Adam, an Illinois resident, was interested in purchasing stock in Joshua Foods Inc. Joshua Foods has corporate head-quarters in Fond du Lac, Wisconsin, and is incorporated in Delaware. Adam e-mailed Joshua Foods’ Investor Relations Department and requested its 2014 annual report including the financial statements. Adam also reviewed several analysts’ opinions on the Internet, including the opinions provided from his Internet broker, Matthew & Co. ExpressTrade. Adam received the annual report in the mail. Based on the increasing revenues, the $ 8 million net income indicated on the financial statements, and the other information received from the analysts, Adam purchased $ 350,000 worth of stock.
Three months later, Joshua Foods announced that over the last three years, the company had included $ 25 million of fictitious revenue and had capitalized more than $ 30 million of charges that should have been expensed. These irregularities will result in a restatement of the fiscal 2014 financial statements resulting in a $ 1,250,000 loss for fiscal 2014. The press release from the company says that it will likely declare bankruptcy in the next few weeks. In the following two weeks, the value of Adam’s holdings in the stock declined to $ 50,000.

a. You are Adam’s attorney. List the various legal issues and precedents that you will use in trying to recover the losses Adam sustained.
b. You are the attorney for Joshua Foods’ auditors. It is apparent that Adam will try to recover losses from your firm. List the defenses you would prepare to protect the auditors from liability.
c. How does Sarbanes- Oxley affect the position of either Adam’s attorney or the auditors’ attorney? You may find helpful.

  • CreatedOctober 27, 2014
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