L&E Final Exam - Questions With Detailed Solutions
Sarah owns Fine Cuts hair salon. Hairdressers each rent a chair in the salon
where they can style customers' hair, and Sarah provides receptionist
services, maintains the space, and sells some hair care products at the front of
the salon. The hairdressers must pay 35 percent of their profits to Sarah in
return for the chair space and earn a commission for each hair product that
they sell. Is Sarah selling the hairdressers a security in Fine Cuts? Correct
Answer - No, the hairdressers are not expecting to earn money
predominately from Sarah's efforts.
Jeremy is a doctor who would like to be able to provide low cost medical care
to underprivileged families. Jeremy and two nurses form Medicine for All and
file a registration statement and prospectus with the SEC. The prospectus
states that Medicine for All is looking for funding for the salaries of Jeremy
and the nurses and medical supplies and that the organization will earn little
profits. Will the SEC allow Medicine for All to sell its securities? Correct
Answer - Yes, provided all of the required disclosures are made clearly.
In the registration statement filed with the SEC, DrugsUSA stated that it had
three different medicines approved by the Food and Drug Administration
(FDA). In reality, DrugsUSA had filed applications for approval with the FDA
that were still pending. The SEC approved the sale of DrugsUSA stock, and
Marilyn purchased $100,000 worth of stock. Two months later, all three of
DrugsUSA's applications were denied by the FDA. The stock price plummeted,
reducing the value of Marilyn's shares to a total of $2,000. What, if anything,
can Marilyn recover? Correct Answer - Marilyn can recover $98,000 from
DrugsUSA and the signatories of the registration statement.
Company A completes its initial public offering (IPO) and complies with all of
the 1933 Act requirements. Must Company A register with the SEC as a
reporting company under the 1934 Act? Correct Answer - Yes, because
Company A has completed a public offering under the 1933 Act.
James, the CEO of a major restaurant chain, learns that he is about to be fired
by the Board of Directors. Furious, he writes a press release calling all of the
company's executives "greedy scoundrels," and stating that "whoever has to
fill my shoes will have to answer to the shareholders for the financial mess
that they have created." James had no actual knowledge of any financial
,mismanagement by the company. The company's stock drops substantially in
the few hours of trading that occur before the markets close after James
releases his statement. The next day, James issues an apology, saying
(truthfully) that his press release had no factual basis, and the stock recovers
over the course of the week. Is James liable for a securities law violation?
Correct Answer - Yes, James is liable for making an untrue statement of
material fact.
Through her job as a paralegal at the Attorney General's office, Charlotte
learns that MegaCorp has been defrauding its customers. Although the
information is highly confidential, Charlotte shares it with her mother and
asks her not to tell anyone. Charlotte's mother does not disclose the secret,
but she does sell her stock in MegaCorp. Has Charlotte's mother committed a
violation of securities law? Correct Answer - Yes, Charlotte's mother has
committed insider trading by misappropriation.
Bobby works as a janitor for a large office building. One night when emptying
the recycling bins in the offices of Big Co., Bobby sees a memo marked
"Confidential - Eyes Only" on the top. Curious, Bobby reads the memo and
learns that Big Co. is closing half of its juice manufacturing plants in the U.S.
and laying off 2,000 employees. At the end of his shift, Bobby tells this to his
supervisor and good friend who promptly sells her stock in Big Co. the next
day. Is Bobby liable for insider trading? Correct Answer - Yes, as a tipper.
After acquiring the RazRSleek brand name and electric shaver assets, Flyy
controlled 55 percent of the electric shaver industry in the United States.
Chaser, a competitor, claimed that the acquisition of such a large market share
was a violation of the law because the increased competition from Flyy would
decrease Chaser's profits. Does Chaser have a valid claim? Correct Answer -
No, unless Flyy excluded competitors and controlled prices.
Smalltown has two family-owned hardware stores that have been in business
for years. Major Hardware opens one of its superstores in Smalltown,
advertising extremely low prices, which are at below cost. Because Major
owns stores nationally, it is able to keep prices extremely low until it forces
both of the family-owned stores out of business. Once Major is the only
hardware store in town, it raises its prices enough to make up for its former
losses and to make some additional profit. Has Major violated any antitrust
laws? Correct Answer - Yes, Major has engaged in predatory pricing.
