Class: Legal Environment of Business Scenario 1 - Deena is an accountant for the
ID: 363325 • Letter: C
Question
Class: Legal Environment of Business
Scenario 1 - Deena is an accountant for the Bean and Counter CPA firm. She was asked to evaluate Denqrt Co. and prepare certified financial statements. She reviewed the financial records and prepared the financial reports, which were incorporated into an SEC registration statement and prospectus. Denqrt was able to issue $35 million in new stock during this offering. In early 2011, it was discovered that Denqrt management had manipulated the books by overstating sales revenue and hiding the manipulation from Bean and Counter. The result was that Deqrt income was substantially overstated for the years 2009 and 2010. The news reports caused the company stock to decline in value on the stock exchange. The investors suffered $25 million in losses after having relied on the information in purchasing Denqrt stock. The investors are now prepared to sue for stock fraud based on a false securities registration statement. Investors seek damages from a. Deena, b.her CPA firm, c. Denqrt Co., d. the six members of the Deqrt board of directors, and e. Denqrt's eight corporate officers.
Question: Assume under the facts of scenario 1 that after Deena had prepared the statements but before word of the understatement of income became public knowledge, Deena discovered her error. Assume further that she told her sister, Petra, about the understatement of income and advised Petra to sell her stock before it fell in price. Petra acted on the advice and sold her Denqrt stock at $40 per share. The price fell to $10 after the announcement. Please discuss Deena and Petra's liability under insider trading law.
Explanation / Answer
Every organisation is wary of insider trading issues which crop up at every quarter. The stock and exchange regulatory body acts with no mercy if it is proven that there was an insider trading before announcement of the quarter results. Hence the staff who are aware of the quarterly numbers of the organisation are prevented to trade in shares of their company for one month prior to the annoucement of results, there by preventing any cases of insider trading.
In this case, although Denqrt Co has over stated the sales revenue and hiding it from the CPA firm where Ms. Deena works as an accountant. This increased the stock price of the company and once the news report of fraud came out, the stock plummented from $40 to $10. The liability of committing the fraud solely relies on Denqurt Co for hiding the facts. The CPA firm is also liable as it failed to notice the manipulation. Hence all are answerable to the investors
As mentioned earlier, Deena and Petra are to be charged for insider trading as they used unfair means to make a profit on a stock which Deena knows will fall. Selling a stock before announcement of the results directly indicates the assessment of the shareholder of the company. In this case, the share holder who sold the shares is a sister of Deena, who works as an accountant of the CPA firm which audits Denqrt Co. It is quite clear that Deena being the accountant clearly knows the impact and hence is liable to be charged under insider trading.