Hello, and welcome to the 8th weekly recap of Yada Yada Law School where this week, we tackle the complex issue of Securities Fraud. After just completing an undergraduate Pre-Law degree, I find myself asking two important questions going into this week… What on Earth is securities fraud, and how could it possibly relate to Seinfeld? This week, Lecturer in Law at Stanford Law School, Andrew K. Jennings seeks to answer these same questions.
What is Securities Fraud?
Professor Jennings explains that securities can be anything from stocks, bonds, derivatives, mineral rights, or all types of investment contracts. This means that securities fraud could mean the falsification of any of these securities in order to incentivize investors.
These securities and their trades are regulated by both the Securities Act of 1933 and the Securities Exchange Act of 1934 and then mainly enforced by the SEC (Securities Exchange Commission) and the DOJ (Department of Justice).
According to Professor Jennings, when it comes to securities regulation, “sunlight is the best disinfectant,” meaning that disclosure from both the investor and buyer is everything in preventing securities frauds and violations. To elaborate on this, let’s take a look at some sub-par disclosure at the expense of our favorite Seinfeld characters.
Kramer’s “Non-Fat” Yogurt
In season 5, Kramer finds a small frozen yogurt shop that offers the most delicious frozen yogurt with the perfect sell, it is completely fat-free! Kramer, a natural businessman himself, then decides to invest his money into the yogurt shop. However after both Jerry and Elaine, loyal customers of the shop, begin to notice some weight gain, serious suspicion arises as to what exactly is in the beloved frozen yogurt.
After Jerry sends a sample of the yogurt off to a lab for testing, it is discovered the yogurt did in fact contain fat… and a lot of it. In response, the yogurt shop is forced to produce actual non-fat yogurt which tastes horrible and plummets their business. But what about Kramer’s investment? He chose to invest in a “non-fat yogurt shop” that turned out to not be non-fat at all! Should he get his money back?
According to Jennings, this would depend on whether there were “material misstatements or omissions” during the investment. In securities law, defining the term “material” requires taking a look at the case of TSC Industries v. Northway where the Supreme Court court decided that a statement “is material if there is a substantial likelihood that a reasonable shareholder would consider it important to their decision.”
Therefore, to seek damages on the claim that the yogurt shop who sold Kramer the investment committed fraud, all Kramer would have to do is prove that the yogurt being “fat-free” was important in making his decision to invest.
Lawyer Practice: How would you argue against Kramer’s case? In other words, how was this fact about the fat-free yogurt not important to Kramer?
The Stock Tip
In this scenario, George hears of a sure-fire company merger that will surely skyrocket the value of a certain stock. There is only one problem, George has gotten this tip from someone within one of the merging companies. Nevertheless, George and Jerry buy the stock and plan to sell it as soon as the merger inflates the stock price. This is what is called insider trading, where an individual uses “material” information that is not available to the general public.
Fun Fact: There is actually no federal law against insider trading. Rather, it is judge-made law.
The basic idea behind insider trading is that the insiders of companies have a duty to use the material information of their company that is not available to the public in a responsible manner that does not promote unfair advantages.
In the case of United States v. O’Hagan, a law partner heard of a major client’s upcoming stock offer and began buying up common stock in the company. After news of the stock offering broke, the client’s stock price rose by around 30% and O’Hagan quickly sold his shares, profiting over 4.3 million dollars. In court, the question in O’Hagan’s case revolved around trading on information belonging to businesses other than your own. In other words, was O’Hagan technically an “insider?” Justice Ruth Bader Ginsburg delivered the majority opinion by explaining that…
“A trader who fails to disclose personal profits gained from reliance on exclusive information is guilty of employing ‘a deceptive device…in connection with the purchase of a security.’ The security-trader knowingly abuses the duty owed toward the source of information, whether the source is the company he works for or not.”
With this in mind as well as the fact that both Jerry and George knew that their information was coming from the “inside,” they could both be very well looking at some more prison time! This would be ironic since Jerry actually lost a great deal of money on the deal due to losing patience and selling prematurely. Talk about a double whammy.
Thanks so much for tuning in to week eight’s recap of Yada Yada Law School! If you would like to watch the full lecture, you can do so for free here!
Yada Yada Law School: The Recaps
Recap: Seinfeld and Property Law (Week One)
Recap: Seinfeld and Evidence (Week Two)
Recap: Seinfeld and Criminal Procedure (Week Three)
Recap: Seinfeld and Gender Law (Week Four)
Recap: Seinfeld and Torts (Week Five)
Recap: Seinfeld and Contract Law (Week Six)
Seinfeld and Criminal Law (Week Seven)
Seinfeld and Securities Law (Week Eight)
Recap: Seinfeld and Business Law (Week 9)