4-23 (Statutory law—1933 Act) The Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with a public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later, the stock fell to $2 a share when it was disclosed that several large loans to two “paper” corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporation that was owned by the director. These facts were not disclosed in the financial report. The director involved and the two corporations are insolvent.
1. The Securities Act of 1933 applies to the above-described public offering of securities in interstate commerce – True 2. The accounting firm has potential liability to any person who acquired the stock in reliance on the registration statement. – True, in case of any part of the registration statement containing an untrue statement of a material fact, any person acquitting such security may sue. 3. An investor who bought shares in Dandy Container would make a prima facie case if he alleged that the failure to explain the nature of the loans in question constituted a false statement or misleading omission in the financial statements. – True, only if the Dandy has not disclosed this in its pre-issue filings with SEC 4. The accountants could avoid liability if they could show they were neither negligent nor fraudulent. – True, they are not liable as they were not appointed post issue. 5. The accountants could avoid or reduce the damages asserted against them if they could establish that the drop in price was due in whole or in part to other causes. – True, if the drop is prior to their...
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