case study

In 1984, several individuals, including David Greenberg, formed seven limited partnerships to develop and operate a chain of one hundred “Video USA” video rental stores.

One hundred and sixteen limited partners, who had invested $13 million in three private placements, sued the accounting firm Touche Ross, among others, for securities fraud. They alleged that Touche Ross had failed to disclose that David Greenberg was a convicted felon; that his twelve-year-old son was the sole officer, director, and shareholder of one of the corporations that served as a general partner; and that the principals used fraudulent invoices and made fraudulent claims against insurance companies.

The limited partners further claimed that Touche Ross had prepared the materially misleading financial projections attached as exhibits to the offering memoranda. Touche Ross did not issue an opinion or certification regarding any part of the offering documents.

Attached to each of the projections that Touche Ross issued was a letter stating that the projection was based on management’s “knowledge and belief,” cautioning that the projection “does not include an evaluation of the support for the assumptions underlying the projections.”

Search the Internet and read the complete case of Shapiro v. Cantor, 123 F.3d 717 (2d Cir. 1997).

Is Touche Ross responsible for disclosing the criminal history of one of its principals? If so, how? If no, why? To what extent, if any, must Touche Ross report to the officers, directors, and shareholders of the corporations that served as general partners? Why? Is Touche Ross responsible for reporting a principal who used fraudulent invoices and claims against insurance companies? Why or why not? Is the projection as issued by Touche Ross materially misleading? Why or why not? To what extent, if any, is Touche Ross liable under Section 10(b) to the limited partners?