LGS 200 Final Exam UPDATED Study
Guide ACTUAL QUESTIONS AND
CORRECT ANSWERS
Business Judgment Rule - CORRECT ANSWER As long as decisions are made in good
faith/honest belief that the action was taken in best interest of the company, company CANNOT be
held liable for losses to shareholders.
Entrepreneurs - CORRECT ANSWER A person who forms and operates a new business either
by him or herself, or with others.
Importance of choosing the right business organization - CORRECT ANSWER 1. Easiest for
one person to own a business, but also riskiest because sole proprietor holds all liabilities
2. Incorporating allows you to protect personal assets (same with LLC's).
Securities Act of 1933 - CORRECT ANSWER 1. Primarily regulates the issuance of securities
by a corporation, a general or limited partnership, an unincorporated association, or an individual
2. Applies to initial issues of securities, including IPOs and sales of new securities by established
companies. Includes issues of securities online
Purpose of laws (Securities Act of 1933) - CORRECT ANSWER To require full and honest
disclosure of information to investors.
Security Exchange Commission (SEC) - CORRECT ANSWER A federal administrative
agency that is 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 - Erects wall between investment bankers and
securities analysts
- To bring more transparency to securities markets and eliminate conflicts of interest in the industry
, How Sarbanes-Oxley Act applies to securities analysts and investment bankers - CORRECT
ANSWER 1. Fear that analysts (who provide investment advice to investors) would be
pressured to give high marks to companies being assisted by firm's investment bankers
2. To avoid conflict, protects analysts from review, pressure, and oversight by investment bankers.
Analysts must disclose each research report or public appearance of any conflict of interest known to
exist at the time
Short swing profits / trading - CORRECT ANSWER Profits that are made by statutory insiders
on trades involving equity securities of their corporation that occur within six months of each other.
These profits belong to the corporation.
Excludes: involuntary transactions and transactions that occur within six months before becoming an
insider
Insider trading (Sec. 10(b)(5) - CORRECT ANSWER - Prohibits the use of manipulative and
deceptive devices in the purchase of sale of securities in contravention of rules and regulations
prescribed by the
SEC
- Only intentional conduct (involving scienter) is a violation
- The use of material nonpublic information to make a profit by trading in securities of the company
US v. Baghat - CORRECT ANSWER NVIDIA corporation won contract to develop X-box for
Microsoft. Nvidia's CEO notified employees NOT to purchase/trade Nvidia stock and to keep
information confidential. Baghat purchased stock approximately 20 minutes after receiving e-mail and
tipped his best friend who also purchased stock. Baghat was found criminally guilty of insider trading
and tipping.
True Insiders - CORRECT ANSWER - Individuals who make a profit by personally
purchasing shares of the corporation prior to public release of favorable information or by selling
shares prior to public release of unfavorable information, different than just insiders
- Another name for statutory insiders
- People that own majority of stock in the company
"Material" information - CORRECT ANSWER Nonpublic information about the company or
securities that would cause an investor to buy or sell based on the understanding of the information
Guide ACTUAL QUESTIONS AND
CORRECT ANSWERS
Business Judgment Rule - CORRECT ANSWER As long as decisions are made in good
faith/honest belief that the action was taken in best interest of the company, company CANNOT be
held liable for losses to shareholders.
Entrepreneurs - CORRECT ANSWER A person who forms and operates a new business either
by him or herself, or with others.
Importance of choosing the right business organization - CORRECT ANSWER 1. Easiest for
one person to own a business, but also riskiest because sole proprietor holds all liabilities
2. Incorporating allows you to protect personal assets (same with LLC's).
Securities Act of 1933 - CORRECT ANSWER 1. Primarily regulates the issuance of securities
by a corporation, a general or limited partnership, an unincorporated association, or an individual
2. Applies to initial issues of securities, including IPOs and sales of new securities by established
companies. Includes issues of securities online
Purpose of laws (Securities Act of 1933) - CORRECT ANSWER To require full and honest
disclosure of information to investors.
Security Exchange Commission (SEC) - CORRECT ANSWER A federal administrative
agency that is 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 - Erects wall between investment bankers and
securities analysts
- To bring more transparency to securities markets and eliminate conflicts of interest in the industry
, How Sarbanes-Oxley Act applies to securities analysts and investment bankers - CORRECT
ANSWER 1. Fear that analysts (who provide investment advice to investors) would be
pressured to give high marks to companies being assisted by firm's investment bankers
2. To avoid conflict, protects analysts from review, pressure, and oversight by investment bankers.
Analysts must disclose each research report or public appearance of any conflict of interest known to
exist at the time
Short swing profits / trading - CORRECT ANSWER Profits that are made by statutory insiders
on trades involving equity securities of their corporation that occur within six months of each other.
These profits belong to the corporation.
Excludes: involuntary transactions and transactions that occur within six months before becoming an
insider
Insider trading (Sec. 10(b)(5) - CORRECT ANSWER - Prohibits the use of manipulative and
deceptive devices in the purchase of sale of securities in contravention of rules and regulations
prescribed by the
SEC
- Only intentional conduct (involving scienter) is a violation
- The use of material nonpublic information to make a profit by trading in securities of the company
US v. Baghat - CORRECT ANSWER NVIDIA corporation won contract to develop X-box for
Microsoft. Nvidia's CEO notified employees NOT to purchase/trade Nvidia stock and to keep
information confidential. Baghat purchased stock approximately 20 minutes after receiving e-mail and
tipped his best friend who also purchased stock. Baghat was found criminally guilty of insider trading
and tipping.
True Insiders - CORRECT ANSWER - Individuals who make a profit by personally
purchasing shares of the corporation prior to public release of favorable information or by selling
shares prior to public release of unfavorable information, different than just insiders
- Another name for statutory insiders
- People that own majority of stock in the company
"Material" information - CORRECT ANSWER Nonpublic information about the company or
securities that would cause an investor to buy or sell based on the understanding of the information
