how rule 10b 5 works
rule 10b 5 is the main basis for the u s securities and exchange commission sec to investigate possible security fraud claims violations of the rule include executives making false statements to elevate share prices a company hiding huge losses or low revenue with creative accounting practices or actions taken to grant current shareholders a better return on their investments as long as the deception remains undiscovered these schemes typically require ongoing misleading statements to perpetrate fraud rule 10b 5 also covers instances where an executive issues false statements to artificially drive down the price of a company s stock so they can buy up more shares at a discounted rate these and other manipulative uses of confidential information are acts of insider trading in addition to making illicit profits or attracting more investors these schemes can be put in motion as a way of taking over a company by changing the shareholder balance introduction of rules 10b5 1 and 10b5 2in 2000 the sec further defined and clarified a range of issues related to potential securities fraud with ratification of rule 10b5 1 and rule 10b5 2 these rules put insider trading into a more modern legal perspective 2rule 10b5 1 says that an individual is trading based on material nonpublic information mnpi if that person is aware of the information while engaging in a sale or purchase of securities 3however there are exceptions to and stipulations of rule 10b5 1 that let individuals proceed with trading even if they possess such information they include trades that are parts of plans that were already set in motion through a contract or process that wouldn t be affected by knowledge of the information 3according to rule 10b5 2 securities fraud can be committed even under nonbusiness circumstances 4rule 10b5 2 explains ways that the misappropriation theory which postulates that a person who uses insider information in trading securities has committed securities fraud against the information source even if that person isn t an insider can apply even under nonbusiness circumstances 4it further states that an individual who obtains confidential information is obliged to a duty of trust 4