Class: Legal Environment of Business

Scenario 1 - Deena is an accountant for the Bean and Counter CPA firm. She was asked to evaluate Denqrt Co. and prepare certified financial statements. She reviewed the financial records and prepared the financial reports, which were incorporated into an SEC registration statement and prospectus. Denqrt was able to issue $35 million in new stock during this offering. In early 2011, it was discovered that Denqrt management had manipulated the books by overstating sales revenue and hiding the manipulation from Bean and Counter. The result was that Deqrt income was substantially overstated for the years 2009 and 2010. The news reports caused the company stock to decline in value on the stock exchange. The investors suffered $25 million in losses after having relied on the information in purchasing Denqrt stock. The investors are now prepared to sue for stock fraud based on a false securities registration statement. Investors seek damages from a. Deena, b.her CPA firm, c. Denqrt Co., d. the six members of the Deqrt board of directors, and e. Denqrt's eight corporate officers.

Question: Assume under the facts of scenario 1 that after Deena had prepared the statements but before word of the understatement of income became public knowledge, Deena discovered her error. Assume further that she told her sister, Petra, about the understatement of income and advised Petra to sell her stock before it fell in price. Petra acted on the advice and sold her Denqrt stock at $40 per share. The price fell to $10 after the announcement. Please discuss Deena and Petra's liability under insider trading law.