatically dismissed on th the 46 day.

3. Chapter 7 and Chapter 11 May be voluntary or involuntary 1. Voluntary Cases a. Debtor Files for Order of Relief i. A voluntary case under Ch 7 or Ch 11 is commenced by the debtor filing a petition for relief. Debts of any amount not capable of paying as due b. Debtor Need not be insolvent- Must Pass Income Tests i. Ch 7 Cases may be dismissed if the debtor has too much income. Involuntary Case- Unsecured creditors may petition a debtor involuntarily into bankruptcy proceedings under Chapter 7 or Chapter 11. a. Grounds- Generally Not Paying Debts When Due- (in default) b. Ineligible debtors- Farmers and Charities i. Farmers and nonprofit charitable organizations may not be petitioned involuntarily into bankruptcy c. Who must join petition- Owed at least $14,425 i. Only creditors who are owed, individually or in aggregate AT LEAST $14,425 in unsecured undisputed debt may petition a debtor involuntarily into bankruptcy. 1. Fewer than 12 Creditors- 1 or more owed at least $14,425 2. 12 or More Creditors- 3 owed $14,425 a. If a debtor has 12 of more creditors, at least 3 who are owed $14,425 in aggregate in unsecured, undisputed debt must join in the involuntary petition. An Involuntary Petition Does Not Constitute and Order for Relief a. Unlike a voluntary petition, an involuntary petition does not constitute an order for relief. There Is a GAP between the filing and the order of relief. (involuntary case gap) b. The court will enter an order of relief if the debtor does not object to the petition within 20 days c. If the debtor does object, a hearing is held to determine the debtor s solvency. (the test for solvency is whether the debtor is generally paying his debts as they come due) d. Persons who become creditors of the debtor during the involuntary case gap are given high priority in recovering against the debtor s estate Dismissal of Petition- Damages- Frivolous a. If creditors improperly filed an involuntary petition, a court may award the debtor compensatory damages, court costs, attorney s fees, and even punitive damages if bad faith can be shown. Section 341 Meeting Creditor s Meeting a. 20-40 days after the order for relief b. Notice Requirements c. Debtor must attend- The primary purpose of the meeting is to provide creditors an opportunity to examine the debtor Property of the Bankruptcy Estate a. Property included Time of filing i. The debtor s estate (all the debtor s real and personal property at the time of filing) ii. Income generated from estate property

2.

3.

4.

5.

6.

4.

5.

6.

7.

iii. Also includes property the debtor receives from a divorce, inheritance, or insurance within 180 days after filing the petition b. Property Excluded from the Estate i. Post- Petition Earnings, spendthrift trusts, educational IRAs, and State tuition programs ii. Exempt Property 1. Generally things necessary to live 2. Homestead up to 21,625 3. Motor vehicle up to 3,450 4. Household goods , crops, animals (550 per item up to 11,525) 5. Tools of a trade, professional books 6. Government benefits 7. Health aids 8. Alimony iii. NOTE : Exemptions do not apply if PMSI, mortgage, tax lien Trustee s Powers as a Lien Creditor a. Trustee is a Hypothetical Lien Creditor as of Filing Date i. The trustee is treated as having a lien on all of the debtor s property the instant the bankruptcy petition is filed ii. This means that the trustee has priority over all creditors except creditors with prior perfected security interests or prior statutory or judicial liens Power Over Fraudulent Transfer- Hide/ fake sale a. A trustee also has power to set aside fraudulent transfers made within 2 years of the filing date b. A fraudulent transfer is any transfer made with intent to hinder, delay or defraud creditors or any transfer where the debtor received less than equivalent value with the debtor was insolvent. Trustee Can Disaffirm Preferences (90 days/ 1 year) a. The trustee has the power to set aside preferences. When the payment is set aside, the payment is taken back from the creditor who received it and it comes part of the bankruptcy estate i. A transfer made to or for the benefit of a creditor 1. Prevent one creditor from being preferred over others ii. On account of an antecedent debt of the debtor 1. Pre-paying, accelerating payments iii. Made within 90 days prior to filing of the petition (one year if the creditor is an insider) iv. Made while the debtor was insolvent b. EXCEPTION: Transfers that cannot be set aside i. Transfers in the ordinary course of business ii. PMSI perfected within 30 days iii. Consumer payments under $600 iv. Domestic support obligations Claims against the estate a. Unsecured creditors and equity security holders must file i. Must file a proof of interest with bankruptcy court ii. Unless someone objects, a filed claim or interest will automatically be allowed b. The general rule is that a perfected security interest passes through and survives bankruptcy even if the creditor does not file a proof of claim

