Liability under the Securities Acts. Orange is a public entity whose shares are traded ona national exchange. A Public Company Accounting Oversight Board inspection revealed adeficiency in audits conducted by Orange’s auditor, LeGrow. LeGrow had failed to performimportant auditing procedures; after performing these procedures in response to the inspection, LeGrow identified several material misstatements and requested that Orange restateits financial statements. These restatements had the effect of reducing Orange’s reportedincome and cash flow from operations and increasing its liabilities.Upon the disclosure of these restatements, Orange’s stock price declined more than 40percent. Angered over this decline, investors are contemplating bringing legal action againstLeGrow for failing to detect the misstatements.Required:a. Assume that investors are bringing suit under the Securities Act of 1933. What wouldinvestors need to demonstrate to bring suit against LeGrow under this act?b. What is LeGrow’s potential liability to investors if LeGrow’s audit was characterized asdemonstrating (1) ordinary negligence, (2) gross negligence, or (3) fraud?c. Repeat parts (a) and (b), assuming that investors are bringing suit under the SecuritiesExchange Act of 1934.d. What are the primary differences in LeGrow’s liability to investors under the SecuritiesAct of 1933 and the Securities Exchange Act of 1934?
Liability under the Securities Acts. Orange is a public entity whose shares are traded on
a national exchange. A Public Company Accounting Oversight Board inspection revealed a
deficiency in audits conducted by Orange’s auditor, LeGrow. LeGrow had failed to perform
important
its financial statements. These restatements had the effect of reducing Orange’s reported
income and cash flow from operations and increasing its liabilities.
Upon the disclosure of these restatements, Orange’s stock price declined more than 40
percent. Angered over this decline, investors are contemplating bringing legal action against
LeGrow for failing to detect the misstatements.
Required:
a. Assume that investors are bringing suit under the Securities Act of 1933. What would
investors need to demonstrate to bring suit against LeGrow under this act?
b. What is LeGrow’s
demonstrating (1) ordinary negligence, (2) gross negligence, or (3) fraud?
c. Repeat parts (a) and (b), assuming that investors are bringing suit under the Securities
Exchange Act of 1934.
d. What are the primary differences in LeGrow’s liability to investors under the Securities
Act of 1933 and the Securities Exchange Act of 1934?
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