Ewan, the chief executive officer of Furniture Inc., intentionally understates the amount of the firm’s debts in information provided to investors as part of an issue of stock. Gary buys the stock and suffers a loss. Ewan may be subject to
a. government prosecution and a private investor’s suit.
b. negative publicity but no criminal prosecution or civil suit.
c. only government prosecution.
d. only a private investor’s suit.
The correct answer and explanation is:
The correct answer is a. government prosecution and a private investor’s suit.
Explanation:
Ewan, as the chief executive officer of Furniture Inc., has intentionally provided false or misleading information to investors about the company’s financial situation. In this case, underreporting the company’s debts could be considered a form of fraud. Fraud involves intentionally deceiving investors or stakeholders to gain an unfair advantage, which is prohibited by securities laws.
The Securities and Exchange Commission (SEC) and other government agencies are responsible for investigating fraudulent activities related to stock trading. If Ewan’s actions are found to be deceptive or fraudulent, he could be subject to criminal prosecution by the government. Securities fraud is a serious offense under U.S. law, and penalties for conviction may include fines, imprisonment, or both, depending on the severity of the offense.
In addition to government prosecution, Ewan could also be subject to a private investor’s suit. Gary, as an investor, has suffered a financial loss after purchasing the stock based on the misleading information. Under securities laws, investors have the right to file a civil lawsuit against those responsible for the fraudulent conduct. This type of suit, commonly known as a securities fraud lawsuit, allows Gary to seek compensation for the financial loss caused by the fraud.
Both legal avenues, government prosecution and a private investor’s suit, are available in cases of securities fraud. Government prosecution aims to punish the offender and deter future fraud, while private investor suits allow individuals harmed by fraudulent activities to recover damages. Therefore, Ewan may face both criminal charges and a civil lawsuit from the investor.