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Question
Kaye Piper buys 1,000 common shares of Sullivan Corp. in an offering of shares made pursuant to a Rule 506 exemption from the registration provisions of the Securities Act. For this purchase, Kaye relied on financial statements audited by Armer & Lander LLP (AL), a CPA firm. The statements materially overstated Sullivan's inventory and earnings because AL's staff auditors counted inventory boxes and still did not confirm whether any of the boxes have inventory in them. Thirty percent of those boxes were empty. Does AL have potential liability to Kaye under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 or Section 12(a)(2) of the Securities Act of 1933?
Answer
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