Discussion Background: CARDWARE Inc. plans to take over First Class Purses & Accessories Corp. (hereinafter "FCPA") in an effort to coordinate elegant CARDWARE professional attire with items from FCPA that will complement CARDWARE's fashion designs.

Darla Dunn, the owner of Darla's Dummies, Inc., a mannequin manufacturer whom CARDWARE had used on numerous previous occasions, was delivering mannequins to CARDWARE's principal place of business in Silkadonia. As Darla was bringing the last of the mannequin dummies down the hall to the room where they are dressed, Darla paused to listen to a conversation coming from one of the open doors of the hallway that she was using. Realizing that a profit could be made from FCPA's stock, Darla immediately called her broker and indicated that she wanted to purchase 50 percent of the outstanding stock that was available for FCPA. Darla bought 2,000 shares of stock at $30 a share.

CARDWARE subsequently offered $50 a share and ultimately ended up paying $65 per share for FCPA stock. Darla was no dummy, as she made a $70,000 profit on her stock purchase - not a bad return for a day "at the office."

The Securities and Exchange Commission (the "SEC") filed a lawsuit in a federal district court against Darla Dunn (and others) for alleged violations of, among other things, SEC Rule 10b-5.

Discussion Questions: Please fully address the following questions and be sure to justify your response based on information from your textbook reading and SEC v. Falbo, 14 F.Supp.2d 508 (S.D.N.Y. 1998):

1. Identify and explain the legal theory under which Darla might be liable? Be sure to identify all of the elements - or requirements - for imposing liability.

2. Discuss and explain whether the circumstances of this case meet all of the requirements for liability under the theory of liability you identified?

3. Summarize and explain the purpose of SEC Rule 10b-5.

4. Discuss whether or not Darla was liable under "misappropriation theory."