, Paul's Pen Co. manufacturers and sells an inexpensive ball-point pen. Stacy's
Stationery purchases the pens for $.25 each in quantities of 1,000. Stacey's
discovered that a national chain, a competitor of Stacey's, buys the pen at $.20
for 1,000. If Stacy's Stationery sues Paul's Pen Co. for price discrimination:
Correct Answer - Stacy's Stationery will win unless Paul's Pen Co. can justify
the price differential.
Jane's Boutique would like to buy some of Holistic Health Co.'s popular nail
polish for resale. Holistic Health tells Jane that if she buys less than 100 units,
she must also buy a small order of their new vitamin product. Jane has no
interest in selling vitamins in her boutique. If Jane wanted to challenge
Holistic Health's requirement as an illegal tying arrangement, what additional
facts would she have to prove? Correct Answer - Holistic Health has
significant power in the nail polish market and is shutting out a significant
portion of the vitamin market through the tying arraignment.
Advertisements for Clean Mouth mouthwash claimed that it was as effective
as flossing in preventing tooth plaque and gum disease. This statement was
true, but only if the flossing was done incorrectly. In fact, many consumers do
floss incorrectly. Is this advertisement deceptive? Correct Answer - Yes,
because Clean Mouth omitted important information from its claim.
Baker George took orders for his famous Christmas Fruitcake. His ad
demanded that orders must be placed two months prior to delivery. However,
this year, George received three times his usual number of orders. In mid-
October, George knew that he could not make on-time deliveries. Which of the
following is true? Correct Answer - George has to notify customers and ask
if they still want their fruitcake
In 2012, Donny wanted to get a loan to buy a house but was told that his credit
scores were bad. Which of the following, if distributed via his credit report, is
NOT in violation of the FCRA? Correct Answer - A note claiming that five
businesses sought Donny's credit score in 2010.
Gerald wants to buy a new digital camera, and he sees an ad for a
PicturePerfect Model A digital camera at a 25 percent discount at Bull's Eye—
a large department store. Gerald goes to Bull's Eye the following day, but the
store clerk tells him that they are out of that particular camera. The clerk
Sarah owns Fine Cuts hair salon. Hairdressers each rent a chair in the salon
where they can style customers' hair, and Sarah provides receptionist
services, maintains the space, and sells some hair care products at the front of
the salon. The hairdressers must pay 35 percent of their profits to Sarah in
return for the chair space and earn a commission for each hair product that
they sell. Is Sarah selling the hairdressers a security in Fine Cuts? Correct
Answer - No, the hairdressers are not expecting to earn money
predominately from Sarah's efforts.
Jeremy is a doctor who would like to be able to provide low cost medical care
to underprivileged families. Jeremy and two nurses form Medicine for All and
file a registration statement and prospectus with the SEC. The prospectus
states that Medicine for All is looking for funding for the salaries of Jeremy
and the nurses and medical supplies and that the organization will earn little
profits. Will the SEC allow Medicine for All to sell its securities? Correct
Answer - Yes, provided all of the required disclosures are made clearly.
In the registration statement filed with the SEC, DrugsUSA stated that it had
three different medicines approved by the Food and Drug Administration
(FDA). In reality, DrugsUSA had filed applications for approval with the FDA
that were still pending. The SEC approved the sale of DrugsUSA stock, and
Marilyn purchased $100,000 worth of stock. Two months later, all three of
DrugsUSA's applications were denied by the FDA. The stock price plummeted,
reducing the value of Marilyn's shares to a total of $2,000. What, if anything,
can Marilyn recover? Correct Answer - Marilyn can recover $98,000 from
DrugsUSA and the signatories of the registration statement.
Company A completes its initial public offering (IPO) and complies with all of
the 1933 Act requirements. Must Company A register with the SEC as a
reporting company under the 1934 Act? Correct Answer - Yes, because
Company A has completed a public offering under the 1933 Act.
James, the CEO of a major restaurant chain, learns that he is about to be fired
by the Board of Directors. Furious, he writes a press release calling all of the
company's executives "greedy scoundrels," and stating that "whoever has to
fill my shoes will have to answer to the shareholders for the financial mess
that they have created." James had no actual knowledge of any financial
,mismanagement by the company. The company's stock drops substantially in
the few hours of trading that occur before the markets close after James
releases his statement. The next day, James issues an apology, saying
(truthfully) that his press release had no factual basis, and the stock recovers
over the course of the week. Is James liable for a securities law violation?