1) Chapter 7 Bankruptcy a) Certain Debts that are not discharged (WAFTED) i) Taxes due within 3 years of filing ii) Debts incurred by fraud iii) Debts undisclosed in the bankruptcy petition iv) Embezzlement, larceny, and fiduciary s fraud v) Alimony, maintenance, support and settlements from marital separation vi) Willful and malicious injury (1) Liabilities arising from willful and malicious injury to another are not dischargeable. (2) Liabilities arising from negligent torts are dischargeable. vii) Fines and penalties viii) Educational loans b) Reaffirmation of Discharged Debts i) Sometimes a debtor does not want a particular debt discharged in bankruptcy. The debtor may reaffirm such debts only if the following requirements are met: (1) The agreement to reaffirm was made before granting of the discharge (2) The agreement contains a clear and conspicuous provision that the debtor has the right to rescind the agreement any time prior to discharge or within 60 days after the agreement has been filed by giving notice to creditor (3) Debtor s attorney advises him that reaffirmation is not required by law c) Revocation of Discharge i) A creditor or trustee may request the discharge be revoked for the following (1) Debtor commits fraud (2) Fails to obey court order d) Distribution of the Debtor s Estate- Payments and priorities i) Secured Claims ii) Priority Claimants (SAG WEG CTI) (1) First Priority-Support obligations to Spouse and Children (2) Second Priority- Administrative Expenses- Fees (3) Third Priority- Involuntary Case Gap Claims (4) Fourth Priority- Wage Claims up to $11,725 (5) Fifth Priority- Employee Benefit Plans up to $11,725 (combined with Wage Claims, cannot exceed $11,725) (6) Sixth Priority- Grain Farmers and Fisherman up to $5,775 (7) Seventh Priority- Consumer Deposits up to $2,600 (8) Eighth Priority- Tax Claims (9) Ninth Priority- Personal Injury Claims Arising from Intoxicated Driving iii) General Creditors who filed their claims on time

2) Chapter 11 Bankruptcy- IPC, Voluntary or Involuntary a) Creation of Creditor s Committee i) Committee of the willing persons holding 7 largest unsecured claims b) Creation of Equity Security Holder s Committee i) 7 largest holders of equity securities c) Powers of Committees- Approve Plan d) Debtor Generally Remains in Possession i) In Ch 7 liquidation, a trustee is appointed to take over the debtor s assets ii) In a Ch 11 reorganization case, committees are appointed to consult with and advise the debtor, but a trustee is generally NOT appointed e) Chapter 11 Reorganization Plan- To Save Business i) The debtor may file a reorganization plan under Ch 11 any time during the bankruptcy case. ii) Unless a trustee has been appointed, the debtor has an exclusive right to file a plan during the first 120 days after the order for relief. Other interested parties may file a plan if: (1) A trustee has been appointed (2) The debtor has not filed a plan within 120 days (3) The debtor ahs filed a plan but has not obtained the acceptances of every impaired class within 180 days after entry of the order for relief. f) Contents of the plan i) Classify all claims ii) Describe the treatment to each impaired class iii) Treat each claimant within a particular class identically iv) Establish ways to implement the plan. g) Acceptance of the plan by creditors/ stockholders- UNANIMOUS NOT REQUIRED i) A class of impaired clams is deemed accepted if it is accepted by 2/3 vote h) Confirmation of the Plan by Court i) Only court can confirm

