Securities Violations Case Study


Please underline or bold-type important terms, laws and phrases.  The emphasis of this exam is the application of elements of each law.  The student will be evaluated in terms of discussing the elements and applying the elements in reaching a conclusion.  Each student must answer four (4) and D is mandatory.

D  Securities Violations
Charles is the president of a non public corporation that plans on going public for the first time.  Charles in collaboration with the accountants and auditors of the corporation prepares a “financial statement” to be used for the distribution of dividends.  Charles knows that the issuance of dividends to the “private investors” will affect the “market value of the stock of the corporation” when the corporation goes public.  However, the financial statement grossly inflates the value of the “assets of the corporation” and also, Charles has created sham corporations who placed orders with his corporation. As a result of the “cash flow” of the corporation is overstated and does not reflect accurately the earnings of the corporation.  As a result, the board of directors issues the dividends.
Charles registers the information (including the financial statement) with the Security Exchange Commission for purposes of offering the stock of the company to the public for the first time.  After the registration, and going through the “waiting period” the stock is offered to public.  In reliance on information provided in the “registration”, the market value of the stock soars providing enormous capital to the corporation.
Is this a “security transaction”?
Is there a SEC 1933 violation?
Is there a SEC 1934 violation?
Is this a “proper distribution of dividends”?