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 Gallopâ€™s most popular product line, the Spartan Warriors. Gallopâ€™s outside counsel was instructed to prepare a press release describing the claim. Before the press release was sent to the copy center at Gallopâ€™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 Gallopâ€™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 Gallopâ€™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 Copierâ€™s and Clientâ€™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, Gallopâ€™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. Attorneyâ€™s Office.
What are the bases on which each proceeding could be brought? Who is potentially liable? For how much?
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