Discuss Union’s charge of negligence against Meng
Discuss Union’s charge of negligence against Meng. Do they have a case; i.e. is the charge applicable? Why or why not?
Discuss Union’s charge of common law fraud against Meng.
Discuss Union’s charge of negligence against Meng
Instructions:
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Discuss the issues or problems and applicable law(s) in the scenario.
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Questions
Discuss Union’s charge of negligence against Meng. Do they have a case; i.e. is the charge applicable? Why or why not?
Discuss Union’s charge of common law fraud against Meng. Do they have a case; i.e. is the charge applicable? Why or why not?
In your opinion, would the stockholders be successful in a suit against Meng under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? Why or why not?
Unit 2 Case: Butler Manufacturing Corporation
Butler Manufacturing Corporation planned to raise capital for a plant expansion by borrowing from banks and making several stock offerings. Also, Butler engaged Meng CPA, to audit its financial statements. Butler told Meng that the financial statements would be given to certain named banks and included in the prospectuses for the stock offerings.
Meng did not confirm accounts receivable during the audit, and as a result, failed to discover a material overstatement of accounts receivable. Additionally, Meng was aware of a pending class action product liability lawsuit that was not disclosed in Butler’s financial statements. Despite being advised by Butler’s legal counsel that Butler’s potential liability under the lawsuit would result in material losses, Meng issued an unqualified opinion on Butler’s financial statements.
Union Bank, one of the named banks, relied on the financial statements and Meng’s opinion in giving Butler a $500,000 loan.
A couple of months after obtaining the Bank loan, Butler also raised $16,450,000 through stock offerings.
Shortly after obtaining the loan from Union, Butler began experiencing financial problems, but was able to stay in business because of the money raised by the offerings. Then, Butler was find liable in the product liability suit. This resulted in a judgment Butler could not pay. Butler also defaulted on the loan from Union and was involuntarily petitioned into bankruptcy. This caused Union to sustain a loss and Butler’s stockholders to lose their investments.
As a result,
• Union sued Meng for negligence and common-law fraud.
• The stockholders who purchased Butler’s stock through the offerings, as well as stockholders who purchased shares subsequently traded on a national securities exchange, sued Meng, alleging fraud under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.
Note: These transactions took place in a jurisdiction that holds accountants liable for negligence to known and intendclxed users of financial statements.
