LAW& ETHICS 4-2

Part I—Case Studies

Select one of the three case studies. Analyze the facts in the scenario and develop appropriate arguments and recommendations using case laws and scholarly sources. Do not copy the case study to the paper. Cite your sources in APA format on a separate page.

Case Study I—Organizations and Liability

Vance Armstrong was the sole incorporator of Triathlon Training Inc., a corporation designed to operate a training center for triathletes of all ages. The business was incorporated according to Florida law in January 2015, with Armstrong as the sole director and shareholder. Armstrong contributed $20,000 of starting capital, which was just enough to make minor repairs to the property he purchased for $400,000 with a loan from the bank. The corporation had no liability insurance. On June 15, 2015, the center opened for business. Over the next few months, the corporation operated with a profit. In July, Armstrong took a two-week vacation in France and used a check written on the company bank account to purchase his airline ticket. In September, Armstrong decided to have the pool resurfaced. Because business had slowed and the corporation’s bank account did not have sufficient funds, Armstrong wrote a personal check to cover the work. Armstrong feared he would not make enough money through the winter to turn a profit, so he decided to work a part-time job selling fitness equipment as an independent contractor for Bowflex. Armstrong used the training center’s office phone to make calls, the copy machine for copies, and the computer for searches. He made a substantial profit, which was maintained in a third bank account not associated with Triathlon Training or his personal account. On April 1, 2016, a child with a mild learning disability drowned in the pool while training for the local children’s triathlon. The parents brought a suit for wrongful death against Triathlon Training Inc. and against Armstrong in his individual capacity as owner. At the time of the suit, the corporation had less than $2,500 in its bank account. Because of these limited funds, the child’s parents hoped to recover most of their damages directly from Armstrong, who lived in a mansion on the beach.

  • Will the parents be successful in holding Triathlon Training Inc. liable for the child’s death?
  • What should the parents argue in order to hold Vance Armstrong liable in his individual capacity? Will the parents prevail? Why or why not?
  • How could Armstrong have protected himself against this type of potential liability?

Case Study II—Insider Trading

During a session with her doctor, Billy Mooney, Maggie Mason mentioned in confidence the imminent merger of Walgreens with Rite-Aid. Mason’s ex-husband, Gus Mason, was on the board of directors at Walgreens. Mooney communicated the information to a securities broker, Olive Green, who immediately made trades in Walgreen’s securities for her own account and for her customers’ accounts.

  • Did Mooney, Maggie Mason, Gus Mason, or Olive Green engage in illegal insider trading? Explain the potential culpability of each party. Include possible civil or criminal penalties for each party.
  • Was the conduct of the parties ethical?

Case Study III—Securities

PEM, a pharmaceutical company created by the merger of Pfizer, Eli Lilly, and Merck, sells an over-the-counter cold remedy through its wholly owned subsidiary Mizac LLC. Between 2009 and 2013, PEM received several complaints from physicians and Mizac consumers alleging a connection between the use of Mizac’s leading product, Mizac Cold Remedy, and loss of smell (anosmia). Even after being notified of an American Rhinologic Society presentation that described eleven Mizac users who lost their sense of smell after using the product, PEM made announcements that Mizac was “poised for growth in the upcoming cough and cold season” and that the company expected that revenues would “be up in excess of 50% and that earnings, per share for the full year [would] be in the 25 to 30 cent range.” In an SEC report, Mizac reported the potential “material adverse effect” that could result from consumer complaints of anosmia but did not disclose that two consumers had already sued.

In early 2014, PEM’s stock price fell by about 22% when Dow Jones Newswires reported that, in light of at least three lawsuits, the Food and Drug Administration was investigating complaints that Mizac may have caused some users to lose their sense of smell. PEM revived its stock price with a press release stating that there had been no reports of loss of smell in clinical trials of Mizac and that anosmia can result from the common cold. The stock price fell again when Good Morning America reported that more than a dozen Mizac users had lost their sense of smell. PEM reported to the SEC that, after meeting with “physicians and scientists to review current information on smell disorders,” it concluded that “there is insufficient scientific evidence at this time to determine if Mizac, when used as recommended, affects a person’s ability to smell.” A few weeks later, PEM stated that it would begin “animal and human studies to further characterize these post-marketing complaints.”

Shareholders brought a class action against PEM alleging that it violated SEC Rule 10b-5 and section 10(b) of the 1934 Act when it made misleading statements that failed to disclose reports of the possible link between Mizac and anosmia in an effort to maintain artificially high prices for PEM securities. PEM argued that the adverse event reports were not material information, as no statistically significant relationship was shown between reports of anosmia and use of the Mizac product. Plaintiffs countered that materiality should be determined by the “total mix of information” test.

  • Did PEM have a legal obligation to disclose information about possible side effects of its drug when there was no statistical information that linked use of the drug with the side effects?
  • What types of information will the court review to determine whether using the drug causes the side effect?
  • What standard will the court apply to address evidence of the claim?
  • Have the plaintiffs stated a valid claim under Rule 10b-5 and section 10(b), or will the court grant PEM’s motion to dismiss?
  • Did PEM act ethically?

Part II—Research Paper (ETHICS IN ACCOUNTING)

This week, you should locate and examine at least two cases that are related to the topic (ETHICS IN ACCOUNTING as a profession). Summarize the cases and explain how they are related to your topic. If possible, review one state and one federal case. You may review more than two cases. Westlaw Campus Research is a great resource for finding specific state and federal cases. You must read and provide information from an actual court case. Do not report on a case that has not been decided or that has been summarized in an article, blog, or law firm website.

For each case, provide the following information in paragraph format. This portion of your paper should contain a minimum of two paragraphs, one for each case reviewed.

  • Case citation—include the names of the parties, reporter, court, and year. See the lecture on Legal Citation in Week 1.
  • State or federal court
  • Issue
  • Summary of events
  • Ruling

Be sure to use your own words when summarizing the cases.

Combine your response to Part I (case studies) and Part II (research paper) into one Microsoft Word document.

Cite any sources using APA format on a separate page.

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