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Business Planning Keyed to Gevurtz
Reves v. Ernst & Young
Citation:
494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990)Facts
The Farmers Cooperative of Arkansas and Oklahoma, with approximately 23,000 members, sold promissory notes payable on demand to raise money for its general business operations. The Co-Op marketed these notes as an “Investment Program” to both members and non-members, advertising them as “Safe” and “Secure” investments backed by the Co-Op’s assets. The notes paid a variable interest rate that was adjusted monthly to keep it higher than rates paid by local financial institutions. Despite being uncollateralized and uninsured, over 1,600 people purchased notes worth a total of $10 million. When the Co-Op filed for bankruptcy in 1984, the noteholders sued Arthur Young & Co. (predecessor to Ernst & Young), which had audited the Co-Op’s financial statements. The plaintiffs alleged that Arthur Young had intentionally failed to follow generally accepted accounting principles in its audit, particularly regarding the valuation of a gasohol plant, thereby inflating the Co-Op’s assets and net worth. The plaintiffs claimed they would not have purchased the notes had Arthur Young properly conducted its audit.
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