Summary Of The Court Case Of Fred Stern & Company, Inc.

In New York City, over 90 years ago, before the Securities and Exchange Commission was established (it was not established until 1934), the absence of strong regulatory system at a federal level to police the securities market aided financial frauds of all types. In this case, Fred Stern & Company, Inc., a rubber importer, due to its business nature that required large amounts of working capital, in 1924, Stern requested a loan from Ultramares Corporation. Ultramares in order to approve the load to Stern, required the audited balance sheet of 1923. Stern’s independent auditor was Touche, Niven & Company. Stern provided the balance sheet and by the end of 1924, it managed to derive loans of $165,000 from Ultramares and $300,000 from 2 local banks. Unfortunately, not a long time later, in January 1925, Stern declared bankruptcy. After further investigation, it was discovered that in this particular year, Stern had overstated its accounts receivable by issuing 17 bogus invoices totaled $706,000, that error, if corrected, would have slashed
However, the fraud charge against Touche was dismissed, but the jury found in favor of Ultramares on the negligence claim and ordered Touche to pay the company damages of $186,000. Judge overturned jury’s ruling on the negligence charge. Subsequent, after reversal of the trail judge’s decision by an appellate court, Justice Cardozo of New York’s Court of Appeals issued the final decision for the case, which was in favor of Touche. Judge Cardozo ruled that if Ultramares had been a primary beneficiary of the Stern audit, Ultramares would have recovered on its negligence claim. However, Justice Cardozo suggested that if Ultramares had clearly designated as a beneficiary of the Stern-Touche contract, his ruling would have been