Gallop, Inc. is a toy manufacturer specializing in games for
boys and girls aged eight to twelve. On March 30, Gallop had predicted
first-quarter earnings of $.20 per share. On April 15, Gallop received a fax
from its key distributor reporting a $10 million claim for personal injury of a
nine-year-old child who was allegedly injured by a design defect in Gallop’s
most popular product line, the Spartan Warriors. Gallop’s outside counsel was
instructed to prepare a press release describing the claim. Before the press
release was sent to the copy center at Gallop’s executive office, the vice
president of marketing, one director, and the outside counsel sold all of their
Gallop shares at the prevailing market price of $25.25 per share.
Collin Copier, who ran the photocopying machine at Gallop’s
executive office, saw the draft press release; called his broker, Barbara
Broker; told her about the press release; and ordered her to sell the 500
shares of Gallop that Copier had acquired in Gallop’s initial public offering.
Broker then called her best client, Charleen Client, and suggested that she
sell her 100,000 shares of Gallop stock but did not tell her why. Client
agreed, and Broker sold Copier’s and Client’s stock at $25.25 a share right
before the market closed on April 17.
The press release was publicly announced and was reported on
the Business Wire after the market closed on April 17. The next day, Gallop’s
stock dropped to $20.75 per share. A class-action suit has been brought, and
the SEC has commenced enforcement proceedings. Criminal prosecution is
threatened by the U.S. Attorney’s Office.
What are the bases on which each proceeding could be
brought? Who is potentially liable? For how much?