Dracca's Senior Vice President Of Sales

Did Marley and Farian commit any securities violations?

Dracca’s Senior Vice President of Sales Mr. Marley and his sales representative Bill Farian committed insider trading, which under the Securities and Exchange Act of 1934 is listed as a security fraud (U.S. Securities and Exchange Commission, n.d.). Insider trading involves trading of a public company’s stock or related securities by individuals with access to non- public information about the company (U.S. Securities and Exchange Commission, n.d.). There are two types of insider trading: the first involves the trading of a company’s stock or associated security by corporate insiders for example directors, key employees or holders with at least a tenth of the company’s stocks (Harris,

2003). This type of insider trading is generally allowed with certain reporting guidelines. The second type involves the purchase or sale of stock based on non- public information obtained during performances of the inside duties at the company and is considered illegal (Harris, 2003).
In the given scenario Marley and Farian are company insiders and they sell their share upon obtaining non- public information in the course of company duties (a conference call) as described under the second type of inside trading, which is illegal. Acting on material non-public information is an unfair act to other investors who do not have access to the information and as such is a securities violation (Harris, 2003).
The Courts Analysis
The court will mainly rely on the guidelines laid out on sections 10(b) and 16(b) of the securities exchanges Act which directly or indirectly address insider trading. In the case of section 10 (b) for example, the court would consider whether Marley and his sales representatives acted within position limits, observed position accountability and whether they made larger trader reporting as laid out by the Act. As for section 16, which lays out disclosure guidelines for directors, officers and principle stockholders, the court would consider the guidelines laid out in section (b)(Securities and Exchange Commission, n.d.). This section identifies a company insider and his roles for the company. Company insiders as noted in this section have a fiduciary duty owed to the stakeholders which makes insider trading consequently fraudulent (Bagley, 2013). The court would analyze this section to assess whether Mr. Marley and his colleague are company insiders to determine if their actions were illegal.
Would the analysis be different for Marley than Farian? Why or why not?
The analysis of Mr. Marley and his sales representatives would most likely not be different on account that both of them acted on material information that was not in the public domain. Even though Farian makes a disclosure that “This won’t be good for stock prices” he does not follow the reporting/ disclosure guidelines laid out by the Act which states that it is illegal to disclose information as a tip (Bagley, 2013).
Presuming Farian’s statement “This won’t be good for stock prices” could be considered disclosure of plan to trade on the nonpublic information, would Farian’s sale of stock be a section 10(b) violation? Would it be ethical? Why or why not?
Under the above presumption, his action may be considered as a non-violation under position limit, position accountability and large trader reporting (U.S. Commodity Futures Trading Commission, n.d.). His action is however non-ethical because he understands the position the company is likely to be stock-wise as a result of the product recall and without making it known to the potential investors goes ahead to sell his interest in shares. Although Farian’s statement may be considered a non-violation, his actions are still considered as unethical business practices (Henderson, 2008). In addition to being unfair to other investors, this practice raises the cost of capital for security providers, consequently decreasing overall and inclusive economic growth (Library of Economics and Liberty, n.d.).
Discuss the legal and ethical issues associated with VGV’s action in selling the molding machine before filing bankruptcy
In cases such as this where a product is sold before filing bankruptcy, a company or business entity retains control of its assets before bankruptcy and may act as it wishes with regard to its assets even when they are assets of debt (Foley & Lardner, 2009).

As such VGV’s action of selling the molding machine and filing bankruptcy does not breach the Bankruptcy Act. Although legally strategic, it was still an unethical decision (Renshaw, Kubat & Angellatto, n.d.). When a company files for bankruptcy as noted in chapter 7 of the bankruptcy Act, it means that the company is badly in debt unable to pay its creditors and as a result the appointed trustee is generally tasked to sell the business assets and distribute the proceeds to its creditors(United States Courts, n.d.). If VGV operated ethically, they would have reserved the molding machine to sale by the trustee so as to try as much as possible to pay off its debt to Dracca. Instead the company chose to sell the machine at significantly lower price to another company and pocket the money. Obviously, it now means that Dracca may never be able to get the money VGV’s owes them. VGV’s has already resold the machine and in addition filed for bankruptcy which as laid out in chapter 7 can help a the business relieve liability for some of its business and personal debt tied to it although not entirely (Madden, 2009). Considering the two businesses had good business relationship that is what prompted Dracca to extend a credit

offer, therefore, the action of VGV is highly unethical.
What recourse does Dracca have in recovering the money still owed on the equipment?

Dracca has still a chance to recover some or all of its money as chapter 7 does not discharge or cancel debts for corporations(Madden, 2009). In this case Dracca should register a claim against the assets of VGV. This would be done through filing a Proof of Claim document (POC) alongside with supporting documentation (Legal Information Institute, n.d.). The POC claim will show the amount owed ($100,000) as of the date of bankruptcy filing and as well as any other priority status such as the one Dracca had with VG.

What actions (internal and external) do you recommend to Dracca to remedy the ethical and legal considerations of this

scenario?
In this scenario, the debt VGV’s debt to Dracca was an unsecured one based on their good relation (Henderson, 2008). As a result, Dracca may not be able to recover the full amount owed since chapter 7of the bankruptcy Act relieves a debtor from paying most unsecured loans (Madden, 2009). Internally, the company will be required to learn from this unfortunate event by changing its lending policy in future to that of secured lending. On the external, the company may try to salvage this loss by hiring debt collectors, filing a lawsuit and or getting a court order.