Fraud charges against Pannell Kerr Forster dismissed.
PFK had generated projections included in VMS Limited Partnership Securities' offering memorandums. The investors cliamed PKF misrepresented the nature of the investments. These were some of the alleged misrepresentations:
1. The cost of the various properties purchased by the partnership was to be either less than appraised value or its replacement cost.
2. The partnership interests were reasonably expected to be profitable, were secure investments and would yield substantial tax benefits.
3. Investors were to enjoy an aftertax gain even if the properties were sold for only $1 above exiting indebtedness.
The investors, alleging each of these representations had proven to be false, charged the defendants with securities law violations, fraud and negligence.
After dismissing the investors' federal securities law claims on statute-of-limitations grounds, the court discussed state law claims against PKF. It noted PKF's report said projections were based on assumptions and estimates inherently subject to uncertainty and variation and it did not "represent them as results that will actually be achieved."
PKF's report also stressed the uncertainty of the financial forecasts in the memorandums, the difficulty of projecting profitability in a venture lacking sufficient operating history and the potentially negative effect of forces beyond the managing partner's control--such as changes in the tax law or government regulations.
In dismissing the state law claims, the court held such language, along with other warnings in the offering memorandums, should have put the investors on notice there was no guarantee of success when investing in the partnerships.
The ruling emphasized the importance of using proper disclaimers and qualifications when producing projection and valuation reports. (In the Matter of VMS Limited Partnership Securities Litigation, no. 90 C 2412, U.S. District Court for the Northern District of Illinois Eastern Division)
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|Publication:||Journal of Accountancy|
|Article Type:||Brief Article|
|Date:||Apr 1, 1993|
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