Morpheus Business Law II Case Study 2009 by wls95201

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CASE STUDY BUSINESS LAW II Morpheus Inc. was a technology start-up that issued an IPO in 1997. 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. At the time of the secondary offering, the CEO of Morpheus, Orpheus Cama issued a press statement painting a golden picture 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 and that Morpheus would meet expectations. Mr. Bundy was keeping an eye on the news and was pacified by the statements of Mr. Cama. He held on to his shares despite the price showing a downward trajectory. Morpheus exceeded analyst expectations for that year and for the next two years. During every analyst conference call, Orpheus Cama had repeatedly stated that the company was in "fantastic financial health" and had found a "silver bullet" to capture the market. 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. Areas to focus on or consider • • • • • The accounting was certified The company exceeded projected earnings for three years Bundy held his shares despite downward trajectory—mostly doing this because of the information that CEO Cama was projecting. The fact that the accounting was still certified while the company was having financial difficulites Fake orders—used to shore up revenue on paper to look as meeting or exceeding objective

Securities Law Sections for review Securities Act of 1933 Codified at 15 U.S.C. § 77a • • • • • 1933 Section 11 1933 Section 12 1933 Sections 13-16 1933 Sections 20 1933 Sections 27

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Securities Exchange Act of 1934 Codified at 15 U.S.C. § 78a • 1934 Act Section 10 A • 1934 Act Section 18 • 1934 Act Section 21 • 1934 Act Section 21D • 1934 Act Section 27A

SEC LINKS • • Securities Act of 1933 Full table of contents and sections of the entire Act of 1933. Securities Exchange Act of 1934 Full table of contents and sections of the entire Act of 1934.

***********Sample brief and answer to the case study. This is only a reference and may contain errors. This is only made available as a tool to assist in understanding where to find the information and how to break the case study down into areas that are relevant to the questions. This was a paper turned in and the paper did receive an A; However please follow your instructors information, and again some of the information maybe inaccurate, please double check anything before using. ****************

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SAMPLE SAMPLE SAMPLE

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
) ) ) ) Plaintiff, ) ) ___________________________________________ ) ) vs ) ) MORPHEUS INC.,ORPHEUS CAMA ) CEO, AND CRUNCHER & ) CRUNCHER ) ) ) Defendant(s) ) ) ) ) ) ____________________________________________) In re CHUCK BUNDY Individually and on behalf of all others situated, Case No. C 09-0326

CLASS ACTION SECURITIES AND EXCHANGE COMMISSION

SNYOPSIS

Morpheus Inc., was a technology start-up that issued an IPO in 1997. Morpheus profited from the dot-com boom, and there was a secondary offering in July of 2000. The secondary offering, the CEO of Morpheus, Orpheus Cama issued a press statement portraying the the prospects of the companies above average, and indicating the company would become cash-flow positive in 2001. The Accountant for Morpheus, certified that the accounts of the company were in order and the financial position was sound. These statements made by Morpheus CEO Cama, and Cruncher&Cruncher—all false, and wilfully misleading. INTRODUCTION Morpheus CEO Cama, along with Cruncher & Cruncher, did willfully, provide false and misleading statements about revenues, financial performance, guidance. As early as January 2001, there

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  were signs of trouble; It was clear to Cama, and Cruncher & Cruncher, that Morpheus earnings would not meet analyst expectations. Morpheus, Cama, and Cruncher & Cruncher,were working in collusion together in perpetuating this fraud on the stockholder, and investors. Plaintiff Chuck Bundy(“Claimant” or “Bundy”), in July 2000, purchased 1000 shares, at $99.00/share, purchasing $99,000 worth of stock .

A short time after Bundy’s initial purchase, and investment of almost one hundred thousand dollars, the painting of the golden picture about the prospects of the company, assuring investors that the prospects of the company were not just good, but very good. Orpheus Cama(“CEO”, “Partner”, “Cama”), issued a press statement “painting a golden picture about the prospects of the company”; Cama made no mistake when he attempted to assure investors that Morpheus was still a “golden egg”, and his press statement was a success so far as it did dispel those worries and fears of insolvency, or collapse out of the investors minds.

Cruncher & Cruncher (“Rep”,”Accountant”, “Auditor”), in 2001 an audit was completed by Cruncher auditor. The results of the audit, did not reflect what was being told to the public by Morpheus; the auditor’s on the other hand had clear evidence that Morpheus would not become cash-flow positive as told in the press conference. In fact at the time when the press conference was given, Morpheus was already past the point of being able to achieve what was portrayed and articulated investors. Instead, a plan of deception was introduced to the public. The Auditor,with the full knowledge that the information that they were certifying to the public, was a scam, and no illusion existed that what was going to happen was anything but, a willful act of misrepresentation of material facts.

FACTS

1. 2. 3.

Morpheus Inc. first issued IPO in 1997. The company shares profiting from the Dot-com boom. A second offering was done in July, 2000. Bundy purchased 1000 shares of Morpheus stock. CEO of Morpheus, Mr. Cama issued a press statement where he misrepresented material facts,

about the company and the possible financial collapse. 4. Cruncher & Cruncher and stated publicly “that the accounts of the company were in order and

the position was sound”. 5. In January 2001, problems started to appear and these were not easy to hide.

