Contract Questions – Case Study on “Security”
Definition of Security
To be able to respond to whether or not these notes may be securities we ought to know the definition of a security. Security can be defined as an instrument or interest that is a warrant, a debenture, a bond, preferred stock or common stock. It may also be defined as an investment contract or an instrument or interest that is mentioned expressly in securities acts (Cheeseman, 2010, p.647).
Subsequently, we can utilize the “family resemblance test” to decide whether the notes that were issued by Co-Op may be classified as securities. The “family resemblance test” refers to a technique of examining a debt instrument that may be having a horizontal commonality (pooling of interests), not only among each individual buyer and the seller, but also between each and every one who purchases investment contracts in the same undertaking.
While using the family resemblance test, four factors ought to be considered. Firstly, the impetus that prompts a rational seller and buyer to take part in the transaction under consideration. The Co-Op put up for sale the notes in an endeavor to raise capital for its universal business process, and buyers bought the notes so as to earn revenue from interest. The second factor to be considered is the distribution plan of the instrument: notes were offered by Co-Op over a comprehensive period to its twenty-three thousand members, in addition to other non-members. Besides, when the Co-Op filed for bankruptcy, more than one thousand six hundred people held the notes. Thirdly, the evenhanded expectations of the investors may be another factor to consider. The advertisements for investments (notes) and there were no aspects that were countervailing that would have made a rational person to query this characterization. The last factor to be considered is the subsistence of a substitute regulatory scheme tumbling the threat of the instrument (USLegal.com, n.d). There may be no risk-reducing aspect to imply that these instruments may indeed not be securities as the notes are uninsured and uncollateralized. Everything considered the notes that were offered by Co-Op may be classified as securities.
41.7. Insider Trading
Insider trading may be a situation where an insider creates a profit through personally buying shares of the company before public discharge of approving information or through selling shares of the company before the public exposé of adverse information (Cheeseman, 2010, p.656). Founded on this information and the facts established from the case description, one can presume that Hoodes ought to win the case stipulated that he was been prosecuted for the offense of insider trading. On the contrary, that is never the case. Hoodes is being sued by the Sullair Corporation based on his contravention of Section 16 of the 1934 Securities Exchange Act. This Act talks about the earnings from sales and purchases of security within a period of six months.
For the goal of protecting against the unfair utilization of information that may have been acquired through such advantageous owner, officer or director by rationale of his connection to the issuer, any earnings from any sale and purchase realized by him, or any purchase or sale of any security (equity) of such an issuer (apart from an absolved security) or a security-structured swap settlement concerning any such security within any time period of below six months. Except in cases where such security or security-structured swap settlement was obtained in good faith in relationship to a debt formerly contracted, should certainly inure to and be obtainable by the issuer, irrespective of any objective on the part of such advantageous owner, officer or director in getting into such transaction of keeping the security or security-structured swap settlement purchased or of not re-purchasing the security or security-structured swap settlement offered for a period going above six months.
Suit to retrieve such earnings may be implemented in equity or at law in any court of capable jurisdiction by the owner of any security issued on behalf and in the name of the issuer, stipulated that the issuer shall refuse or fail to bring forth such suit within 60 days following request or shall diligently fail to take legal action against the same afterwards; however, no such suit should certainly be brought more than 2 years following the date the said revenue was realized. Dependant on this information and facts, Sullair Corporation will certainly win the case and Hoodes will have to pay out the revenue he created in the course of the transactions mentioned in the case which is approximately 11,350 dollars.
51.5. Ultramares Doctrine
In this case, three terms ought to be looked at, the foreseeability standard, the restatement (2nd) of Torts under Section 552 and the Ultramares doctrine. These are 3 key liability rules that a state will embrace in deciding whether an accountant may be legally, to blame for negligence, to third parties. So as to establish whether or not Coopers may be held accountable under any of these liability rules we ought to have an understanding of what each rule implies.
