Larry Master is the owner of Masterâs Casino and Resort, a gambling casino. Lucy is a wealthy gambler and a Vice President and Board Member of Right Way Meat Company, a regional meat company that sells meat to restaurants. One night Lucy loses a lot of money, over $500,000, in Larryâs casino. She is very upset because the money she was betting was her entire retirement account. She comes to Larry and asks if there is anything that she can do so that she can avoid having to pay this gambling debt.
Larry is also a big investor in the stock market. He asks Lucy if she has any special information about Right Way Meat Company that he might find âinterestingâ. Lucy tells him, âconfidentially,â that Right Way Meat Company is going to be acquired by Swift Meat Packing Company and the stock price to be paid will be a great premium. Larry tells Lucy that he will invest in Right Way Meat Company stock and if he makes a profit, he will credit 50% of his profit against her $500,000 gambling debt. Lucy signs a promissory note payable to Larry acknowledging that she owes him $500,000.
Lenny is the custodian in Larryâs office building. While cleaning Larryâs office he sees a note in Larryâs trash can that says âBuy Right Way Meat.â Lenny has just inherited $30,000 from his father and has been wondering what to do with it. Lenny keeps the note and promptly buys $30,000 of Right Way Meat Company stock. The purchase price is $10 a share.
Lenny tells his brother, Josh, âHey, I am going to buy some stock in the Right Way Meat Company. I think it is a good deal.â Josh also inherited $30,000 from their father and also buys $30,000 worth of stock in Right Way Meat Company at $10 a share. Josh does not ask Lenny about why he thinks this is a good stock.
Larry buys $1,000,000 worth of Right Way Meat Company Stock, also at $10.00 a share. The following week, the potential acquisition of Right Way Meat Company by Swift Meat Packing Company is announced and the stock value of Right Way Meat goes up to $20 a share. Larry sells his stock and makes $1,000,000 of profit. Larry returns the promissory note that Lucy gave him to her marked CANCELLED. Lenny and Josh both sell their stock in Right Way Meat Company at $20 a share, doubling their money.
Questions
1. What potential claims does the SEC have against Lucy, Larry, Lenny and Josh in connection with their actions set forth in the fact pattern above? Do any of the parties have any defenses? What do you think the outcome would be if the SEC brought actions against these parties?
2. What difference, if any, in your analysis above in question 1 of this essay question would it make if the purchase of Right Way Meat Company by Swift Meat Packing Company was done as a tender offer?
3. Do the shareholders of Right Way Meat Company have any claims against Lucy, Lenny, Larry or Josh? If you think they do have claims, what are they and on what basis?