Bowie, a certified public accountant, prepares and certifies Candy Products Corporation's financial statements. These statements are included in Candy's registration statement filed with the Securities and Exchange Commission before Candy's offering of securities. Dona buys a security covered by the registration statement. Based on this transaction, Dona files a suit against Bowie under Section 11 and Section 10(b) of the Securities Exchange Act of 1934. To succeed in the suit, what must Dona prove? Bowie responds that Dona was not in privity with him and that even if she had been in privity, she cannot prove his lack of due diligence. Can Bowie prevail on these grounds? Why or why not?

Question

What will be an ideal response?

Answer 1

To prevail in her suit against Bowie, Dona must allege and prove, under both Section 11 and Section 10(b), that there was a material misstatement or omission of fact in the financial statements that were filed with Candy's registration statement. Dona must show, under both statutes, that she suffered a monetary loss on the security. To establish liability under Section 10(b) and collect damages from Bowie under that statute, Dona must show that she relied on the misstatement or omission in making the purchase. Under Section 10(b), Dona must also prove that Bowie had scienter¾intent to manipulate, deceive, or defraud¾and that the misstatement or omission caused Dona to suffer a monetary loss. Privity is not required under either statute, so Bowie cannot successfully defend against the suit on this ground. Lack of due diligence is not an element that Dona must prove under either Section 11 or Section 10(b), although after Dona has proved her loss on the security, Bowie must show that he exercised due diligence in the preparation of the financial statements to avoid liability.