Question

Petty Corp. makes a public offering subject to the Securities Act of 1933.In connection with the offering, Ward & Co., CPAs renders an unqualified opinion on Petty's financial statements included in the SEC registration statement. Huff purchases 500 of the offered shares.Huff brings an action against Ward under Section 11 of the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Ward's weakest defense would be that

A) Ward had no knowledge of the misstatements.
B) Huff did not rely on the financial statements.
C) Huff was aware of the misstatements but still purchased the shares.
D) Ward was not in privity of contract with Huff.

Answer 1

Ward's weakest defense against Section 11 of the Securities Act of 1933, which creates a type of strict liability for misstatements, is that Huff did not rely on the financial statements as reliance is not a requirement for liability under this law.

Step-by-step explanation:

The correct answer is:

D) Ward was not in privity of contract with Huff.

Under Section 11 of the Securities Act of 1933, individuals who purchase securities issued under a registration statement have the right to hold certain parties liable for material misstatements or omissions in the registration statement. These parties can include the issuer, underwriters, and others involved in the offering.

However, in the context of the question, the weakest defense for Ward, the CPA firm, would be that they were not in privity of contract with Huff. Privity of contract refers to a direct contractual relationship between two parties. In this case, Ward & Co., as the accounting firm, did not have a direct contractual relationship with Huff, the purchaser of the shares.

Under Section 11, the liability extends to certain parties involved in the offering who have provided false or misleading information in the registration statement, regardless of the direct contractual relationship. Yet, Ward's defense of not being in privity of contract with Huff might be considered a weaker defense compared to other potential defenses like lack of knowledge of the misstatements (A), lack of reliance by Huff (B), or Huff's awareness of the misstatements but still choosing to purchase the shares (C).