1. You have three (3) hours to complete this exam. You are not required to spend the entire time working on the exam - the average time for completion is between two and three hours. I recommend that you spend one hour on the multiple-choice questions, and two hours on the essay question. Try to avoid the temptation to second-guess yourself on the multiple-choice questions – your initial instinct is often the most accurate.

2. THIS IS A CLOSED BOOK EXAM.

3. The exam has two components – a set of 40 multiple-choice questions, and a single essay question. The multiple-choice questions are each worth one (1) point, for a total of 40 points. The essay question is worth 60 points.

4. With respect to the multiple choice question section, you must complete your answers on the separate “ParSCORE TEST FORM” using pen or pencil and following the instructions on that form. If you change your answer, place a clear X through the wrong answer and mark the correct answer. A machine will score the exam and any ambiguities will be counted as a wrong answer.

5. With respect to the essay question, answer it as fully as you can, citing any appropriate cases, model rules, industry standards, and statutes that are relevant. Please answer the essay question in the blue books provided to you. Write only on the right hand side of the page (skipping a page each time) and double-space your work. Please write clearly. If I cannot read your response to a question, your grade will be adversely affected.

6. On the essay question, I recommend that you first spend about forty (40) minutes issue-spotting and outlining your response, before you start writing. This way you are less likely to miss issues or to submit a disorganized response. Points are deducted if you miss an issue. The essay question contains numerous issues. Each issue is worth the same amount of points (for example, if there are ten (10) issues, they are each worth 6 points towards the total of 60 points). To obtain a high score, you will need to properly identify and respond to all of the issues.

7. Write your exam number on your exam envelope. Put your correct class section and student exam # at the top of this page, each page of questions, each blue book, and the “ParSCORE TEST FORM.” Do not use your name, student ID number or Social Security Number on any exam materials.

8. At the conclusion of the exam, return all test materials, including blue books, ParScore answer sheet, scratch paper, and this exam packet to the envelope and submit it to the proctor. DO NOT seal the envelope. Students who do not return all exam materials at the end of the exam may not be graded.

Part 2 – Essay Question – Sixty (60) points

Having completed law school and passed the California Bar exam, and having been admitted to practice in both California state courts and the U.S. District Court for Northern California, you have been hired as an associate attorney in the regional office of the Securities and Exchange Commission. In your new job, you have been given an investigation file regarding an alleged violation of securities laws. Your boss, a senior attorney with the SEC, has asked you to write an evaluation of the file, based on the following summary and series of questions she has posed for your response.

The file introduces you to Sear Corporation, a publicly traded corporation based in San Jose, CA, which specializes in the manufacture and sale of computer database management products. The CEO and Chairman of the Board of Directors of SEAR is Tom Edison. Well-known for his aggressive tactics, Mr. Edison has successfully engineered the takeover of a number of smaller publicly traded companies by buying large quantities of their stock, and then mounting proxy contests to elect his friends to their board of directors, effectively taking control of the smaller companies in this fashion.

In December 2003, Mr. Edison’s friend Mr. Fastow, a member of the Board of Directors of Moon Corporation, a San Francisco based competitor of Sear in the database business, called Mr. Edison and told him that an internal financial report, provided under a confidentiality seal to the Moon Board, indicated that a key patent for a new database product had been preliminarily approved, and the Moon company was about to see a significant increase in its stock in about six months, when the news would be public. The directors were sworn to secrecy about this news, and could not tell shareholders. At that time, shareholders were unhappy with Moon Corp., whose per share value had fallen over 25% in the past year, since the company had concentrated its resources on the development of this new product.

Armed with this information, on January 15th, Edison placed an order by phone with his broker and bought 1 million shares of Moon stock, then trading at $5.00 per share. He also registered a proxy solicitation with the SEC for the purpose of launching a proxy fight. He sought, via this proxy fight, to put several of his friends on the board of directors of the Moon Corporation, at the company’s annual meeting, set for next month. His solicitation stated that since the company was suffering such a fall in value, his directors should be elected to help take the company in a new direction. He did not disclose, in this solicitation, his knowledge that the new product patent was likely to cause the value of the stock to go up considerably.

The proxy contest was successful and Edison’s three friends got on the Board of Directors of Moon, and in February they each bought 1 million shares, via telephone orders to their brokers. On May 1st, news of the patent grant was released and the stock price of Moon Corp went up to $25 per share. Edison and two of the other new Directors sold their stock on May 25th. Their five million dollar investment in the Moon stock was worth $25,000,000 when they sold it. Their other Director friend, Bob, waited until September before selling his 1 million shares, which were then valued at $15 per share.

Your boss at the SEC wants you, in your memo to her, to tell her whether any of the parties involved in these transactions involving SEAR and Moon corporations are liable for any violations of law, and to identify what laws they have violated, what defenses are available to them, and what the likely outcome will be as to each defendant. What is your response?

END OF EXAM