V. ANSWERS TO PROBLEM CASES:
1. Yes. Since E&W failed to provide a turnkey system as promised, it was liable for negligence.
E&W’s liability could have been predicated on breach of contract grounds as well. The court
2. Yes. Rizek was permanently barred from the securities industry because he churned Donato’s
account in violation of Rule 10b-5. Churning requires (1) control of the customer’s account
by the broker, (2) excessive trading in light of the customer’s investment objectives, and (3)
3. For negligent misrepresentation, the court followed the Restatement (Second) of Torts and
required that Prospect and the other funds prove that they suffered damages (1) as the person
or one of a limited group of persons for whose benefit and guidance Grant Thornton intended
to supply the information or knew that Epic intended to supply it and (2) through reliance
4. In part. PW failed to prove that its client’s negligence caused any of the client’s damages not
caused by the fire. PW was negligent and breached its contract with Scioto because it did not
In this case, the court did not limit an accountant’s ability to use a client’s comparative
negligence as a defense to situations only when the client interfered with the accountant’s
5. Possibly. The court held that summary judgment for PW, the auditor, was inappropriate
because there was sufficient evidence from which a jury may conclude that Marcus Brothers
was in a class of foreseen users and relied on PW’s opinion. The court noted that PW had
been Piece Goods’s auditor since 1986, that Piece Goods had been sending audited financial
6. No. Ellis failed to show that Grant Thornton knew (or intended) that potential employees,
like Ellis, were intended to receive the audit report for their benefit and guidance. The audit
7. Yes for Section 11, but not for Section 12(a)(2) and Rule 10b-5. AccentPoint has no Rule
10b-5 liability, because it did not act with scienter, which requires intent or knowledge of the
misstatement; carelessness is not sufficient fault for Rule 10b-5 liability. Under Section 12(a)
(2), liability attaches only to persons who are sellers of securities sold in an offering of
securities by the issuer or persons who actively solicit the sale of such securities and have a
financial interest in the sale. AccentPoint is not the seller and does not actively solicit a sale,
8. Yes. Applying the rule of the Janus case discussed on page 1252, the court held that Daifotis
“made” several statements that are attributable to him for Rule 10b-5 liability. Unlike Janus,
9. The court held that Cross could be held liable as a primary violator of section 10(b) and Rule
10b-5, but remanded the case because it was not clear whether the jury found Cross liable as
10. No. The court rejected plaintiffs’ argument that Palaschuk’s resistance when DTTC proposed
conducting client confirmations of revenue contracts was a “significant red flag.” The court
pointed out that once fraud has been revealed, it is always obvious which audit procedures
would have revealed the fraud earlier, and resistance to those audit procedures always appears
suspicious. To suggest that every available audit procedure must be conducted, though, is
The court also found that the plaintiff’s complaint did “little more than allege that, had DTTC
performed a better audit, Longtop’s fraud would have been uncovered sooner.” The court
stated that the most compelling inference from the complaint was that DTTC was duped by
Longtop, not that it recklessly enabled it. The complaint revealed that DTTC identified risk
factors at Longtop, even when it had no obligation to do so; disclosed to the public problems
11. The result was an SEC cease and desist order barring Kinross from practicing before the SEC
for a period of five years. The Commission found that Kinross willfully violated Sections
12. Although this question is short and simple, the answer to this question was not intended to be
13. No. The communications were not privileged, because there is no accountant-client
privilege. The communications were not covered by the attorney-client privilege, because