In English, if you read this paragraph, all it basically says is that,
manipulation and deception in the trading of securities,
which is in violation of SEC rules, is prohibited.
Now, so what you gotta know is what are those SEC rules that you can manipulate
and deceive with respect to, well, Rule 10b-5 will tell us.
Any communication that defrauds, someone using any quote,
device, scheme or artifice is in violation of SEC rules.
Also, rule 10b-5 says any untrue statements of material fact,
any omission of a material fact, or any act, practice, or
course of business resulting in fraud.
Now, as a general rule, if you could summarize all these things, basically it
says, you gotta be honest when you're communicating in a securities transaction.
You gotta tell people what's necessary, you can't leave out stuff,
you can't tell them any untrue stuff, and you can't actively mislead them.
So, when do we see this in real life?
A couple of really, really common violations of sections 10b and
rule 10b-5, the first is, investment newsletters that manipulate stock prices,
these, unfortunately, are pretty common.
And if an investment newsletter is sent out to recipients and
it says, hey buy this stock, it's a great stock, but
it doesn't actually tell you to buy that stock because it really is a great stock.
It says buy this stock because the person who writes the newsletter wants to
drive up the stock price, and then sell when it's high,
before it crashes back down to Earth.
That is a violation,
because they're misleading you as to the purpose of their stock recommendation.
The second common violation of sections 10b and rule 10b-5 are Ponzi schemes.
Now Ponzi scheme is when a person or organization takes investment money from
its customers, promising them to invest their money in the stock market usually,
or in other investment vehicles, and promises them a certain rate of return.
But, instead of actually investing their money, it takes their money, and
then uses money from new clients to pay the return for existing clients.
So, as long as you keep getting a steady stream of new clients,
you could pay the returns of your existing clients and it works fine for a while.
But eventually, your pool of new clients dries up, and
then your existing clients say, where's my money?
And you say, I don't have any, time for me to go to jail,
or try to escape to some country with no extradition treaty.
So by far the most famous Ponzi scheme in history is that of
Bernie Madoff who was convicted of running a Ponzi scheme up
to 50 billion dollar, now the actual amount is in debate, but
Bernie Madoff is now sitting in prison as a result of his Ponzi scheme.
So though investment news letters and Ponzi schemes,
two very common unfortunately, violations of sections 10b and Rule 10b-5.
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