Foreseeability standard may be a liability rule that states that an accountant may be liable for negligence to third parties in which these parties are foreseeable users of the financial statements of the client. In this case, Coopers could never have predicted that Lindner was likely to use the financial statements of Texscan Corporation. The case never specifies whether there was anything wrong with the report rather it states that Texscan Corporation encountered financial challenges. Regardless of whether it did encounter financial challenges or not, Lindner would still have to show that they were part of these statements’ limited foreseeable users. Cooper would never be held liable under foreseeability standard except in cases where Lindner can show and prove to be part and parcel of the foreseeable users.
The Ultramares doctrine may be a liability rule that states that, an accountant may only be liable for negligence to third parties given that they may be in a “privity-like” connection or in privity of contract with the accountant. Employing this liability rule, Lindner Funds can be established to not having a close connection with the accountant or Texscan Corporation; therefore, Lindner was never in privity of contract. Consequently, Cooper can never be held accountable under the Ultramares doctrine liability rule.
The restatement (2nd) of Torts under Section 552 may be a liability rule that states that an accountant may be held liable just for negligence to third parties that may be members of an intended users’ limited class of the financial statements of the client. In this case, Lindner is never a part of an intended users’ limited class considering that the financial statements that were prepared by Coopers were never exclusively intended for Lindner. For Lindner to make use this defense they ought to first prove and demonstrate to the court that they are part of the intended users’ limited class. Except in cases where Lindner can prove and confirm this to the judge, Coopers would never be held accountable under this liability rule.
51.7. Accountant–Client Privilege
The accountant-client privilege is a statute by the state that provides that an accountant can never be called in courts to appear as a witness against a client in an action of the court (Cheeseman, 2010, p.812). Nevertheless, the United States Supreme Court has held that under federal law there may be no accountant-client privilege; hence, an accountant can be to appear as a witness in a federal court, to testify. In this case, Roberts absolutely wins since Chaple intentional discharged some information that was confidential without the approval of Robert, his client. One significant factor stated in this case may be that Chaple was accredited in Georgia State; as a result, Chaple can make use of the defense that accountant-client privilege in the state of Georgia is irrelevant in federal proceedings not concerning state law assertions given that IRS is a federal body. Nevertheless, that would not alter the truth that he divulged information devoid of been subpoenaed or being ordered by a federal court to disclose this information.
In my view, this case involves a divergence between federal and state laws. In the Roberts case, the court ruled that, a privilege sanctioned by the state never apply when an accountant is subpoenaed in a federal examination. Nevertheless, the answer in this case was that, the accountants never waited for a subpoena; nonetheless, the accountant on own accord, exposed client information with no consent from the client. As a result, the action of the court was in favor of the client; hence, the client won. The outcome would probably have been different stipulated that the accountants had patiently waited for the subpoena.
- Cheeseman, H. (2010). Business Law: Legal Environment, Online Commerce, Business Ethics,
- and International Issues. (7th Ed.). Pearson Learning Solutions.
- Lindner Fund vs. Abney, 770 S.W.2d 437, Mo.App. Lexis 490 (Court of Appeals of Missouri,
- 1989). Retrieved on Feb 16, 2015, from;
- Reeves vs. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47, U.S. Lexis 1051
- (Supreme Court of the United States, 1990). Retrieved on Feb 16, 2015, from; http://www.law.illinois.edu/aviram/Reves.pdf
- Roberts vs. Chaple, 187 Ga.App. 123, 369 S.E.2d 482, Ga.App. Lexis 554 (Court of Appeals of
- Georgia, 1988). Retrieved on Feb 16, 2015, from; http://mo.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19880412_0004.ga.htm/qx
- Securities Exchange Act of 1934. Retrieved on Feb 16, 2015, from;
- Sullair Corporation vs. Hoodes, 672 F.Supp. 337, U.S. Dist. Lexis 10152 (United States District
- Court for the Northern District of Illinois, 1987). Retrieved on Feb 16, 2015, from; http://www.leagle.com/xmlResult.aspx?xmldoc=19871009672FSupp337_1957.xml&docbase=CSLWAR2-1986-2006
- USLegal.com. (n.d). “Family Resemblance test Law & Legal Definition.” Retrieved on Feb 16,
- 2015, from; http://definitions.uslegal.com/f/family-resemblance-test/
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