Securities Regulation 1) Securities Act of 1933- IPO a. Purpose- Provide Investors with Sufficient Investment Information i. The goal of the 1933 Act is to assure that investors have sufficient information on which to make and informed investment decision. ii. It accomplishes this goal by requiring most issuers to register new issues of securities with the SEC and provide prospectuses containing material information regarding the securities to prospective investors iii. The SEC does not guarantee the accuracy of this information b. Those Required to Register: i. Issuers- entity who s securities are being sold ii. Underwriter- intermediary who sells an issuer s securities to the general public or to dealers iii. Dealer- one who sells or trades securities on a full- or part-time basis c. Registration Statement- Most securities cannot be sold unless they are first registered with the SEC. The registration statement consists of two parts: i. Part 1: The Prospectus- A written offer to sell securities 1. Any written, radio, or TV offer to sell securities 2. Summarizes important information contained in Part 2 3. Each investor must receive a copy of the prospectus before or contemporaneous with every sale of the security ii. Part 2: Information About the Securities being Issued must Include: 1. Audited Balance Sheet and P&L Statement a. B/S not more than 90 days before filing and P&L for preceding 5 years 2. Other Material Facts Requiring Disclosure a. Names, addresses of directors, officers, underwriters, >10% shareholders b. Amount of stock and debt outstanding c. Purpose of offering iii. Shelf Registrations- Registration Statement for Future Issuances 1. Prepare one registration statement for all securities that they will offer in the future. 2. Permitted if the issuer has continuously filed under the 1934 Act for 1 year and the information is continuously updated. iv. The SEC reviews the registration statement to ensure both parts are complete v. The registration statement becomes effective on the 20th day after its filing with the SEC d. Timetable of Sales Activity i. 30 Days before registration (prefilling period)- No sales activity allowed 1. Issuer is permitted to negotiate with underwriter, communications do not constitute sales activity ii. After registration but before effectiveness (waiting period) 1. There is a 20-day waiting period between registration and the filing date. Permitted activities include

e.

Oral offers to sell Tombstone ads- ad identifies security, price, and who will execute orders c. Preliminary (red herring) prospectus can be made- statement in red ink (not final) iii. After effective date (post- effective period) Exemptions from Registration i. Securities Exemptions --BRINGS 1. Securities issued by BANKS and savings and loans 2. Securities issued by NOT FOR PROFIT organizations 3. Securities issued by the GOVERNMENT 4. Securities of REGULATED common carriers (railroads) 5. SHORT-TERM commercial paper with a maturity of 9mo or less 6. INSURANCE policies ii. Transaction Exemptions- one transaction 1. Casual sales exempt- Not an issuer, underwriter, or dealer 2. Exchanges with existing holders; Corporate Reorganizations a. Exemption when an issuer exchanges securities with its existing holders provided no commission is paid (e.g. stock dividends and stock splits) 3. Intrastate sales 4. Regulations A (partial exemption) a. Regulation A is a partial Exemption, permitting a simplified form registration that costs less to prepare than full registration. (Unaudited FS) b. Under Regulation A, instead of filing a registration statement, the issuer files an offering statement, which consists of a notification and an offering circular. c. Regulation A sales may not exceed $5M in a 12 month period 5. Private Offering Exemption- Regulation D a. Regulation D Exempts private offerings and the SEC has 3 private offering exemptions under Regulation D: 504, 505, 506. b. General Conditions of 504,505,506 i. General solicitation usually prohibited- no advertising ii. Immediate resale to public is prohibited- must hold LT investment (2 years or more) iii. SEC must be informed within 15 days c. 504- $1M limit i. Not exceed $1M in a 12 month span ii. No limit on number or type of purchasers iii. No specific disclosures required d. 505- $5M limit i. Not exceed $5M in a 12 month span ii. Securities issued under 505 may be sold any number of accredited investors and 35 or fewer unaccredited investors.

a. b.

e.

