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N Cal Attorney
N Cal Attorney, Lawyer
Category: Criminal Law
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Experience:  Since 1983
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Morpheus Inc is a technology bus. Its shares profited from

Customer Question

Morpheus Inc is a technology bus. Its shares profited from the dot-com boom and it made a secondary offering in 2000. Mr. Chuck Bundy bought 1000 shares at $99/share in July 2000. During the secondary offering, the CEO of Morpheus, Orpheus Cama issued a press statement about the prospects of the company and assured investors that it would become cash-flow positive in 2001. The auditors of the company, Cruncher & Cruncher Inc., also certified that the accounts of the company were in order and that its financial position was sound. In January 2001 there were signs of trouble when some orders were cancelled and rumors abounded that Morpheus' earnings would not meet analyst expectations. Mr. Cama again issued a press statement that the rumors were false
In February 2004 it was revealed that the earnings expectations had been met by ingenious accounting practices devised by Mr. Cama and that the so-called revenues were in fact for fake orders that were never fulfilled. Cruncher & Cruncher had been and continues to be the company's auditors, and had certified its accounts during the entire period. The stock is worth $2/share on 20th June 2004. Mr. Bundy wants to bring a suit under the federal security laws for losses caused to him by holding on to the shares.
Submitted: 5 years ago.
Category: Criminal Law
Expert:  N Cal Attorney replied 5 years ago.
It sounds like Cama violated SEC rule 10b5, see http://www.law.uc.edu/CCL/34ActRls/rule10b-5.html

Cama concealed material facts. It is unclear if Cruncher & Cruncher should have been aware of this, but it sounds like Cruncher & Cruncher was negligent in conducting the audits.

According to http://en.wikipedia.org/wiki/SEC_Rule_10b-5#Purchase_or_sale
In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the Supreme Court held that Rule 10b-5 provides no cause of action for a securities owner who decides not to sell based on false information. The rule specifically requires that the act or omission occur in the context of a "purchase or sale", which simply does not encompass a failure to sell.

In this case, it sounds like Bundy may have a claim under 10b5 if he can show he purchased the stock based on misrepresentations or failure to disclose material facts by Cama at the time Bundy bought the stock. If so, Bundy has a claim under 10b5.

Does this answer your question?
Customer: replied 5 years ago.
Right. I agree. The problem I am having is I'm the lawyer for Cama in this mock case and I am coming up with nothing on how to save him. How do you defend someone in this situation?
Expert:  N Cal Attorney replied 5 years ago.
Argue lack of scienter.

It sounds like your client is doomed. Sometimes all the defense attorney can do is to make sure the defendant has a fair trial.

Argue that the other side has the burden of proof and has not met it. Try to get the jury lost in the woods so they cannot see the forest for the trees. Augue reasonable doubt is this is a criminal trial.

Are you allowed to settle or plea bargain? Probably not if this is a trial practice class. In the real world I'd tell Cama to try for a plea bargain.

Cama can rely on what is called the SODDI defense: Some Other Dude Did It. Cama can claim Cruncher misled him and he really didn't know and did not conceal any material fact at the time Bundy purchased the shares. The time of purchase is critical since under Blue Chip the fact that Bundy did not sell does not give him standing as a plaintiff or as a victim under 10b5.

Good luck with this. Like I said, your job is not necessarily to win, just to make sure the trial is fair.

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