Question

Ivor and Associates, CPAs, audit the financial statements of Jaymo Corporation. As a result of Ivor's negligence in conducting the audit, the financial statements include material misstatements. Ivor was unaware of this fact. The financial statements and Ivor's unqualified opinion are included in a registration statement and prospectus for an original public offering of stock by Jaymo. Thorp purchases shares in the offering. Thorp receives a copy of the prospectus prior to the purchase but does not read it. The shares decline in value as a result of the misstatements in Jaymo's financial statements becoming known. Under which of the following Acts is Thorp most likely to prevail in a lawsuit against Ivor?

A) Securities Act of 1933, Section 11: YES
B) Securities Exchange Act of 1934, Section 10(b), Rule 10b-5: NO
C) Sarbanes-Oxley Act of 2002: NO
D) Consumer Protection Act: NO

Answer 1

Thorp can most likely prevail against Ivor under the Securities Act of 1933, Section 11, which holds auditors liable for material misstatements in a registration statement. Section 10(b) of the Securities Exchange Act of 1934 is not applicable as intent to deceive is required, and Sarbanes-Oxley Act isn't typically the basis for a private lawsuit in securities fraud cases.

Step-by-step explanation:

In the context of securities litigation, Thorp is most likely to prevail in a lawsuit against Ivor under the Securities Act of 1933, specifically Section 11. This section provides that if any part of the registration statement, when it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, then those who were responsible for the registration statement, including auditors, can be held liable.

Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 require proof of scienter, where the plaintiff must demonstrate that the defendant acted with intent to deceive, manipulate, or defraud, which is not applicable in Thorp's case, as Ivor was unaware of the misstatements. Regarding the Sarbanes-Oxley Act of 2002, it increased transparency in the financial reporting of corporations but generally is not the basis for private right of action for securities fraud. The Consumer Protection Act is typically not related to securities fraud cases. Therefore, Thorp's most likely cause of action lies within the Securities Act of 1933, Section 11.