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MBA05, W5


In 1984, several individuals, including David Greenberg,
formed seven limited partnerships to develop and operate a chain of one hundred
“Video USA” video rental stores.

One hundred and sixteen
limited partners, who had invested $13 million in three private placements, sued the accounting firm Touche Ross, among others,
for securities fraud. They alleged that Touche
Ross had failed to disclose that David Greenberg was a convicted felon; that his twelve-year-old son was the sole
officer, director, and shareholder of one of the
corporations that served as a general partner; and that the principals used fraudulent invoices and made fraudulent claims against insurance companies.

The limited partners
further claimed that Touche Ross had prepared the materially misleading financial projections attached as exhibits
to the offering memoranda. Touche Ross did not issue an opinion or
certification regarding any part of the offering documents.

Attached to each of the
projections that Touche Ross issued was a letter stating that the projection
was based on management’s “knowledge and belief,” cautioning that the
projection “does not include an evaluation of the support for the assumptions
underlying the projections.”

Search the Internet and
read the complete case of Shapiro v. Cantor, 123 F.3d 717 (2d Cir. 1997).

-Is Touche Ross
responsible for disclosing the criminal history of one of its principals? -If
so, how? – If no, why?

-To what extent, if any,
must Touche Ross report to the officers, directors, and shareholders of the
corporations that served as general partners? -Why?

-Is Touche Ross
responsible for reporting a principal who used fraudulent invoices and claims
against insurance companies? Why or why not?

-Is the projection as
issued by Touche Ross materially misleading? -Why or why not?

-To what extent, if any,
is Touche Ross liable under Section 10(b) to the limited partners?


ABC Food Corporation, a food company with
annual sales of more than $1 billion, had a paper division that supplied ABC
with packaging for its food products. After ABC’s management decided that the
company should concentrate on its core business of manufacturing food products,
it was recommended that the assets of the paper division be sold.

Newcorp, Inc. is a newly formed
corporation with two shareholders who have experience in the timber industry.
The two shareholders also jointly own Lumber Corporation, which operates two
lumber mills in the state of Washington. Newcorp was formed specifically to
acquire the assets of ABC’s paper division. On February 1, 2008, ABC and
Newcorp signed a letter of intent specifying a closing no later than July 1,
2008, subject to Newcorp obtaining the required financing. The letter of intent
provided that ABC and Newcorp would enter into a long-term contract according
to which Newcorp would supply specified quantities of paper packaging to ABC.

On February 15, 2008, Newcorp
approached the Bank of Hope seeking a term loan to acquire the assets of ABC’s
paper division and a revolving line of credit to meet its day-to-day working
capital requirements. On March 31, 2008, the Bank of Hope delivered to Newcorp
a letter stating that it would agree to extend a credit facility to Newcorp on
specific terms and conditions, one of which was that the credit be secured by
all fixed and current assets of Newcorp.

Carlos Banker, the account officer
for the bank, gave the bank a valid first-priority lien on all collateral. A
major source of revenue for Newcorp will be the long-term supply contract with
ABC. The Bank of Hope requires an assignment of the supply contract that
prohibits ABC and Newcorp from making any amendments to the contract without
the bank’s consent. One of the terms of the Bank of Hope’s loan is a guaranty
from each shareholder and from Lumber Corporation.

on the given case study, answer the following questions:

a manager at Newcorp, what could be your objections to such an assignment?

a manager at ABC, would you have any objections to such an assignment? Why or
why not?

yourself the president of Newcorp who is involved in the company’s day-to-day
operations. What would be your arguments against giving such a guaranty?

own 51 percent of Newcorp’s stock and you made loans to the company during its
initial stages. However, you are no more involved in its daily operations.

arguments could you make against giving such a guaranty?

are an attorney working for the Bank of Hope.

would be your advice to the bank regarding accepting Lumber Corporation’s

**Support your answers with additional
examples and reasoning. **

**APA format,
Provide References, Cite material, Use Scholarly resources, 2-paragraphs for
each question! *** 500-words Please****

use this as reference material: Bagley,
C. (2012). Managers and the Legal Environment: Strategies for the 21st
Century (7th ed).
Cengage Learning.

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