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John Baker is the CEO of Baker Broker Dealer, LLC (“BBD”), a registered U.S. broker-dealer headquartered in New York City. BBD’s primary business is to underwrite initial public offerings of U.S. equities in the pharmaceutical industry. Baker has personally been calling on Fever Industries (“FI”), a private company with over $1 billion in sales. FI produces prescription and non-prescription cold remedies. Through John Baker’s efforts, BBD will be “taking FI public” by underwriting and distributing FI’s IPO.

FI’s biggest seller is a cherry flavored cough syrup, called Cough Ender. Cough Ender accounts for three quarters of FI sales. FI is just finishing up the last FDA trials of a new prescription drug (“Fever Ender”) and expects full FDA approval to offer this drug to the market generally. FI has made a number of statements at industry conferences that Fever Ender could have twice the sales of Cough Ender. Stock Analysts have already been sending out positive reports to their clients about FI based on the potential success of Fever Ender.

Frank Fever is the CEO of FI and is already planning on what to do with the proceeds of the IPO that will be handled by BBD. Frank is a majority owner of FI and expects to receive $80 million from the sale of his shares at the expected IPO price of $20 per share. He has his eye on buying a few sports cars – each with a price of $2 million, a large house with a price of $40 million, jewelry for his girlfriend of $15 million, and a large vacation house in Florida for $20 million. Frank repeatedly checks with John Baker about the expected IPO sale pricing to make sure that Frank would receive enough cash to buy all of these items.

A few days before the IPO, Frank receives news that the FDA has disapproved Fever Ender as 10% of all test subjects die from using it. The FDA also reviews Cough Ender and finds the red coloring used in it causes cancer. The FDA orders that Cough Ender no longer be sold anywhere until a new coloring can be chosen and tested.

Frank reviews his dream list of purchases. Frank convinces himself that the latest news from the FDA is not important or material to the IPO. Frank does not discuss this with BBD, FI’s lawyers or FI’s board of directors but tells his managers that the FDA news is for internal discussion only even if BBD asks in its “closeout” due diligence discussions the night before the IPO offering. BBD never learns of the FDA news and completes the IPO at a price that enables Frank to purchase everything on his list.

The FDA releases its findings about Fever Ender and Cough Ender three days after the IPO and FI’s stock price drops by 90%. Investors are shocked and lose a lot of their money that they invested in FI stock. The SEC notices the stock’s decline. What should be the SEC’s response? What should the SEC do? What procedure, including each step, would you imagine that the SEC would follow? What should be the outcome for FI, Frank Fever, BBD, and John Baker? Would any other agencies, regulators or SROs be involved? If so, what should their response be and what actions should they take?


Bob Brainless is one of five sons of Ted Brainless, the original owner of the Ohio Wombats, a powerhouse NFL team with a fan favorite female cheerleading team. Ted and his wife unfortunately died last year and their family of five sons (one of whom is Bob) survived. Each son received an equal ownership share of the Wombats with each share valued at $100 million. None of the sons have sold their shares. Matthew Strong is the CEO of the Wombats and has an independent board of directors to guide him. Matthew is known for his ethics and compliance with all laws and regulations.

Unlike his other brothers, Bob has never worked in his life and has always enjoyed a party every day with his fifteen close friends. His brothers have all been successful with each amassing wealth in excess of their father. Bob comes up with what he thinks is a great idea. He goes to his other brothers and suggests that they require the Wombats cheerleaders to come to a pool party with Bob and his friends. Bob’s brothers react negatively to this idea as it would place the cheerleaders in a difficult, adverse and possibly unsafe environment. Bob said that he thought of this and suggests that he require all of the football players come as well. Bob’s brothers again react negatively to this idea for the same reasons. Bob wants his party and approaches Matthew Strong. How should Matthew respond to Bob’s request? What should or could the brothers do about Bob? What are the potential economic consequences of Bob’s idea with respect to the Wombats?


