Question

Paxon Laboratories filed an initial public offering of equity securities in order to raise capital to carry out its expansion plan. On September 30, 2009, it sold $50 million of its $2 par common stock in accordance with the registration statement requirements of the Securities Act of 1933, which stipulates that the filing include audited financial statements for the company’s most recent three-year period. The audits were performed by Hawken & Miles, CPA and unqualified audit opinions were issued for each of these three years. Based on the audited financial statements and the unqualified audited opinion thereon, Dean Borgg made a substantial investment in Paxon’s stock.
Less than a year following the initial public offering, the market price of Paxon’s common stock fell over 40% upon the discovery of misstated financial information included in the audited financial statements accompanying the registration filing.Net assets and net income were both materially overstated. Hawken & Miles failed to discover these overstatements because they failed to exercise due professional care in the performance of their audit procedures.

Required:
a. Will Dean Borgg be able to bring a civil action against Hawken & Miles under the Securities Act of 1933? Why or why not?
b. Will Dean Borgg be able to bring a criminal action against Hawken & Miles under the Securities Act of 1933? Why or why not?
c. What defense may apply to Hawken & Miles?
d. What penalties may apply to Hawken & Miles if it is found that the firm violated the Securities Act of 1933?



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  • CreatedJanuary 21, 2015
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