Jackson is a sophisticated investor. As such, he was initially a member of a small group that was going to participate in a private placement of $1 million of common stock at Clarion Corporation. Numerous meetings were held between management and the investor group. Detailed financial and other information was supplied to the participants. Upon the eve of the completion of the placement, it was aborted when one major investor withdrew. Clarion then decided to offer $2.5 million of Clarion common stock to the public, registered with the OSC. Jackson subscribed to $300,000 of the Clarion public stock offering. Nine months later, Clarion’s earnings dropped significantly, and as a result, the stock dropped 20 percent beneath the offering price.
Jackson sold his shares at a loss of $60,000 to Chang. Jackson seeks to hold liable all parties who participated in the public offering, including Clarion’s accounting firm of
Allen, Dunn, and Rose. Although the audit was performed in conformity with auditing standards, there were some relatively minor misstatements subsequently discovered in the financial statements that accompanied the share registration documents. It is believed by Clarion and Allen, Dunn, and Rose that the claim is without merit.
REQUIRED
a. What will be the likely basis of Jackson’s suit?
b. What are the probable defenses that might be asserted by Allen, Dunn, and Rose? Will the defenses succeed?
c. If, subsequent to Chang’s purchase of the shares at $240,000, a material misstatement was discovered in the financial statements, would your answers to questions (a) and (b) change? If Chang then lost $80,000 upon disposal of his shares, what suit would be available to Chang?