In: Operations Management
CARDWARE Inc. plans to take over First Class Purses & Accessories (FCPA) in an effort to coordinate elegant CARDWARE professional attire with items from FCPA that will complement CARDWARE's fashion designs. Darla, owner of Darla's Dummies, a mannequin manufacturer whom CARDWARE had used on numerous occasions happened to be delivering mannequins to CARDWARE's principal place of business in Silkadonia. As she was bringing the last of the dummies down the hall to the room where the dummies are dressed, she paused to listen to a conversation coming from one of the open doors of the hallway she was using. Realizing that a profit could be made from FCPA's stock, Darla called her broker and indicated that she wanted to purchase 50 % of the outstanding stock that was available for FCPA. Darla bought 2,000 shares of stock at $30 a share.
CARDWARE offered $50 a share and ultimately ended up paying $65 per share for FCPA stock. Darla was no dummy, as she made a $70,000 profit on her stock purchase.
The Securities and Exchange Commission (SEC) filed a suit in a federal district court against Darla and others for alleged violations of, among other things, SEC Rule 10b-5. [SEC v. Falbo 14 F.Supp.2d 508 (S.D.N.Y. 1998)]
Discuss the following, justifying your response using information from your Reading
1. Under what theory might Darla be liable?
2. Do the circumstances of this case meet all of the requirements for liability under that theory? Explain.
3. Examine the SEC Rule 10b-5.
4. Discuss whether or not Darla was liable under the misappropriation theory.
While performing any business activities, there are some predefined rules and regulation which must be adhered by the management and the manpower. In case of Darla, the terms and conditions which are made for the operations of the business activities do not permit Darla to get involved in any sort of business activities if the other business members do not agree with this. The liability of Darla can be fixed under the theories of fraud, misinterpretation, and deceit in the sale and purchase of securities. Without participating in any kind of activities, Darla was expected to deliver the dummies to the company. When Darla buys these dummies, it will provide her with some financial benefits. There can be the case that the organization is having the contract with the other buyer and this situation could lead to the breach of the contract.
2. Do the circumstances of this case meet all of the requirements for liability under that theory? Explain.
The various requirements which frame the liability are not met by the circumstances mentioned in this case as in the case it is mentioned that there is no approval of misinterpretation and deceit. This is not the actual event in this case as the company gets profits from the purchase of dummies by Darla.
3. Examine the SEC Rule 10b-5
As per SEC Rule 10b-5, no employee is allowed to use any scheme of a method to initiate any fraud. Using any kind of false statement is prohibited but it is the responsibility of the employee or any other person who is planning to perform any business activity to inform the various circumstances under which the business can be performed. This rule further adds that no party should be involved in any kind of business activities or act which can be seen as a fraud or deceit related to the buying or selling of the securities. This rule is not applicable in those situations where a breach of contract can result in a favourable situation to one party and unfavourable condition to other.
4. Discuss whether or not Darla was liable under the misappropriation theory.
Yes, Darla can be accounted as liable under the misappropriation theory. In this case, she is treated as an outsider to the business who somehow receive the inside information due to wrongful acts and this information is used to gain some profit. This is equal to stealing the information which is actually a property of the company. Darla is not an insider to the organization and thus she should not be having any access to the information.