wcc exam 2 questions with complete
solutions16
Security and Exchange Commission (SEC) - ANSWERS-Protects investors by watching for signs of
illegal activities in the stock market
SEC responsibilities - ANSWERS-Regulate securities markets
SEC central role - ANSWERS-To protect and safeguard investors
Securities Act of 1933 - ANSWERS-required registration of most securities sales in U.S.
Prevents securities fraud and stated that investors must receive truthful financial data about
public securities for sale
Ponzi Schemes - ANSWERS-a fraudulent investment operation that pays returns to investors
from their own money or money paid by subsequent investors rather from any actual profit
earned
Red flags of a Ponzi Schemes - ANSWERS-· Too good to be true
· Promises to low right or high rewards
· History of consistent returns
· Pressure to reinvest
· Complex trading strategies
· Lack of transparency
· Appears exclusive
,Bernie Madoff Case Study - ANSWERS-· Worlds first global Ponzi schemes
· Dec 11, 2008, FBI arrested 70-year-old Bernie Madoff
· Madoff confessed to running investment fraud believed to have lost at least 65 billion
· Madoff had informed 3 senior employees that Bernard l Madoff investment securities ranked
in the top 1% of American securities firms had been bankrupt for years
· June 29, 2009, sentences to 150 years in prison (Maximum sentenced allowed)
· March 12, 2009, Madoff pleaded guilty to 11 federal felonies
· Madoff dies in prison at the age of 82
Affinity Fraud - ANSWERS-a special group is targeted
Microcap Fraud - ANSWERS--stock of public companies in the U.S. with low or "micro"
capitalization, meaning the total value of company's stock is less than $300 Million
-Also known as "penny stocks," "pink sheet stocks," and "over-the-counter stocks"
pump and dump scheme - ANSWERS-Artificially inflating price of a known stock through false
and misleading positive
sell cheaply purchases stock at a higher price
· Fraudsters spread false or misleading information to create a buying frenzy that pump
Jordan Belfort - ANSWERS-· Former Stockbroker
· 1989 investment company - Stratton Oakmont
, · With a partner, Danny Porush, Belfort ranked in cash using Pump and dump
· 1992 SEC efforts to stop the company's errant ways in 1992
· 1992 pled guilty to securities fraud and money laundering
· Sentenced in 2003 to four years in prison only served 22 months
insider trading - ANSWERS-· Using non-public information- knowledge to trade stock
· Breach of fiduciary duty
-Tipper or someone on the insider who passes along the information
-Tippee someone who receives the information
· Did the tipper benefit in some way
-Benefit being a payment
Forms of insider trading - ANSWERS-Front Running
· Form of insider trading (harder to detect)
· Managers buying stock for themselves BEFORE buying it for their funds or
· One broker tipping off another trader of implementing transaction in return for a
kickback
· Result= quick profit made as socks almost rise following larger institutions purchase
what made insider trading illegal? - ANSWERS-Securities Exchange Act of 1934
solutions16
Security and Exchange Commission (SEC) - ANSWERS-Protects investors by watching for signs of
illegal activities in the stock market
SEC responsibilities - ANSWERS-Regulate securities markets
SEC central role - ANSWERS-To protect and safeguard investors
Securities Act of 1933 - ANSWERS-required registration of most securities sales in U.S.
Prevents securities fraud and stated that investors must receive truthful financial data about
public securities for sale
Ponzi Schemes - ANSWERS-a fraudulent investment operation that pays returns to investors
from their own money or money paid by subsequent investors rather from any actual profit
earned
Red flags of a Ponzi Schemes - ANSWERS-· Too good to be true
· Promises to low right or high rewards
· History of consistent returns
· Pressure to reinvest
· Complex trading strategies
· Lack of transparency
· Appears exclusive
,Bernie Madoff Case Study - ANSWERS-· Worlds first global Ponzi schemes
· Dec 11, 2008, FBI arrested 70-year-old Bernie Madoff
· Madoff confessed to running investment fraud believed to have lost at least 65 billion
· Madoff had informed 3 senior employees that Bernard l Madoff investment securities ranked
in the top 1% of American securities firms had been bankrupt for years
· June 29, 2009, sentences to 150 years in prison (Maximum sentenced allowed)
· March 12, 2009, Madoff pleaded guilty to 11 federal felonies
· Madoff dies in prison at the age of 82
Affinity Fraud - ANSWERS-a special group is targeted
Microcap Fraud - ANSWERS--stock of public companies in the U.S. with low or "micro"
capitalization, meaning the total value of company's stock is less than $300 Million
-Also known as "penny stocks," "pink sheet stocks," and "over-the-counter stocks"
pump and dump scheme - ANSWERS-Artificially inflating price of a known stock through false
and misleading positive
sell cheaply purchases stock at a higher price
· Fraudsters spread false or misleading information to create a buying frenzy that pump
Jordan Belfort - ANSWERS-· Former Stockbroker
· 1989 investment company - Stratton Oakmont
, · With a partner, Danny Porush, Belfort ranked in cash using Pump and dump
· 1992 SEC efforts to stop the company's errant ways in 1992
· 1992 pled guilty to securities fraud and money laundering
· Sentenced in 2003 to four years in prison only served 22 months
insider trading - ANSWERS-· Using non-public information- knowledge to trade stock
· Breach of fiduciary duty
-Tipper or someone on the insider who passes along the information
-Tippee someone who receives the information
· Did the tipper benefit in some way
-Benefit being a payment
Forms of insider trading - ANSWERS-Front Running
· Form of insider trading (harder to detect)
· Managers buying stock for themselves BEFORE buying it for their funds or
· One broker tipping off another trader of implementing transaction in return for a
kickback
· Result= quick profit made as socks almost rise following larger institutions purchase
what made insider trading illegal? - ANSWERS-Securities Exchange Act of 1934
