1. Please take a look at end of chapter Case 41.9. Under what theory of insider trading should the prosecution of this case proceed? Is it important that we vigorously prosecute insider trading? How much insider trading goes on and is rarely caught (the Martha Stewart situation)?
Business Ethics R. Foster Winans, a reporter for the Wall Street Journal, was one of the writers of the “Heard on the Street” column, a widely read and influential column in the Journal. This column frequently included articles that discussed the prospects of companies listed on national and regional stock exchanges and the over-the-counter market. David Carpenter worked as a news clerk at the Journal. The Journal had a conflict-of-interest policy that prohibited employees from using nonpublic information learned on the job for their personal benefit. Winans and Carpenter were aware of this policy.
Kenneth P. Felis and Peter Brant were stockbrokers at the brokerage house of Kidder Peabody. Winans agreed to provide Felis and Brant with information that was to appear in the “Heard” column in advance of its publication in the Journal. Generally, Winans would provide this information to the brokers the day before it was to appear in the Journal. Carpenter served as a messenger between the parties. Based on this advance information, the brokers bought and sold securities of companies discussed in the “Heard” column. During 1983 and 1984, prepublication trades of approximately 27 “Heard” columns netted profits of almost $690,000. The parties used telephones to transfer information. The Wall Street Journal is distributed by mail to many of its subscribers.
Eventually, Kidder Peabody noticed a correlation between the “Heard” column and trading by the brokers. After an SEC investigation, criminal charges were brought against defendants Winans, Carpenter, and Felis in U.S. District Court. Brant became the government’s key witness. Winans and Felis were convicted of conspiracy to commit securities, mail, and wire fraud. Carpenter was convicted of aiding and abetting the 663664commission of securities, mail, and wire fraud. The defendants law? Did Winans act ethically in this case? Did Brant act ethappealed their convictions. Can the defendants be held crimiically by turning government’s witness?
United States v. nally liable for conspiring to violate and aiding and abetting Carpenter, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275, Web the violation of Section 10(b) and Rule 10b-5 of securities 1987 U.S. Lexis 4815 (Supreme Court of the United States)
2. The demise of Arthur Anderson, one of the world’s largest CPA firms during the Enron scandal, taught all of us how quickly an accounting enterprise can destroy all allegations of improper accounting activity. How broadly should Courts hold Accountants liable to third parties? Is the Ultramares Doctrine or the Restatement Doctrine likely to be the prevailing standard in the long run?
The ideal answer will identify the applicable issue, propose a solution, and state a justification. apply the appropriate concept to each fact scenario in order to come to a correct legal conclusion. Then, once you have determined which one applies, show me how it applies and then apply it to resolve the case.
3. Definition of Security The Farmer’s Cooperative of Arkansas and Oklahoma (Co-Op) was an agricultural cooperative that had approximately 23,000 members. To raise money to support its general business operations, Co-Op sold to investors promissory notes that were payable upon demand. Co-Op offered the notes to both members and non-members, advertised the notes as an “investment program,” and offered an interest rate higher than that available on savings accounts at financial institutions. More than 1,600 people purchased the notes, worth a total of $10 million. Subsequently, Co-Op filed for bankruptcy. A class of holders of the notes filed suit against Ernst & Young, a national firm of certified public accountants that had audited Co-Op’s financial statements, alleging that Ernst & Young had violated Section 10(b) of the Securities Exchange Act of 1934. Are the notes issued by Co-Op “securities”?
Reeves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47, Web 1990 U.S. Lexis 1051 (Supreme Court of the United States)
4. Insider Trading Donald C. Hoodes was the chief executive officer of the Sullair Corporation. As an officer of the corporation, he was regularly granted stock options to purchase stock of the company at a discount. On July 20, Hoodes sold 6,000 shares of Sullair common stock for $38,350. On July 31, Sullair terminated Hoodes as an officer of the corporation. On August 20, Hoodes exercised options to purchase 6,000 shares of Sullair stock that cost Hoodes $3.01 per share ($18,060) at the time they were trading at $4.50 per share ($27,000). Hoodes did not possess material nonpublic information about Sullair when he sold or purchased the securities of the company. The corporation brought suit against Hoodes to recover the profits Hoodes made on these trades. Who wins?
Sullair Corporation v. Hoodes, 672 F.Supp. 337, Web 1987 U.S. Dist. Lexis 10152 (United States District Court for the Northern District of Illinois)
5. Ultramares Doctrine Texscan Corporation (Texscan) was a corporation located in Phoenix, Arizona. The company was audited by Coopers & Lybrand (Coopers), a national CPA firm that prepared audited financial statements for the company. The Lindner Fund, Inc., and the Lindner Dividend Fund, Inc. (Lindner Funds), were mutual funds that invested in securities of companies. After receiving and reviewing the audited financial statements of Texscan, Lindner Funds purchased securities in the company. Thereafter, Texscan suffered financial difficulties, and Lindner Funds suffered substantial losses on its investment. Lindner Funds sued Coopers, alleging that Coopers was negligent in conducting the audit and preparing Texscan’s financial statements. Can Coopers be held liable to Lindner Funds for accounting malpractice under the Ultramares doctrine, Section 552 of the Restatement (Second) of Torts, or the foreseeability standard?
Lindner Fund v. Abney, 770 S.W.2d 437, Web 1989 Mo.App. Lexis 490 (Court of Appeals of Missouri)
6. Accountant–Client Privilege For five years, Chaple, an accountant licensed by the state of Georgia, provided accounting services to Roberts and several corporations in which Roberts was an officer and shareholder (collectively called Roberts). During this period, Roberts provided Chaple with confidential information, with the expectation that this information would not be disclosed to third parties. Georgia statutes provide for an accountant–client privilege. When the IRS began investigating Roberts, Chaple, voluntarily and without being subject to a subpoena, released some of this confidential information about Roberts to the IRS. Roberts sued Chaple, seeking an injunction to prevent further disclosure, requesting return of all information in Chaple’s possession, and seeking monetary damages. Who wins?
Roberts v. Chaple, 187 Ga.App. 123, 369 S.E.2d 482, Web 1988 Ga.App. Lexis 554 (Court of Appeals of Georgia)