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Fraud and financial projections.

FRAUD AND FINANCIAL PROJECTIONS

A recent decision by the U.S. Federal Court for the Southern District of New York limited a plaintiff's ability to sustain a fraud action against a CPA firm that prepared financial projections for a failed private placement of securities.

The firm, Price Waterhouse, had prepared projections for a limited partnership involved in the acquisition and operation of a shopping center. The projections were included in the private placement memoranda plaintiffs allegedly relied on in investing in the partnership.

The partnership allegedly did not meet investors' expectations from either an investment or a tax standpoint. Consequently, the investors sued the partnership's management, its real estate appraisers and Price Waterhouse for fraud in offering the investment.

In dismissing the fraud claim against Price Waterhouse, the court ruled that, in cases of multiple defendants, plaintiffs must disclose the specific nature of each defendant's participation in the alleged fraud. Mere conclusory allegations against all defendants is insufficient to sustain a fraud count against a particular defendant.

The court noted allegations of fraud against Price Waterhouse were refuted by the cautionary language in the firm's report. Specifically the report disclosed all assumptions, specific risks and other elements of the investment that were germane to Price Waterhouse's preparation of the projection. The court went on to say the fact that the firm relied on allegedly inaccurate data in preparing its report does not sustain plaintiff's allegation of fraud. (O'Brien v. National Property Analysts Partners, U.S. District Court, Southern District of New York, 88 Cw. 4153)

Wayne J. Baliga, CPA, JD, vice-president, AON Corp.
COPYRIGHT 1990 American Institute of CPA's
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Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Date:Mar 1, 1990
Words:263
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