Insider Trading

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.