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A collection of people who have been given the go-ahead to operate independently form a corporation. De jure and de facto corporations are the two different kinds. The difference between a de facto corporation and a de jure corporation is that the former has all the requirements satisfied, the latter does not, but the parties involved still place their ultimate confidence in one another. (Warren 1907).
As a result of the lack of essentials, Darla was forced to deal with de facto corporation. Since Darla and the other defendants are the shareholders accountable for the corporate actions carried out by CARDWARE professionals, the court holds them accountable under the equitable standard of care. This is also known as ’piercing the corporate veil’.
The SEC rule 10b-5 relates to the requirements regarding disclosure of critical non-public information by individuals trading in a corporation’s securities. The rule discourages any unlawful act that might lead to fraudulent activities such as employing a device or scheme to defraud, making a false statement of a material fact, and engaging in a business that operates as a deceit upon any person. Darla did not follow the right procedure for acquiring the shares since a certificate was not offered to her. Therefore, she was involved in an unlawful purchase of shares; hence she violated the SEC Rule 10-5b (Scott 1980).
Darla overheard a conversation as she brought the last dummies down the hall to the room where the dummies were addressed. She managed to grasp essential information and realized that one would make a profit on FCPA. On hearing that, she called her broker and told the broker that she wanted to purchase 50 percent of the outstanding stock available for FCPA.
Despite having made the purchase successfully, Darla violated the rule, and the court was right to hold her responsible and judge her appropriately. She used the information she overheard to persuade the broker that she needed to acquire fifty percent of the stock owned by FCPA. She used the news for her own benefit and did not consult or involve any other executive member of the corporate.
SEC v. Falbo 14 F. Supp. 2d, 14 508 (Dist. Court, SD New York 1998).
Scott, K. E. (1980). Insider trading: rule 10b-5, disclosure and corporate privacy. The Journal of Legal Studies, 9(4), 801-818.
Warren, E. H. (1907). Collateral Attack on Incorporation: De Facto Corporations. Harvard Law Review,20(6), 456. doi:10.2307/1323515
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