Question

6. In January and February 1986. Mrs. Wells was a patient of Dr. Robert Willis, a psychiatrist. During the course of their sessions, Mrs. Wells disclosed that her husband, Sanford Wells, a vice president at BankAmerica Corporation, would soon be promoted to CEO and that he had obtained a commitment from an investment banking firm to invest $1 billion in BankAmerica. Beginning in January 1986, Dr. Willis began purchasing shares in BankAmerica Corporation for himself and his children. When the commitment was made public on February 20, 1986, the price of BankAmerica stock rose by 15%. Dr. Willis sold all of his stock shortly thereafter making a profit of $27, 475. Has Dr. Willis violated Sec. 10(b) of the 1934 Act? Explain.

Answer 1

The exchange act antifraud provision is used for any kind of fraud activities , behavior incorporating misleading statements in company filings and documents which are used to sell the shares, including inside trading where inside information is shared to a person and his information is used by that individual for personal gains as these information are not available to common investor.

If we look above, it is clear that Dr. Willis is a culprit of violating Sec. 10(b) of the 1934 Act as he used the inside information for his personal gains by buying the shares in advance and selling it when the price was high. These inside information was not available to any other investor thus it can be treated as a case of inside trading.