The notes are offered in part by an offering circular, which includes financial statements audited by A&Y. A&Y's unqualified audit opinion is also included in the offering circular. A&Y receives a $6,500,000 fee for auditing Macrohard's financial statements and reviewing the financial statements for inclusion in the offering circular.
CDFC assists Macrohard with the offering of the notes by calling prospective investors on the phone, visiting investors in person, and sending e-mails to prospective investors urging them to buy the notes. In all three contacts, CDFC emphasizes that the notes carry an interest rate that is higher than the 30-year Treasury bond rate and, therefore, offer an excellent return on investment. As compensation for its role in the notes offering, CDFC will receive 0.5 percent of the proceeds from the sale of the notes.- What standard of care must CDFC meet when recommending that Marcrohard issue promissory notes as a solution to its liquidity problems?
- If one of CDFC's partners during the course of the offering negligently makes false statements about Macrohard's financial position to purchasers of the notes, does CDFC have potential liability to the purchasers under Section 12(a)(2) of the Securities Act of 1933? Especially consider whether CDFC is a proper type of defendant under that section.
- Is CDFC a proper type of defendant under Rule 10b-5 of the Securities Exchange Act of 1934 due to its communications with purchasers, if one of its partners negligently made false statements?
- Should A&Y fear liability to the note purchasers under Section 12(a)(2) of the 1933 Act?
- If A&Y negligently audited Macrohard's financial statements and as a result the financial statements materially misstate Macrohard's financial position, does A&Y have potential liability to the purchasers under Rule 10b-5 of the 1934 Act? Especially consider whether A&Y is a proper type of defendant under that rule.
- Does CDFC have potential liability to any of the note purchasers under the state law of negligent misrepresentation in a state that has adopted the Ultramares test?
- If A&Y knows that the audited financial statements will be used in the offering circular to sell the notes, but it does not know to which institutional investors the notes will be sold, does A&Y have potential liability to any of the note purchasers under the state law of negligent misrepresentation in a state that adopted the Ultramares test? How about a state that has adopted the rule of the Restatement (Second) of Torts?
- Is CDFC a statutory defendant under Section 11 of the 1933 Act? For what portions of the registration statement is CDFC liable under Section 11? What is CDFC's due diligence defense for errors in the financial statements audited by A&Y? What is CDFC's due diligence defense for errors in the portions of the registration statement that describe Macrohard's business and material risks?
- Is A&Y a statutory defendant under Section 11 of the 1933 Act? For what portions of the registration statement is A&Y liable under Section 11? What is A&Y's due diligence defense?
- Compile a checklist that will help CDFC and A&Y meet their due diligence defenses under Section 11.