To gain an understanding of SEC enforcement actions
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Purpose: To gain an understanding of SEC enforcement actions concerning insider trading and the fair disclosure regulation.
Instructions: For this written assignment, assume that you have been asked to represent a company in a potential enforcement action before the SEC concerning violation of insider trading laws. Your assignment is to prepare an argument or defense to convince the SEC that it should not seek any further enforcement action against the company. Be creative and make your argument/defense feasible. Incorporate course concepts (especially from the FD (Fair Disclosure) Regulation into your argument/defense to demonstrate your understanding of the insider trading laws.
Read the below facts about the case before preparing your argument/defense.
Make sure you fully support your argument/defense.
There is no page limit for this assignment, but you must complete all of the requirements, so you are likely to end up with about two pages, excluding a title and reference page, which are included in APA formatting.
Computer Pros Unified (CPU) manufactures and sells computers and components. The company's common stock is registered with the SEC pursuant to the Security Exchange Act and trades on the New York and Chicago Stock Exchanges.
a. CPU's Public Announcements
On January 11, 2015, CPU held a scheduled analyst conference call, during which company officials discussed CPU's fourth-quarter 2014 results and estimated first quarter 2015 sales at $10 billion and earnings at 10 cents per share. The conference call was webcast live, and a transcript of the call was posted on CPU's website.
On February 23, 2015, however, CPU issued a press release (the "February 23 Release") stating that "as a result of significant weakness in first-quarter order input across its business segments, the company does not expect to achieve the first-quarter 2015 sales guidance of $10 billion or the earnings guidance of 10 cents per share given on Jan. 11, 2015." Later the same morning, during a live, webcast analyst conference call (the "February 23 Call"), CPU's President and Chief Operating Officer (the “COO”) explained that CPU was "experiencing significant weakness in orders and sales versus the company's expectationsat the beginning of the quarter, and that all markets are down compared with the same period last year." CPU did not define the terms "significant" and "down" in the February 23 Release or on the February 23 Call and never indicated that it was using those terms in a specific manner or to convey particular quantitative information.
b. Direct Communications with Analysts
Following the February 23 announcements, most analysts who cover CPU lowered their estimates. Nevertheless, after reviewing the analysts' models and research notes, the COO concluded that the analysts still were overstating CPU's likely quarterly results. Between March 6 and 12, 2015 the COO directly contacted approximately 15 analysts to discuss their models. On these calls, the COO reiterated and verbally emphasized particular statements from the February 23 Release and the February 23 Call, such as the term "significant." On 10 calls, the COO specifically told analysts that when CPU uses the term "significant" it intends a rate of change of 25% or more. The COO made this statement based on advice from CPU’s in-house attorney.
c. SEC Enforcement
The SEC has claimed that CPU violated section 10(b) of the Securities Exchange Act of 1934 and Regulation FD by providing quantitative information (25% definition of significant) to 10 analysts.
Review the grading rubric for this assignment found within the syllabus.