CFL Securities Law & Regulatory Compliance 3

Question 1

In a securities class action, the lead plaintiff is selected based primarily on which criterion under the PSLRA?

Accepted Answer

The member with the largest financial interest in the relief sought

Answer

The PSLRA creates a rebuttable presumption that the plaintiff with the largest financial interest who satisfies Rule 23 requirements should be lead plaintiff.

Question 2

The Securities Litigation Uniform Standards Act (SLUSA) preempts state law class actions that allege:

Accepted Answer

A misrepresentation or omission in connection with the purchase or sale of a covered security

Answer

SLUSA prevents plaintiffs from using state law class actions to evade the PSLRA's heightened standards by preempting state fraud claims tied to covered securities.

Question 3

Under Section 20(a) of the Securities Exchange Act, a 'controlling person' can be jointly and severally liable for a controlled person's securities violation unless the controlling person proves:

Accepted Answer

Good faith and no direct or indirect inducement of the violation

Answer

Section 20(a) provides a good faith defense for controlling persons who acted in good faith and did not directly or indirectly induce the violating act.

Question 4

An investment bank underwrites a public offering and fails to conduct adequate due diligence on the issuer's financial statements, which contain material misstatements. Under Section 11 of the Securities Act, the underwriter's primary defense is:

Accepted Answer

Due diligence—that it had reasonable grounds to believe the statements were accurate

Answer

Section 11 permits underwriters to escape liability by proving they conducted adequate due diligence and had reasonable grounds to believe the registration statement was accurate.

Question 5

Which of the following is a key element distinguishing the misappropriation theory of insider trading from classical insider trading?

Accepted Answer

The trader breaches a duty owed to the source of the information, not to the company whose securities are traded

Answer

Under the misappropriation theory (U.S. v. O'Hagan), liability arises when a trader deceives the source of information—such as an employer—not the issuer company.

CFL - Certified Financial Litigator Practice Test

CFL - Certified Financial Litigator Practice Test

CFL Securities Law & Regulatory Compliance 3