S3: Securities On June 30, 2015, FSPC predicted first-quarter earnings of $0.25
ID: 459740 • Letter: S
Question
S3: Securities
On June 30, 2015, FSPC predicted first-quarter earnings of $0.25 per share. On July 13, 2015, FSPC received an e-mail from their in-house attorney related to a $2.5 million claim for personal injury of a three-year-old child who was allegedly injured when choking on a toy contained in a kid's meal sold by one of the FSPC restaurants. Chip Stone, the CEO of FSPC, instructed the attorney to prepare a press release describing the claim. Before the press release was sent to the copy center at FSPC's executive office, the vice president of sales sold his FSPC shares at the prevailing market price of $35.25 per share.
Charlene Copier, who ran the photocopying machine at FSPC's executive office, saw the draft press release. She called her broker, Bradley Broker; told him about the press release; and ordered him to sell the 250 shares of FSPC that she had acquired in FSPC's initial public offering. Broker then called his best client, Calvin Client, and suggested that he sell his 10,000 shares of FSPC's stock but did not tell him why. Client agreed, and Broker sold Copier's and Client's stock at $35.25 a share right before the market closed on July 15.
The press release was publicly announced and was reported on the Business Wire after the market closed on July 15. The next day, FSPC's stock opened at $27.75 per share. Plaintiffs have brought a private class action suit, and the SEC has commenced enforcement proceedings. Criminal prosecution is threatened by the US Attorney's Office:
Evaluate the potential claims by the plaintiffs in the class action lawsuit and the basis for the criminal action by the US Attorney's Office.
Assess the potential liability for securities violations of Stone, the vice president, Copier, Broker, and Client.
Explanation / Answer
As mentioned in the statement above, they're is a class action suit involved which will have several implications and claims.
General claims will revolve around coupons where debate is on which class members are given coupons with little or no value in exchange for a release of claims by the class against the defendant and payment of substance.
Attorneys in consumer class actions still face the challenge of trying to fashion a settlement acceptable to both sides or face the prospect of years of prolonged and expensive litigation.
There are still cases where defendant agrees to pay a monetary settlement award to qualifying class members who mail in a claim for a payment.
Each class action settlement is unique, but there are several common methods for distributing relief to the class. They include: (1) direct payment; (2) fund; (3) claims-made; (4) coupon; and (5) equitable relief.
Two or more methods may be used in combination as part of an overall settlement structure. In a direct payment settlement, class members are sent payments or have accounts credited directly without having to take any affirmative action.
In fund settlements, the defendant pays an agreed sum to a fund that may then be used to pay for settlement costs, attorneys’ fees, and cash awards to class members. Class members may or may not have to file claims for benefits as part of a fund settlement.
In coupon settlements, class members are sent coupons for free or discounted products or services from the defendant, which provide actual monetary benefits only to the extent the coupons are redeemed. Equitable relief, in which the defendant agrees to change its conduct in the future, may be provided on its own or in addition to other relief.
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