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No duty to disclose omitted facts in financial forecast.

A U.S. District Court in New Jersey held an accountant who performed a financial forecast as part of a limited partnership offering had no duty to the partnership's investors to disclose material facts about the investment.

Norman Cohen was retained by John Berg to review financial projections for the Cooper River Office Building Associates limited partnership. Cohen reviewed the projections and prepared a forecast letter for inclusion in the offering memorandum distributed to the limited partnership.

The forecast, however, failed to disclose several key facts about the property:

* It was purchased out of bankruptcy for $2.5 million.

* It was immediately sold to another company owned by Berg for $4.7 million.

* This company then sold the property to its parent company, also controlled by Berg, for $5.3 million.

The Internal Revenue Service subsequently disallowed all deductions taken by investors in the partnership because the $5.3 million purchase price did not reflect the property's fair market value.

The investors sued Cohen and other parties to the transaction, alleging the defendants failed to disclose the related-party sales of the property, which "substantially diminished" the likelihood that the investors would realize desired profits and misled them into believing that they would receive substantial depreciation and interest deductions.

In his defense, Cohen argued he had no duty to disclose these facts omitted from his forecast letter.

The court ruled Cohen could not be liable for these alleged omissions because he had not duty to disclose the omitted information to the investors. In support of this ruling, the court noted Cohen's services were limited to issuing an opinion letter; he did not initiate the transaction and his fee was not contingent on the partnership's success or failure. The court said although Cohen could be liable for affirmative misrepresentations, he could not be held liable for alleged omissions of fact. (Gilmore v. Berg, 761 F. Supp. 358)
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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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Next Article:Duty to disclose material facts in private placement memorandum.

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