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    Business Law: Securities Exchange Act

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    Deon Donato buys 1,000 common shares of Tromput Corporation in an offering of shares made pursuant to a Rule 506 exemption from the registration provisions of the Securities Act. Deon relies on financial statements audited by Angst & Yearn LLP (AY), a CPA firm, which statements materially overstate Tromput's inventory and earnings. The statements overstate inventory and earning because AY staff auditors count inventory boxes but do not check to determine whether any of the boxes have inventory in them. Thirty percent of the boxes were empty. Does AY have potential liability to Deon under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1933 or Section 12(a)ii. of the Securities Act? Why is the formation of the corporation important in this case?

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    Solution Preview

    Step 1
    To establish a liability under the Rule 10b-5, of the SEC act, Deon Donato must show that there is a manipulation or Deception, materiality, 'In Connection With' the purchase or sale of securities and scienter. Also Deon Donato has to show that there is a purchase/selling requirement, reliance, loss causation and damages. In this case AY has been negligent; it has ...

    Solution Summary

    This solution explains material misstatement in the prospectus. The sources used are also included in the solution.