Question - Jackson is a sophisticated investor. As such, she was initially a member of a small group that was going to participate in a private placement of $1 million of common stock of Clarion Corporation. Numerous meetings were held between management and the investor group. Detailed financial and other information was supplied to the participants. Upon the eve of completion of the placement, it was aborted when one major investor withdrew. Clarion then decided to offer $2.5 million of Clarion common stock to the public pursuant to the registration requirements of the Securities Act of 1933. Jackson subscribed to $300,000 of the Clarion public stock offering. Nine months later, Clarion's earnings dropped significantly. The stock dropped 20 percent beneath the offering price. In addition, the Dow Jones Industrial Average was down 10 percent from the time of offering.

Jackson sold her shares at a loss of $60,000 and seeks to hold all parties liable who participated in the public offering including Allen, Dunn, and Rose, Clarion's CPA firm. Although the audit was performed in conformity with generally accepted auditing standards, there were some relatively minor irregularities. The financial statements of Clarion Corporation, which were part of the registration statement, contained minor misleading facts. Clarion and Allen, Dunn, and Rose believe that Jackson's asserted claim is without merit.

Required:

(a) Assuming Jackson sues under the Securities Act of 1933, what will be the basis of her claim?

(b) What are the probable defenses that Allen, Dunn, and Rose might assert given the above facts?