Accredited- institutional investor, bank, person with $1M of net worth or $200,000 annual income iii. If only accredited investors purchase, no disclosure is required. If there are any unaccredited investors, all investors must be given at least an annual report containing audited financial statements 506- Unlimited $ amount- SOPHISTICATED INVESTORS ONLY i. No limit on the amount of stock that can be sold ii. Any number of accredited and 35 or fewer unaccredited, but sophisticated investors iii. If only accredited investors purchase, no disclosure is required. If there are any unaccredited investors, all investors must be given at least an annual report containing audited financial statements

1.

6.

Liability Under the 1933 Act a. Section 11 (LAM) imposes civil liability for misstatements whether or not intentional, in registration statements i. Elements of a Section 11 Cause of Action 1. Makes anyone who signed a registration statement (officers, directors, lawyers, auditors, underwriters) liable for all damages caused by a misstatement of material fact. A person suing must prove: a. ACQUIRED the stock b. Suffered a LOSS c. Registration statement contained a MATERIAL MISREPRESENTATION 2. The cause of action must be brought within 1 year after discovery and within 3 years of the offering date. 3. Defenses a. Due diligence defenses i. GAAP/GAAS workpapers

b.

c.

Misstatement did t not cause plantiff s damages Section 12: Civil Antifraud Section of the 1933 Act i. Section 12 imposes civil liability if a required registration was not made; if a prospectus was not given to all investors or if materially false statements were made or omitted in connection with sales or offers to sell. ii. The immediate purchaser may sue for damages Section 17: Criminal Antifraud Section of the 1933 i. Sec. 17 imposes criminal penalties against anyone who uses any type of fraud in connection with the issuance of a security ii. ENFORCED BY THE SEC AND PROSECUTED BY THE JUSTICE DEPT.

b.

2) Securities Act of 1934 a. Introduction i. The 1934 Act is concerned with exchanges of securities after they are issued ii. 1934 Act has registration and reporting provisions that apply only to certain companies and anti-fraud provisions that apply to all purchasers and sellers, regardless of registration iii. The SEC can seek suspension or revocation of a company s registered securities for violation of the 1934 s registration or reporting requirements b. Registration requirements i. Only two types of companies must register their securities: 1. Companies whose shares are traded on a national exchange 2. Companies that have at least 500 shareholders in any outstanding class and more than $10M in assets ii. National stock exchanges, brokers, and dealers must also register. c. Information Required in registration statement i. Company s financial structure; nature of its business and outstanding securities ii. Audited financial statements d. Exemptions- Savings and Loans and Charitable Organizations e. Reporting Requirements- MANDATORY DISCLOSURES i. Companies Required to Report- Called Reporting Companies- Two categories 1. All companies required to register under the 1934 Act must report (500 shareholders and more than $10M in asset) 2. Any issuer that must register under the 1933 ii. Periodic business reports- 10K, 10Q, and 8K 1. 10 K- annual reports filed within 60 days (large corporations) and 90 days (small corporations) of the end of the fiscal year. 2. 10Q- quarterly report filed within 40 days, 45 for small corporations 3. 8K- must be filed within 4 days after a major change in the company, such as in a change in control, disposition of major assets, change in officers, or directors, resignation of directors, etc. iii. 5% or more owners must report- to SEC, issuer, and exchange

f.

