LGS 200 Exam 4 ACTUAL QUESTIONS AND
CORRECT ANSWERS
Business judgement rule - CORRECT ANSWER In making a business decision, the
directors of a corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interests of the company.
Entrepreneur - CORRECT ANSWER A person who forms and operates a new business
either by him- or herself or with others.
Securities Act of 1933 - CORRECT ANSWER require full and honest disclosure of
information to investors.
SEC (Securities Exchange Commission) - CORRECT ANSWER -Federal
administrative agency empowered to administer federal securities laws.
-Adopts rules and regulations to interpret and implement federal securities laws.
-Investigates alleged securities violations and brings enforcement actions.
-Regulates activities of securities brokers and advisors
Sarbanes-Oxley Act - CORRECT ANSWER enacted to bring more transparency to
securities markets and eliminate conflicts of interest in the industry. Sarbanes-Oxley Act
erects a wall between investment bankers and securities analysts
Short swing profits - CORRECT ANSWER Profits made by statutory insiders on trades
that occur within 6 months of each other.
Insider trading (Sec. 10(b)(5) - CORRECT ANSWER -When an insider makes a profit
by personally purchasing shares of the corporation prior to public release of favorable
information or sells shares of the corporation prior to the disclosure of unfavorable
information
-The use of material nonpublic information to make a profit by trading in securities of the
company
, U.S. v. Baghat - CORRECT ANSWER -Facts: Bhagat worked for NVIDIA Corp.
Invidia won the contract to develop the Xbox for Microsoft Corp.The CEO sent out a
company -wide email announcing the contract and that the Xbox information should be kept
confidential, and advised Nvidia employees to stop trading on the purchase of Nvidia stock.
Minutes later, Bhagat purchased large quantities of Nvidia, testifying he read the emails 40
minutes after his purchase. Less than 30 min. later his friend Mamat Gill purchased Nvidia
stock. The U.S. brought criminal charges against Bhagat for insider trading.
-Issue: Is Bhagat criminally guilty of insider trading and tipping?
-Decision: Yes, conviction upheld. The government proved he traded the stock based on
material nonpublic information. And, he provided the tippee, Gill, with material inside info.
prior to his purchase.
True insiders - CORRECT ANSWER -Officers, directors, and employees at all levels
of the company
-Lawyers, accountants, consultants, and other agents and representatives who are hired by the
company on a temporary and nonemployee status to provide services or work to the company
-Others who owe a fiduciary duty to the company.
"Material" information - CORRECT ANSWER would it cause the prudent investor to
want to buy or sell?
Due diligence - CORRECT ANSWER reasonable steps taken by a person in order to
satisfy a legal requirement, especially in buying or selling something.
Vicarious liability - CORRECT ANSWER a situation where someone is held
responsible for the actions or omissions of another person.
ex: employer is liable for something his employees did
Independent contractors - CORRECT ANSWER Person not subject to principal's
control.
E.g., outside counsel, building contractor.
Factors in determining independent contractor status:
Worker engaged in distinct occupation or independent business.
CORRECT ANSWERS
Business judgement rule - CORRECT ANSWER In making a business decision, the
directors of a corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interests of the company.
Entrepreneur - CORRECT ANSWER A person who forms and operates a new business
either by him- or herself or with others.
Securities Act of 1933 - CORRECT ANSWER require full and honest disclosure of
information to investors.
SEC (Securities Exchange Commission) - CORRECT ANSWER -Federal
administrative agency empowered to administer federal securities laws.
-Adopts rules and regulations to interpret and implement federal securities laws.
-Investigates alleged securities violations and brings enforcement actions.
-Regulates activities of securities brokers and advisors
Sarbanes-Oxley Act - CORRECT ANSWER enacted to bring more transparency to
securities markets and eliminate conflicts of interest in the industry. Sarbanes-Oxley Act
erects a wall between investment bankers and securities analysts
Short swing profits - CORRECT ANSWER Profits made by statutory insiders on trades
that occur within 6 months of each other.
Insider trading (Sec. 10(b)(5) - CORRECT ANSWER -When an insider makes a profit
by personally purchasing shares of the corporation prior to public release of favorable
information or sells shares of the corporation prior to the disclosure of unfavorable
information
-The use of material nonpublic information to make a profit by trading in securities of the
company
, U.S. v. Baghat - CORRECT ANSWER -Facts: Bhagat worked for NVIDIA Corp.
Invidia won the contract to develop the Xbox for Microsoft Corp.The CEO sent out a
company -wide email announcing the contract and that the Xbox information should be kept
confidential, and advised Nvidia employees to stop trading on the purchase of Nvidia stock.
Minutes later, Bhagat purchased large quantities of Nvidia, testifying he read the emails 40
minutes after his purchase. Less than 30 min. later his friend Mamat Gill purchased Nvidia
stock. The U.S. brought criminal charges against Bhagat for insider trading.
-Issue: Is Bhagat criminally guilty of insider trading and tipping?
-Decision: Yes, conviction upheld. The government proved he traded the stock based on
material nonpublic information. And, he provided the tippee, Gill, with material inside info.
prior to his purchase.
True insiders - CORRECT ANSWER -Officers, directors, and employees at all levels
of the company
-Lawyers, accountants, consultants, and other agents and representatives who are hired by the
company on a temporary and nonemployee status to provide services or work to the company
-Others who owe a fiduciary duty to the company.
"Material" information - CORRECT ANSWER would it cause the prudent investor to
want to buy or sell?
Due diligence - CORRECT ANSWER reasonable steps taken by a person in order to
satisfy a legal requirement, especially in buying or selling something.
Vicarious liability - CORRECT ANSWER a situation where someone is held
responsible for the actions or omissions of another person.
ex: employer is liable for something his employees did
Independent contractors - CORRECT ANSWER Person not subject to principal's
control.
E.g., outside counsel, building contractor.
Factors in determining independent contractor status:
Worker engaged in distinct occupation or independent business.
