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Duty to disclose material facts in private placement memorandum.

The U.S. District Court for the Southern District of New York ruled an accounting firm that assisted in preparing a private placement memorandum (PPM) had a duty to disclose material facts to investors in a limited partnership.

The suit was brought by investors in a limited partnership designed to purchase stock from financially distressed nurseries and resell the stock to the partnership at significantly increased prices. The investors alleged Touche Ross & Co., which prepared the tax opinion and a financial projection report for the PPM, failed to disclose there was no reasonable possibility of economic gain to the investors (who would likely lose their original investment); the purchase price paid for the nursery stock was inflated; and probable revenue generated by the partnership would be insignificant to satisfy notes for the balance due the original sellers.

The investors further alleged Touche knew the partnership promoters were on the IRS watch list of likely promoters of abusive tax shelters and a similar nursery deal promoted by an affiliate of the promoters was under examination by the IRS during the same period.

Touche countered by arguing the investors knew they were investing in a speculative venture and the PPM described in detail the risks involved. Further, Touche's involvement was limited to expressing an opinion on the tax disclosures in the PPM and reporting on the promoters' financial projections. Finally, Touche said there was no duty to disclose anything material since there was no fiduciary relationship with the investors nor did Touche possess information not readily available to the investors.

In ruling against Touche's motion to dismiss, the court rejected the firm's argument that it did not have a duty to disclose material facts to the investors. The court characterized this as an attempt by Touche to put its name on the PPM and give a glowing recommendation and positive projections to investors while absolving itself of any duty to tell investors anything.

The court reasoned if this argument was valid, investors would have an independent duty to investigate the promoters and the PPM would serve no purpose. Consequently, Touche owed a duty to disclose material facts about the promoters and the promotion to the investors. (Duke v. Touche Ross & Co., 765 F. Supp 69)
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Apr 1, 1992
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