LAP: QS-050LAP: QS-050

ObjectivesObjectives

Explain how legislation protects investors Explain how legislation protects investors and promotes market stability.and promotes market stability.

Describe common investment scams.Describe common investment scams.

Explain how legislation protects Explain how legislation protects investors and promotes market stability.investors and promotes market stability.

ObjectiveObjective

• October 29—Black TuesdayOctober 29—Black Tuesday

• Millions lost life savings.Millions lost life savings.

• Country sank into Country sank into depression.depression.

• People lost faith in the People lost faith in the stock market. stock market.

The Stock Market Crash of 1929The Stock Market Crash of 1929

BLACK

TUESDAYBLACK

TUESDAY

• The government’s response to the The government’s response to the crash and lack of investor crash and lack of investor confidenceconfidence

• Sometimes called the “truth in Sometimes called the “truth in securities” lawsecurities” law

• Basic premises:Basic premises:

Public companies must tell the Public companies must tell the truth about their finances.truth about their finances.

Anyone who sells securities Anyone who sells securities must behave honestly.must behave honestly.

The Securities Act of 1933The Securities Act of 1933

• Created the Securities and Created the Securities and Exchange Commission (SEC)Exchange Commission (SEC) To monitor and enforce To monitor and enforce

the Securities Actthe Securities Act To promote stability in To promote stability in

the marketthe market To protect investorsTo protect investors Operates on the belief that all Operates on the belief that all

investors should have access investors should have access to certain facts about potential to certain facts about potential investmentsinvestments

The Securities Exchange Act of 1934The Securities Exchange Act of 1934

• Occurs when a company’s Occurs when a company’s “insiders” (such as officers and “insiders” (such as officers and board members) trade its board members) trade its securitiessecurities

• Legal when reported to the SECLegal when reported to the SEC

• Illegal when trades are made with Illegal when trades are made with information that is not disclosed information that is not disclosed to the publicto the public

Insider TradingInsider Trading

• EnronEnron

• WorldcomWorldcom

• Martha StewartMartha Stewart

• TycoTyco

• Once again, investor Once again, investor confidence was eroded.confidence was eroded.

Corporate ScandalsCorporate Scandals

MARTHAMARTHASTEWARTSTEWART

The Sarbanes-Oxley Act of 2002The Sarbanes-Oxley Act of 2002

• The government’s response to the corporate scandals The government’s response to the corporate scandals and lack of investor confidenceand lack of investor confidence

• Also known as the Public Company Accounting Also known as the Public Company Accounting Reform and Investor Protection ActReform and Investor Protection Act

• Highlights:Highlights:

CEOs and CFOs must certify financial reports.CEOs and CFOs must certify financial reports.

Compensation and profits must be made public. Compensation and profits must be made public.

Stiffer penalties and jail time for violationsStiffer penalties and jail time for violations

Internal controls for financial reportingInternal controls for financial reporting

Describe common investment scams.Describe common investment scams.

ObjectiveObjective

• Pump and dumpPump and dump

• Pyramid schemePyramid scheme

• Ponzi schemePonzi scheme

• Affinity fraudAffinity fraud

• PhishingPhishing

Investment ScamsInvestment Scams

• Be skeptical.Be skeptical.

• Consider the source.Consider the source.

• Independently verify claims.Independently verify claims.

• Beware of high-pressure Beware of high-pressure pitches.pitches.

• Research the company.Research the company.

• Confirm registration Confirm registration (on EDGAR). (on EDGAR).

SEC Recommendations SEC Recommendations for Investor Protectionfor Investor Protection

Quick CaseQuick Case

• A single investor can A single investor can manipulate market manipulate market sentiment.sentiment.

• 15-year-old Jonathan Lebed 15-year-old Jonathan Lebed did so.did so.

• He ran a pump-and-dump He ran a pump-and-dump scheme over the Internet.scheme over the Internet.

• The youngest person to be The youngest person to be charged with securities charged with securities fraudfraud

Stick With the Facts!Stick With the Facts!

MarkED

Acknowledgments

Original DevelopersChristopher C. Burke,

Janet Coulon and Sarah Bartlett Borich, MarkED

Version 1.0

Copyright © 2006MarkED Resource Center

Copyright:

All photographic digital images on this CD are owned by the aforementioned photographic resources or their licensors and are protected by the United States copyright laws, international treaty provisions, and applicable laws. No title to or intellectual property rights to the images on this CD are transferred to you. These sources retain all rights and are not to be used, digitally copied, transferred, or manipulated in any way. To do so is a violation of federal copyright laws.