stocks question?

Question

what happens if an accountant makes an honest mistake at a corporation while providing financial statements and will plumet their stocks, but b4 the the public know about it, the accountant tells her brother (stockholder) that his shares will drop, in order that he cash in b4 it happens. Under insider trading law, what liabilities does the accountant face? thanks..

Answer 1

Rule 10b-5 of the Securities and Exchange Commission, established under the Rules Promulgated Under the Securities and Exchange Commission Act of 1934 provides:

Rule 10b-5 -- Employment of Manipulative and Deceptive Devices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

1. To employ any device, scheme, or artifice to defraud,

2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

Rule 10b-5 in short makes it illegal to engage in any conduct which is designed to manipulate the purchase or sale of stock in the market place. Its also called "insider trading" or "insider tipping".

Rule 13(i) of the Security and Exchange Commission Act of 1933 provides as follows:

Accuracy of Financial Reports

13(i) Each financial report that contains financial statements, and that is required to be prepared in accordance with (or reconciled to) generally accepted accounting principles under this title and filed with the Commission shall reflect all material correcting adjustments that have been identified by a registered public accounting firm in accordance with generally accepted accounting principles and the rules and regulations of the Commission.

Moreover, Section 13(i) is restated in the Sarbannes-Oxley Act of 2002 as Section 401 as follows:

"(i) Accuracy of Financial Reports.--Each financial report that contains financial statements, and that is required to be prepared in accordance with (or reconciled to) generally accepted accounting principles under this title and filed with the Commission shall reflect all material correcting adjustments that have been identified by a registered public accounting firm in accordance with generally accepted accounting principles and the rules and regulations of the Commission."

The accountant would not only face administrative action by the Securities and Exchange Commission for insider trading, but could face criminal penalties (jail time) in addition to criminal fines.

Finally, shareholders who lost money as a result of the mistake could sue the accountant personally for not restating the financial statements before the information becomes public.

By knowing that there was a mistake, keeping quiet, and telling the brother about it, the accountant has crossed the line from an honest mistake to fraud, deception, breach of a duty to the corporation and its shareholder, and insider trading or tipping.

P.S. I am sure you have seen the member "on thin ice" 's comment to your other homework question. Undoubtedly he will appear here to scorch you for not reading your business law books and instead asking a question on Yahoo Answers..

I can see he was angry with my last answer to one of your questions. Obviously he's frustrated for some reason. Why? I don't know. I can only hazard to guess that he's a lawyer wannabe. What do you think?

Answer 2

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Answer 3

The answer depends on which country you are from, but in the UK and US you would face a trial and perhaps prison.

It breaks the Securities and Exchange commission or the Financial Services Authority code on insider trading. The offence is the misappropriation or misuse of material or information that is not publically available.

The corporation and the CEO are then guilty of fraud and acting in breach of contract with the firms stockholders.

Even if the accounting error was innocent, the act of speaking to a family member and telling them what happened in advance of the information going public, is a criminal act. They would use the inside information to make profit or limit loss and it would be at the expense of a broker, trader or other interested party.

Jail

Answer 4

Oops. If what you say is correct and IF they are found out, the penalties are severe (if convicted). Since you don't provide any specifics (better not to!) and unless you have a vested interest, you'd better be sure of your facts before pushing this through a legal action.

Answer 5

Jail

Answer 6

The accountant and brother have commited securities fraud under US Code.
They are looking at 10 years in jail each at a minimum.

Answer 7

Martha Stewart was the beneficiary of insider trading. She spent nine months in jail.