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 who inadvertently overheard the conversation, 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 (shareholders) have brought a private class-action lawsuit 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. Note: The plaintiffs are shareholders unrelated to the personal injury lawsuit.
Assess the potential liability for securities violations of Stone, the vice president, Copier, Broker, and Client.