Summary of the case
The litigation was brought by investors of Osborne Computer Corp. a computer manufacturing company. The business was founded in 1980 by Adam Osborne. The Company grew rapidly, and by fall of 1982, sales reached $10 million per month, making the company one of the fastest growing enterprises in the history of American business. Late in 1982, Osborne planned an initial public stock offering. In the process, the company retained service of Arthur Young to prepare audit reports and financial statements. Arthur Young issued unqualified or "clean" audit opinions on the company's 1981 and 1982 financial statements. In order to obtain funds to finance the company until the public offering was consummated, Osborne issued warrants to certain venture capitalists in exchange for direct loans. The warrants entitled the holders to purchase stocks at favorable prices, which would result in large profits to the holders when, and if, the public offering took place. Shortly after the warrant transaction closed in April 1983, the company's financial performance faltered. Sales declined sharply because of manufacturing problems with the company’s new …show more content…
Under section 10(b) of the Securities Exchange Act of 1934, accountants may be held liable to actual buyers and sellers of public securities for fraud or gross negligence. Liability for ordinary negligence under section 11(a) of Securities Act of 1933 is limited to purchasers of initial offering. Under the federal securities laws, the auditor’s liability is limited to those persons who relied on auditor's misstatements included in the public registration statements or other public documents filed with the SEC. The federal statue is irrelevant in this case since Osborne Computer Corporation never materialized its public