CFL Securities Law & Regulatory Compliance 2 — Questions and Answers
Question 1: In securities litigation, 'loss causation' requires the plaintiff to demonstrate that:
- The fraudulent misstatement caused the economic loss suffered (Correct answer)
- The stock price declined after the misstatement was made
- The misstatement was the sole cause of the investment decision
- The defendant profited from the plaintiff's loss
Correct answer: The fraudulent misstatement caused the economic loss suffered
Dura Pharmaceuticals v. Broudo held that plaintiffs must prove the alleged fraud caused the actual investment loss, not merely that they paid an inflated price.
Question 2: Under SEC Rule 10b5-1, an insider can establish an affirmative defense to insider trading by:
- Entering into a pre-planned trading arrangement before becoming aware of material non-public information (Correct answer)
- Disclosing trades to compliance within 48 hours
- Limiting trades to less than 1% of average daily volume
- Obtaining board approval for each trade
Correct answer: Entering into a pre-planned trading arrangement before becoming aware of material non-public information
Rule 10b5-1 plans allow insiders to establish trading plans when not in possession of MNPI, providing an affirmative defense for trades executed under the plan.
Question 3: The SEC's enforcement authority under Section 21(d) of the Exchange Act allows it to seek all of the following EXCEPT:
- Criminal incarceration directly through SEC proceedings (Correct answer)
- Injunctions against future violations
- Disgorgement of ill-gotten gains
- Civil monetary penalties
Correct answer: Criminal incarceration directly through SEC proceedings
The SEC can seek civil penalties and disgorgement but cannot directly impose criminal sanctions—criminal charges must be referred to the DOJ.
Question 4: Which doctrine holds that a tippee who receives material non-public information from an insider can be liable for insider trading if the tipper received a personal benefit?
- The Dirks tipper-tippee liability doctrine (Correct answer)
- The misappropriation theory
- The temporary insider doctrine
- The constructive possession rule
Correct answer: The Dirks tipper-tippee liability doctrine
In Dirks v. SEC, the Supreme Court held that tippee liability flows from the tipper's breach of fiduciary duty, which requires the tipper to have received a personal benefit.
Question 5: A financial litigator representing a company in an SEC enforcement action would most likely assert which defense to a disgorgement order when the company's profits are difficult to trace?
- Lack of a sufficient causal nexus between the violation and the profits (Correct answer)
- Statute of limitations under the 5-year repose period
- Good faith reliance on counsel's advice
- Absence of a private right of action
Correct answer: Lack of a sufficient causal nexus between the violation and the profits
Courts require a causal connection between the violation and the profits subject to disgorgement; attenuated or unrelated gains may be excluded.
Question 6: Under the Sarbanes-Oxley Act Section 304, a CEO or CFO must reimburse the company for bonuses and profits from stock sales if the company is required to restate its financials due to:
- Misconduct resulting in material noncompliance with financial reporting requirements (Correct answer)
- Any accounting error regardless of cause
- An SEC-initiated investigation
- A material weakness identified by external auditors
Correct answer: Misconduct resulting in material noncompliance with financial reporting requirements
SOX Section 304 clawback applies when the restatement results from material noncompliance caused by misconduct, not mere accounting errors.
CFL Securities Law & Regulatory Compliance 2
In securities litigation, 'loss causation' requires the plaintiff to demonstrate that: