Question

ESSAY QUESTION- BUSINESS LAW

2. Jetco, a corporation whose stock is traded on a national stock exchange, has 200,000 shares of common stock outstanding that is at $20 per share. Dan owns 100 shares of Jetco stock and is a member of the board of directors of Jetco. Five months ago, Dan learned that Jetco has developed a secret new invention to convert organic waste into commercial jet fuel and that a public announcement was soon to be made. Dan immediately emailed all three of Jetco’s shareholders whom he knew had previously announced a willingness to sell shares for $2 per share. Dan offered the shareholders $5 per share. They accepted his offer and sold him 400 shares of stock.   Dan also had been previously given a stock option allowing him to purchase an additional 1000 shares of un-issued Jetco stock from the company for $1 per share at some point within the next year. He exercised this option and purchased the shares for $21 per share from the company.  

One week later the news conference is held and Jetco Stock almost immediately doubles in value. The next day Dan sold his 4200 shares and his 1000 shares at $50 per share.

Evaluate Dan’s potential liabilities, both criminal liability for securities law violations and civil liabilities to the corporation and the other shareholders.

Answer 1

In this case Mr. Dan is found guilty of insider trading. Under the security law any employee/partner/director who trade in securities of the company or share any price sensitivie information in contravention of the code of conduct of the company may be penalised and appropriate action may be taken by the organisation. Employees/partners/directors of the organisation who voilate code of conduct may also be subject to disciplinary action by the company.

The action by the organisation shall not preclude SEBI from taking any action in case of voilation of SEBI (Prohibition of Insider Trading) Regulations, 1992. The SEBI Act has basically given two options to the board:

1. Refer the complaint for adjudication and a penalty not exceeding 5 lakh rupees may be imposed by the adjudicator.

2. The second option for SEBI is to file a criminal suit against the alleged offender before the court not inferior to the metropolitan magistrate or judicial magistrate. The Court can impose a fine of not less than 2000 rupees and an imprisonment that shall not be less than one month but not exceeding 3 years or with both.

Also there are some civil liabilities or penalties of offender like he can be barred from serving from serving as an officer or adirector of public company and also there is possibility of shareholder lawsuits for securities fraud.