Because securities can be easily manipulated by issuers, federal and state governments have strongly regulated the issuance and trading of securities. Studying the following case example and answering some critical thinking questions about it will help you better appreciate the need for regulation of securities. Jessica received a phone call from a man claiming to represent Buy-It-Here, a corporation that was relocating to Jessica’s town. The man stated that the corporation was planning to issue new securities, and he was extending this offer to residents in Jessica’s town. He claimed that Buy-It-Here would easily double its profits within six months. The man said that if Jessica would send $3,000, he would buy stock in Buy-It-Here for Jessica. Jessica sent the money; two weeks later, she discovered that Buy-It-Here was in the process of filing for bankruptcy.
1. This case is an example of the need for government regulation. We want the government to protect citizens from cases such as Jessica’s buying stock in a bankrupt company. If we want governmental protection from potentially shady businesses, what ethical norm are we emphasizing? Clue: Put yourself in Jessica’s place. Why would you want governmental protection? Now match your answer to an ethical norm listed in Chapter 1. Think about which ethical norm businesses would emphasize.
2. Jessica wants to sue Buy-It-Here for misrepresentation. Before she brings her case, what additional information do you think Jessica should discover? Clue: What additional information do you want to know about the case? Even without having extensive knowledge about securities, you can identify areas in which you might need more information about Jessica’s case. For example, pay close attention to the role of the telephone caller.
3. Jessica did some research about securities cases in her state. She discovered a case in which a woman named Andrea Stevenson had purchased $100,000 worth of stock from a stockbroker.The company went bankrupt three months later. The stockbroker had known that the company was suffering financial problems, but had said nothing to Andrea. The jury in this case found in favor of Andrea. Jessica wants to use Andrea’s case as an analogy in her lawsuit. Do you think that Andrea’s case is an appropriate analogy? Clue: What are the similarities between the cases? How are the cases different? Are these differences so significant that they overwhelm the similarities?