Correct Answer - Yes, James is liable for making an untrue statement of
material fact.
Through her job as a paralegal at the Attorney General's office, Charlotte
learns that MegaCorp has been defrauding its customers. Although the
information is highly confidential, Charlotte shares it with her mother and
asks her not to tell anyone. Charlotte's mother does not disclose the secret,
but she does sell her stock in MegaCorp. Has Charlotte's mother committed a
violation of securities law? Correct Answer - Yes, Charlotte's mother has
committed insider trading by misappropriation.
Bobby works as a janitor for a large office building. One night when emptying
the recycling bins in the offices of Big Co., Bobby sees a memo marked
"Confidential - Eyes Only" on the top. Curious, Bobby reads the memo and
learns that Big Co. is closing half of its juice manufacturing plants in the U.S.
and laying off 2,000 employees. At the end of his shift, Bobby tells this to his
supervisor and good friend who promptly sells her stock in Big Co. the next
day. Is Bobby liable for insider trading? Correct Answer - Yes, as a tipper.
After acquiring the RazRSleek brand name and electric shaver assets, Flyy
controlled 55 percent of the electric shaver industry in the United States.
Chaser, a competitor, claimed that the acquisition of such a large market share
was a violation of the law because the increased competition from Flyy would
decrease Chaser's profits. Does Chaser have a valid claim? Correct Answer -
No, unless Flyy excluded competitors and controlled prices.
Smalltown has two family-owned hardware stores that have been in business
for years. Major Hardware opens one of its superstores in Smalltown,
advertising extremely low prices, which are at below cost. Because Major
owns stores nationally, it is able to keep prices extremely low until it forces
both of the family-owned stores out of business. Once Major is the only
hardware store in town, it raises its prices enough to make up for its former
losses and to make some additional profit. Has Major violated any antitrust
laws? Correct Answer - Yes, Major has engaged in predatory pricing.
, Paul's Pen Co. manufacturers and sells an inexpensive ball-point pen. Stacy's
Stationery purchases the pens for $.25 each in quantities of 1,000. Stacey's
discovered that a national chain, a competitor of Stacey's, buys the pen at $.20
for 1,000. If Stacy's Stationery sues Paul's Pen Co. for price discrimination:
Correct Answer - Stacy's Stationery will win unless Paul's Pen Co. can justify
the price differential.
Jane's Boutique would like to buy some of Holistic Health Co.'s popular nail
polish for resale. Holistic Health tells Jane that if she buys less than 100 units,
she must also buy a small order of their new vitamin product. Jane has no
interest in selling vitamins in her boutique. If Jane wanted to challenge
Holistic Health's requirement as an illegal tying arrangement, what additional
facts would she have to prove? Correct Answer - Holistic Health has
significant power in the nail polish market and is shutting out a significant
portion of the vitamin market through the tying arraignment.
Advertisements for Clean Mouth mouthwash claimed that it was as effective
as flossing in preventing tooth plaque and gum disease. This statement was
true, but only if the flossing was done incorrectly. In fact, many consumers do
floss incorrectly. Is this advertisement deceptive? Correct Answer - Yes,
because Clean Mouth omitted important information from its claim.
Baker George took orders for his famous Christmas Fruitcake. His ad
demanded that orders must be placed two months prior to delivery. However,
this year, George received three times his usual number of orders. In mid-
October, George knew that he could not make on-time deliveries. Which of the
following is true? Correct Answer - George has to notify customers and ask
if they still want their fruitcake
In 2012, Donny wanted to get a loan to buy a house but was told that his credit
scores were bad. Which of the following, if distributed via his credit report, is
NOT in violation of the FCRA? Correct Answer - A note claiming that five
businesses sought Donny's credit score in 2010.
Gerald wants to buy a new digital camera, and he sees an ad for a
PicturePerfect Model A digital camera at a 25 percent discount at Bull's Eye—
a large department store. Gerald goes to Bull's Eye the following day, but the
store clerk tells him that they are out of that particular camera. The clerk