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  6. Mr. Cama sensing the restlessness in the stockholders, he again issues a press statement that the

all the rumors. 7. Bunday is pacified by the statement of Mr.Cama. Bundy held onto his shares despite the

downward trend, because of what Mr. Cama was saying. 8. Morpheus exceeded expectations for two years through to 2004. The whole time throughout

the two year run; Mr Cama continued to repeat claims that the company was in “fantastic financial health”, during one analyst conference Mr. Cama made the remark “we have found are silver bullet” 9. In February 2004 it was revealed that the earning expectations had been meet throughout an

ingenious accounting practices devised by Mr. Cama. All of the revenues were that Mr. Cama touted, and Cruncher & Cruncher, certied, were fake orders that were never fulfilled. 10. 11. As of June 20, 2004 Bundy's stock is only worth 2.00/share. Bundy initiates this suit in a class action against the named defendants.

DISCUSSION Plaintiff Bundy respectfully submits this brief to seek relief from damages, and the listed defendant’s conduct over a period of many years. Pursuant to Section 21D(a)(B ) of the Securities Exchange Act of 1934, as amended by Private Securities Litigation Reform Act of 1995(“PSLRA”), and Fed. R. Civ. P. 42(a). The plaintiff alleges that Morpheus, Cama, and Cruncher & Cruncher over the course of 3+ years; Consistently issued materially false, and misleading statements pertaining to revenues, financial performance. During the three or more years that Cama and Cruncher & Cruncher were secretly involved, all of the money that was made, was in fake, in so far it was not profit, but was being used to keep Morpheus afloat . The Securities Act of 1934, referred to as “the truth in securities law”, ensures that investor’s receive full and accurate financial information, that is accurate and not misleading . The Securities Act of 1934, also provides protection for information about about investment opportunities offered to the public Bundy v. Morpheus et.al. [5]

  and to prohibit deceit, misrepresentations, and other fraud in the sale of securities. Furthermore, the Statue found under California Government Code §12660:
(a)Any person who violates any provision of the securities law or the commodities law shall be liable for a civil penalty notto exceed twenty-five thousand dollars ($25,000) for each violation, which shall be assessed and recovered in a civil action brought in the name of the people of the State of California by the Attorney General in any court of competent jurisdiction. (b)As applied to the penalties for acts in violation of the securities law or the commodities law, the remedies provided by this section and by other sections of this article are not exclusive, and may be sought and employed in any combination to enforce the provisions of this article. (c)No action shall be maintained to enforce any liability created under subdivision (a) unless brought before the expiration of four years after the act or transaction constituting the violation.

Under the 1934 Act Section 10(b) makes it unlawful for any person to use any manipulative or deceptive device in contravention of SEC rules(Twomey & Jennings, 2008, p.1039). Under the authority of 10(b), rule 10b-5, states that “ [i]t shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce . . . (a)employ any device,scheme, or artifice to defraud (b)to make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, not misleading, or (c) to engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security”(Twomey & Jennings, 2008, p.1039).

The defendants in this case over many years, perpetuating a fraud that fed on it self, getting so big in scope that, it collapsed and exposed what the defendants had known for many years: there was no money, Morpheus, CEO Cama, and Cruncher & Cruncher, using their experience and knowledge to take advantage of investors of the company—luring people in with lies, to keep the scheme going. Bundy asserts that the acts, conduct, and other wrongs alleged within this paper, defendants, directly, or indirectly, used means and instrumentalities of interstate commerce, including but not not

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  limited to, the United States mails, interstate telephone communications and the facilities of the national securities exchange. Materially False and Misleading Statements Issued by the Company Morpheus Inc, was a technology start up that did very well during the dot-com boom. However after riding the wave of the boom, Morpheus had to reinvent or reinvigorate it’s self as a company. CEO had known since 2001, that there was some financial issues with the business—because he himself was causing the most detriment to the company.

CEO(“Cama”) press release in which he embellishes the truth, and paints a golden picture of prospects for the company and the future. He also made several reassurances to investors, while clearly having the information, that the company was not financially strong, nor was it likely to be cash flow positive by 2001. Cama, also having the knowledge that he and Cruncher & Cruncher had schemed, and made sure to keep the lie alive by giving materially false and misleading statements.

Cruncher & Cruncher making materially false and misleading statements, whereupon they certified an accounting audit; doing this even when they knew the contrary was true. Their comments to the public indicating that Morpheus accounts were in order, and the company was “financially sound”. Both perceptions, omitting the fact that the company was really having money issues.

Additionally, several more times leading up to collapse CEO Cama did knowingly, continue to mislead the public about the companies financial situation; instead”the company is in fantastic financial health”. By not telling the stockholder about the financial issues, and truth before damage had already taken place; Each of the defendants subjected the holders of the company to undisclosed adverse facts— ergo not telling the truth to the public while a chance to minimize some damage—however, lacking the ability to know forcing the full brunt of adversity upon with no possible way to minimize the impact. Bundy v. Morpheus et.al. [7]

 

Loss causation from the defendant's conduct as alleged in this letter. Bundy not only suffering a loss of 97,000 dollars, but also knowing that his life savings was wiped out, and he had a chance to pull out when he still could have gotten a good portion of his money back; knowing as well that he was ready to walk away from the company but was convinced to stay because of Cama press releases, and all the false information that he shovelled out.

Each defendant contained herein in violation of Section 10(b) of The Exchange Act and Rule 10b-5Promulgated Thereunder Against Defendants. Defendants did employ devices, schemes, and artifices to defraud; by making untrue statements of material fact and /or omitted to state material facts as necessary to make statements not misleading: and engaged in acts, practices, and a course of business which operated as fraud and deceit upon the purchasers and potential purchasers of the Company’s securities in an effort to maintain financial control, or to gain more financial control through the stealing of money.

Reference

Twomey, D. P. & Jennings, M. M. (2008). Anderson’s Business Law and The Legal Environment. Mason, OH: Thomson West.

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