Academic journal article Journal of Accountancy

Duty to Disclose Material Facts in Private Placement Memorandum

Academic journal article Journal of Accountancy

Duty to Disclose Material Facts in Private Placement Memorandum

Article excerpt

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. …

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