Part A The common stock of Wilson, Inc. is owned by twenty stockholders who live
ID: 2715678 • Letter: P
Question
Part A
The common stock of Wilson, Inc. is owned by twenty stockholders who live in several states. Wilson’s financial statements as of December 31, 2012 were audited by Doe & Co., CPAs, who rendered an unqualified opinion on the financial statements. In reliance on Wilson’s financial statements, which showed net income for 2012 of $1,500,000, Peters purchased 10,000 shares of
Wilson stock for $200,000 on April 10, 2013. The purchase was from a shareholder who lived in another state. Wilson’s financial statements contained material misstatements. Because Doe did not carefully follow GAAS, it did not discover that the statements failed to reflect unrecorded expenses, which reduced Wilson’s actual net income to $800,000. After disclosure of the corrected financial statements, Peters sold his shares for $100,000, which was the highest
price he could obtain. Peters has brought an action against Doe under federal securities law and state common law.Required
Answer the following, setting forth reasons for any conclusions stated:
a. Will Peters prevail on his federal securities-law claims?
b. Will Peters prevail on his state common-law claims?
Part B
Able Corporation decided to make a public offering of bonds to raise needed capital. On June 30, 2012, it publicly sold $2,500,000 of 12%
debentures in accordance with the registration requirements of the Securities Act of 1933.
The financial statements filed with the registration statement contained the unqualified opinion of Baker & Co., CPAs. The statements overstated Able’s net income and net worth. Through
negligence, Baker did not detect the overstatements. As a result, the bonds, which originally sold for $1,000 per bond, have dropped in value to $700. Ira is an investor who purchased $10,000 of the bonds. He promptly brought an action against Baker under the Securities Act of
1933. Required
Answer the following, setting forth reasons for any conclusions stated:
a. Will Ira likely prevail on his claim under the Securities Act of 1933?
b. Identify the primary issues that will determine the likelihood of Ira’s prevailing on the claim.
Explanation / Answer
Part A
As Doe & Co. did not carefully follow GAAS, it did not discover that the financial statements of Wilson, Inc. failed to reflect unrecorded expenses, which reduced Wilson’s actual net income from $1,500,000 to $800,000. Because of Doe & Co.’s Negligence, Peter lost $100,000.
a) If Peters brought an action against Doe under federal securities law, then Peters will prevail on his federal securities-law claims
b) If Peters brought an action against Doe his state common-law, then it depends on the test used (identified user, Foreseen User, Foreseeable user), So based on the test, Peters may or may not prevail on his state common-law claims
Part B
As Baker & Co., did not detect the over statement of Able’s net income and net worth in the financial statement, the bond value dropped from $1000 to $700. So Ira lost her money due to Baker& Co.’s Negligence.
a) If Ira brought an action against Baker under the Securities Act of 1933, then he will prevail the claims under Security Act 1933, as it is negligence of Baker & Co.
b) The primary issue is Baker & Co’s negligence, because of which they could not identify the misstatement in the financial statement of Able