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2)Causation-in-fact--because an insider engaged in insider trading, it caused a loss

3)Disgorgement--we look at D’s profit. ITSA measures the damage to sh by the amount of profit that D received from the transaction.

2)SEC civil penalties--treble damages; SEC may seek penalty capped by three times profit gained or loss avoided.

A.COMMON LAW--under the majority rule, there was no duty to disclose to the shs inside info affecting the value of shares. Therefore, the protection of investors was very weak.

a)For lability to exist there should be:

1)At least fraud or deceit upon purchasers;

2)May also be a device or scheme;

3)May also be an implied misrepresentation.

b)Two Elements (relationship and unfairness):

 1)Relationship--existence of a relationship giving access, directly or indirectly, to information intended to be available for a corporate purpose and no other.

I)Insiders include at least officers, dirs, controlling shs (In re Cady Roberts)

ii)Persons charged with confidentiality by contractual or fiduciary relationship

2)Unfairness--inherent unfairness that results when a party takes advantage of such information knowing it is unavailable to person with whom he is dealing.

B.SECURITIES EXCHANGE ACT OF 1934--IN GENERAL--the act superseded common law. Section 12 of the Act requires registration of any security traded on a national exchange, or any equity security (held by 500 or more persons) of a corp with assets exceeding $5 million.

C.SECTION 10(B) AND RULE 10B-5--section 10(b) prohibits any manipulation or deception in the purchase or sale of any security, whether or not it’s registered. Rule 10b-5 prohibits the use of the mails or other instrumentality of interstate commerce to defraud, misrepresent, or omit a material fact in connection with a purchase or sale of any security.

1.COVERED CONDUCT--rule 10b-5 applies to nondisclosure by dirs or officers, as well as to misrepresentations. It applies not only to insider trading but also to any person who makes a misrepresentation in connection with a purchase or sale of stock.

2.COVERED SECURITIES--rule 10b-5 applies to the purchase or sale of any security, registered or unregistered. a jurisdictional limitation requires that the violation must involve the use of some instrumentality of interstate commerce.

3.WHO CAN BRING SUIT UNDER 10B-5--private plaintiffs and the SEC. Private plaintiffs must be either purchasers or sellers of security.

4.MATERIALITY--for rule 10b-5 to apply, the information misrepresented or omitted must be material (i.e., a reasonable sh would consider it important in deciding whether to buy or to sell).

5.FAULT REQUIRED (SCIENTER)--a defendant is not liable under rule 10b-5 if he was without fault or merely negligent. The scienter requirement is satisfied by recklessness or an intent to deceive, mislead, or convey a false impression. Scienter is also required for injunctive relief.

a)Recklessness Defined:

1)D knew the hazard and proceeded nonetheless (subjective test);

2)D proceeded despite what a reasonable person would perceive (objective test);

b)Recklessness Under PSLRA:

1)Knowing conduct-- yields jointly and severally liable;

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