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Accountants not liable in failed private placement.

In 1983 California-based Spendthrift Farms, Inc., then the largest thoroughbred horse breeding operation in the world, solicited investors in a private placement of stock. The investors were required to have a net worth of $5 million, sufficient knowledge to evaluate the risks and a warranty that they carefully reviewed the private placement memorandum.

By 1985, the price of the shares had declined dramatically. The following year the investors sued multiple defendants, including Deloitte & Touche, alleging securities law violations, fraud and negligent misrepresentation.

On appeal, the U.S. Court of Appeals, Ninth Circuit, upheld the district court's dismissal of Deloitte from the case. The court said the private placement memorandum contained a number of disclaimers emphasizing that valuations of Spendthrift did not represent management's estimate of value nor did any valuation in the memorandum represent Spendthrift's worth.

The court said the investors were not neophytes in business or financial affairs. Moreover, the district court was allowed to consider this in determining whether a reasonable shareholder would consider valuation figures in the private placement memorandum to be a significant factor in making an investment decision.

In other words, the court could look to the sophistication of investors in assessing the reasonableness of their reliance on the valuation figures. (McGonigle v. Combs, 92 Daily Journal D.A.R.i P.8 578)

Edited by Wayne Baliga, CPA, JD, vice-president, AON Corp.
COPYRIGHT 1992 American Institute of CPA's
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Nov 1, 1992
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