John Hoover is the Chief Operating Officer of Smith Brokerage LLC (“SBL”), a U.S. registered broker dealer. SBL has a large business and does thousands of deals a month. Bob Wolf, SBL’s Chief Legal Officer, stops by Hoover’s office. Wolf appears to be very upset. Wolf explains that he just received a Wells Notice from the SEC on behalf of SBL for a debt offering that just closed where the U.S. dollar five year term fixed rate note of a U.S. company was sold by SBL to the London office of a Russian Bank. The Russian Bank has been on the U.S. terrorist list for the last year and U.S. law forbids any business dealings with that bank regardless of office location. Wolf understands that the primary SBL banker has not been seen for the last several days and preliminary information is that the SBL banker has left the U.S. to go to an island in the Caribbean that does not have an extradition treaty with the U.S. In reviewing the deal, Wolf found that the primary SBL banker used a few newly hired analysts who were studying for their licensing exams to help with calls and money transfers related to the subject deal. What should Wolf and Hoover expect as far as regulatory and judicial process? How should they prepare? What weaknesses should they look for in SBL and how could SBL be strengthened? What should they do as far as trying to reduce the damage to SBL from the impending process? What are the economic costs of this type of business problem to SBL?


The following are people who have funds to invest. Each comes to you separately to ask for your recommendation. Please provide your recommendation as to investments or types of investments, how much of the money they should put into each investment (note that one investment may be sufficient), the reasons why, and any clarifying or other assumptions about the potential investor that you might need to make in order for your recommendation to be valid:

  1. A recent college graduate works at a job and can invest $1000 every three months. The graduate does not have a lot of investment knowledge. He may quit his job and take another better paying job elsewhere in the U.S.
  2. A man with $500,000 in a bank savings account that wants to obtain more yield on his money. He is married with three children under 10 years of age. He expects that each child will eventually attend college and he does not want them to have substantial college loans. He has some investment knowledge but his wife does not and she is afraid of another recession occurring.
  3. A professional investor runs a structured finance (primarily investing in asset-backed securities) hedge fund. His investment goal is a balance between risk and return but tries to seek yield on his fund’s assets. He is paid a percentage fee on the income that the fund earns (not capital appreciation). He has $10 million to invest at this time.
  4. A 75 year old man and his wife have $5 million in life savings and they want to invest all of it at this time. The wife enjoys their life of expensive dining and traveling. Her husband is concerned about medical bills.
  5. A money manager runs a U.S. equity only long short hedge fund. He has $20 million to invest now. He believes that a trade war would be an issue to the U.S. economy and feels that a recession will occur in the next 24 months.


Ron Roberts is a proud graduate of the University of Mudland. Unfortunately for Ron, his company moved Ron’s business to Wespo, CT, the home of Wespo State University, the arch rival of University of Mudland. There are a lot of stories about cars that were unfortunately painted the colors of the University of Mudland and were burned on sight in Wespo even if the owner had no idea about the rivalry. Ron decided that he wanted a quick lunch on Sunday and visited his favorite fast food shop in Wespo. He did not realize that he was wearing one of his favorite University of Mudland t-shirts. When he walked into the fast food restaurant’s front door, the people there starting booing Ron and throwing food at Ron. The local police were summoned by the fast food manager – complaining that Ron was disturbing the peace. Ron was arrested. During his arrest, he was beaten until he was unconscious but he could not identify who did this. The fast food restaurant manager erased the security camera’s record of the beating. Ron’s wife went to the police station to report Ron missing. Identifying the beaten, bloody, almost unconscious Ron at the police station, his wife posted bail and Ron was let go to await trial. His wife brought Ron to the hospital and Ron was admitted with life threatening injuries. At his trial a month later, the town attorney sought to throw Ron in jail and throw Ron’s lawyer in jail for representing Ron. The ensuing media coverage led the Department of Justice to intervene in the case. Ron was freed and the criminal charges dropped. Ron’s company sent Ron a company t-shirt and told him never to wear a University of Mudland t-shirt ever again and did not pay Ron for the time he could not work due to his injuries. Please discuss whether Ron was treated properly and correctly by the fast food restaurant, the Wespo police, the town of Wespo, and Ron’s company. Please describe the potential economic consequences of Ron’s treatment to the fast food company, the town of Wespo, and Ron’s company. What should Ron’s lawyer do?


Which regulator or SRO is the most important to the U.S. finance industry in your opinion and why? What is its most important function given its general importance to the U.S. finance industry?


Describe any recent news story that is relevant to our course and explain how it is relevant to our course (ethics, compliance, and/or financial regulation)? Explain the facts, the issues, and why it is relevant to our course?

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