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Oral misrepresentations suffice for securities action.

The U.S. Court of Appeals, Fourth Circuit, ruled that oral misrepresentations by an accountant-even when contradicted by specific written warnings-may sustain a securities fraud claim.

The Myers family collectively invested $4.8 million in 15 real estate limited partnerships recommended by the family's accountant, Robert Finkle.

Although the Myers took substantial tax deductions, the partnerships are now in financial distress. The family sued Finkle for its lost investments and consequential damages.

Finkle's main defense was his claim the Myers did not "rely justiflably" on his telling them the investments would result in "economic profits." To the contrary, Finkle argued (and the Myers conceded), they did not study the private placement memorandum that accompanied each investment and that contained specific warnings on the risks of this investment.

The court observed several factors that militated against sustaining the summary judgment granted Finkle by the trial court. It said wealth alone does not brand someone as a sophisticated investor for the purpose of determining justifiable reliance. Factors such as education, professional status and investment experience should be taken into consideration. The court also said there was a factual question as to whether the Myers received the private placement memorandums before or after the investments were placed.

Finally, the Myers claimed Finkle initiated the investments just before the filing of their tax returns, allegedly leaving the family with insufficient time to review the investments properly.

The court ruled summary judgment for Finkle was inappropriate and the case was remanded to the district court for reconsideration of the factual issues. (Myers v. Finkle, Fed.Sec.L. Rep. 96,404, 4th Cir. 11/27/91)
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Publication:Journal of Accountancy
Date:May 1, 1992
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