Question

42–3. Insider Trading.

Scott Ginsburg was chief executive officer (CEO) of Evergreen Media

Corp., which owned and operated radio stations. In 1996, Evergreen became interested in

acquiring EZ Communications, Inc., which also owned radio stations. To initiate negotiations,

Ginsburg met with EZ’s CEO, Alan Box, on Friday, July 12. Two days later, Scott phoned his

brother Mark, who, on Monday, bought 3,800 shares of EZ stock. Mark discussed the deal with

their father Jordan, who bought 20,000 EZ shares on Thursday. On July 25, the day before the

EZ bid was due, Scott phoned his parents’ home, and Mark bought another 3,200 EZ shares.

The same routine was followed over the next few days, with Scott periodically phoning Mark or

Jordan, both of whom continued to buy EZ shares. Evergreen’s bid was refused, but on August

5, EZ announced its merger with another company. The price of EZ stock rose 30 percent,

increasing the value of Mark and Jordan’s shares by $664,024 and $412,875, respectively. The

Securities and Exchange Commission (SEC) filed a civil suit in a federal district court against

Scott. What was the most likely allegation? What is required to impose sanctions for this

offense? Should the court hold Scott liable? Why or why not? [

SEC v. Ginsburg,

362 F.3d 1292

(11th Cir. 2004)]

Answer 1

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What was the most likely allegation?

The allegation on Mr Scott Ginsburg was about his fraud and insider trading. He made use of internal information in an illegal manner for his own personal gain.

The accusations were that Scott Ginsburg violated Section Rule (10b) and Section 10b-5, by sharing substantial non-public material to Mark and Jordan, who availed the information and traded on stock. The corroboration of scienter is involved to institute liability under Section 10(b) and SEC Rule 10b-5. It is an indentation to deceive or wrongdoing with respect to the present case, to a failure to reveal substantial details used at the time of a trade.

What is required to impose sanctions for this offense? Should the court hold Scott liable?

One can impose sanctions on Mr Scott Ginsburg for fraud under the federal security laws or antifraud as he violated Sections 14(e) and 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5 and 14e-3.

The people usually sell when they think value of stock is increasing and buy when they think it is decreasing. The sequential immediacy of phone calls between the one insider knowledge and trader offers a rational basis for concluding that the basis of the traders’ certainty was the info from insider. Hence, in this case, Scott Ginsburg violated Section 10(b) and SEC Rule 10b-5, by sharing substantial non-public info to Mark and Jordan, who then used that info and traded on stock.

Should the court hold Scott liable? Why or why not?

Yes, the court should hold Mr Scott Ginsburg liable for the fraud as he used the insider information for personal gains while pretexting to go in venture with Company EZ. He had informed his family members about the financial conditions of the firm and buys the shares of the firm. He understood that after acquisition of the firm the share prices would increase. His actions were against the rules of SEC and hence he should be acquitted.

In the present case, there is a proof of conversation or pattern of trade regarding the stock of EZ to Mark following the next period by his buying of 3,800 shares. Because Mark and Jordan confessed conversing EZ during that time, the disparity of few calls and trades is not difficult. The members of family who frequently traded in a specific stock or form of stock could trade based on insider information with impunity. Therefore, court should hold Scott Ginsburg liable.