Any person acquiring 5% or more beneficial ownership in any equity security registered under the 1934 Act must file a report with the SEC, the issuer and the exchange on which the security is traded. 2. The report must include background information about the purchaser, the source of her funds and her purpose in buying. iv. Tender offers must be reported- by the one making the tender offer 1. A tender offer is an offer to all shareholders to purchase stock for a specific price for a specified period of time 2. Any party making a tender offer to purchase 5% or more of the shares of a class of securities registered under the 1934 Act must file a report with the SEC, the issuer and the exchange on which the share are traded 3. The report must include background information about the purchaser, the source of her funds, and the purpose in buying. v. Insiders must report 1. Insiders are officer s directors, more than 10% stockholders, accountants and attorneys 2. Insiders must file a report with the SEC disclosing their holdings in the reporting company and make monthly updates 3. Imposes absolute liability on any insider who makes a profit on the purchase or sale of a reporting company s stock within a 6 month period (short-swing profits) vi. Proxy Solicitations and proxy statements must be reported 1. A proxy solicitation is a written request for permission to vote a shareholder s shares at a shareholder meeting. Must be reported to SEC 2. Proxy statements must be sent to all stockholders disclosing all facts that are pertinent to the matter on which the stockholders will vote. Proxy statements and any other documents that will be sent to shareholders as a part of the proxy solicitation must be filed with the SEC vii. Section 18 liability 1. A person can be held liable for intentionally making false or misleading statements in a registration statement or any report required under 1934 Antifraud Provisions- Rule 10b-5 i. In General- Rule 10b Applies Even if Registration is Not Required 1. Rule 10b-5, promulgated by the SEC under Section 10(b) of the 1934 Act, prohibits fraud in connection with the purchase or sale of any security 2. Rule 10b-5 applies whether or not the securities are of a registered company. Anyone who sells or buys securities using fraud can be liable. 3. Violation of rule 10b-5 can result in civil damages, an SEC injunction action, or criminal fines and penalties. ii. General Elements of cause of Action 1. Plaintiff bought or sold securities a. Rule 10b-5 applies only if the plaintiff bought or sold securities. 2. Suffered a Loss 3. Material Misstatement or Material omission of fact 4. Scienter (intent to deceive or reckless disregard for the truth) a. The plantiff must show scienter

1.

b. 5. 6.

Negligence on the part of the defendant is NOT sufficient to satisfy this element

Reliance a. The plaintiff must have relied on the defendant s misrepresentation Interstate commerce- Thus Federal laws apply a. The plaintiff must show that a means of interstate commerce was involved. Any use of the mail or phones or a national securities exchange is sufficient to satisfy this element.

iii. Insider Trading under Rule 10b-5 1. Under rule 10b-5, it is illegal for a person to trade on the basis of inside information if the person would breach a duty of trust owed to the issuer of the security or the shareholder of the issuer. a. Basically, inside information is any material nonpublic information about the security or the issuer. b. Typically, a securities issuer s insider, such as a director, officer, etc will be held to owe a duty of trust and confidence. (CPAs, attorneys as well) c. A private person injured by a violation of rule 10b-5 can bring an action against the person violating the rule for any actual damages (not punitive) or seeking recission of the transaction. The SEC can impose fines and seek criminal penalties (but does not prosecute, dept of justice does)

CPA Legal Liability 1) Breach of Contract a. If a CPA does not fulful the terms of his engagement, the client can hold the CPA liable for breach. Contract liability generally requires PRIVITY, so only a party to the contract can sue under a contract theory. b. Damages rd i. Where a CPA breaches the contract, the client or named 3 party beneficiary is entitled to recover compensatory damages ii. If the CPA s breach is material, the CPA cannot recover any payment iii. Of course, all defenses that were mentioned in the contract outline apply to a contract made by the CPA 1. Client s falure to let the CPA see accounting records 2) Commission of a Tort a. CPA liability can also arise from commission of a tort. i. Negligence- Ordinary- As a general rule, a CPA owes a duty to his or her client not to perform work negligently. To make out a case for negligence, the client must prove:

b.

1. The defendant owed a duty of care to the plaintiff 2. The defendant breached that duty by failing to act with due care 3. The breach caused plaintiff s injury 4. Damages ii. A CPA s duty to act with reasonable care generally runs only to clients, and under the majority rule, any person or limited forseeable class of persons whom the CPA knows will be relying on the CPA s work. 1. Even if not specifically named 3rd party beneficiary Fraud and Constructive Fraud (gross negligence) i. Elements of Actual Fraud- Intentional Misrepresentation 1. Misrepresentation of material fact 2. Intent to deceive 3. Actual and justifiable reliance by plaintiff on the misrepresentation 4. An intent to induce plaintiff s reliance on the misrepresentation 5. Damages ii. Elements of Constructive Fraud 1. The defendant acts recklessly, intentionally deceiving iii. CPA is liable to anyone who proves the above elements 1. Privity is not a defense for fraud.

c.