Legal Environment of Business

This is a take-home exam. The exam is to be handed out on June 3, 2014 and returned on or before

final exam time (June 10, 2014). Please underline or bold-type important terms, laws and phrases.

Each student must answer a total of four (4) question including E which is mandatory.Each student

is to answer E and then choose 3 from A, B, C, D, F. Note: C is considered the least difficult

question. A decent answer to each question should be at least one and a half type written page.

Good luck. 100 points.
A. Commercial Contracts

John goes to the internet to purchase some computer software. John locates Ace Inc. Computer

Software on the web site. Ace has the software John wants and John places the order by

identifying himself and orders two types of software.
Ace then sends John a letter ofconfirmation of his order over the internet. When the software

arrives at John’s place, John refuses to accept delivery. John rejects the software because after

placing the order, John found the same software at a cheaper price. Assuming that the various

cyberspace laws only address authentication, attribution, warranties and signature verification

and is not applicable, discuss this situation by applying Article 2 of the Uniform Commercial Code.

Note, remember to discuss the elements of Article 2.

B. Commercial Contracts

Erma, a merchant, receives a brochure from Ammco regarding some merchandise that is sold in

Erma’s business. Erma then sends in a purchase order ordering 25 units of merchandise (which

exceeds $500.00 in value). Ammco upon receipt of the order, sends a letter of confirmation Erma’s

order. The letter of confirmation contains additional information. The letter of confirmation sent

by Ammco states that ” the price did not include shipping and insurance costs and that the

shipping costs and insurance cost would be added on to the total contract price”. While the goods

were in transit, the truck was hijacked and all the merchandise, including Erma’s order. What law is

applicable to this transaction and why? Was there proper formation? Is the carrier liable for the

stolen merchandise? Is Ammco liable? Is Erma liable? Discuss.

C. Sarbanes Oxley Act
Analyze the following scenarios and determine which Title of the Sarbanes Oxley

Act is applicable and explain the correct application of the law.
1. Whether or not a Chief Financial Officer or Chief Executive Officer is criminally liable for

certifying reports that contain misrepresentation in the financial statement of a public

corporation.
2. Whether or not a CFO or CEO is liable for using their respective position to influence an

“audit report” of a public corporation.
3. Whether or not an outside auditing firm must report directly to the “internal auditing

committee” of a public corporation.
4. Whether or not a manager or executive is criminally liable for “whistleblower

retaliation”.
5. Whether or not there is criminal liability for destruction of document with the intent

to impede criminal investigation.
6. Whether or not a public corporation can make loans to managers and executives.
7. Whether or not a person who conspires with other to engage in fraudulent activities

will receive the same punishment as those who actually engage in the fraudulent activity.
Discuss each as the scenario applies to the Sarbanes Oxley Act.

D Securities Violations

Charles is the president of a non public corporation that plans on going public for the

first time. Charles in collaboration with the accountants and auditors of the corporation prepares

a “financial statement” to be used for the distribution of dividends. Charles knows that the

issuance of dividends to the “private investors” will affect the “market value of the stock of the

corporation” when the corporation goes public. However, the financial statement grossly inflates

the value of the “assets of the corporation” and also, Charles has created sham corporations who

placed orders with his corporation. As a result the “cash flow” of the corporation is grossly

overstated and does not reflect accurately the earnings of the corporation. As a result, the board

of directors issues the dividends.
Charles registers the information (including the financial statement) with the Security

Exchange Commission for purposes of offering the stock of the company to the public for the first

time. After the registration, and going through the “waiting period” the stock is offered to public.

In reliance on information provided in the “registration”, the market value of the stock soars

providing enormous capital to the corporation.
Is this a “security transaction”?
Is there a SEC 1933 violation?
Is there a SEC 1934 violation?
Is this a “proper distribution of dividends”?

E. Intra-Business Relationship

Rudolph has a chain store operation in country X. Rudolph decides to expand his

business operations into the United States. To cover the cost of expansion, Rudolph decides to

“franchise” the operation into the United States Carl, a resident of country X, enters into a

franchise agreement with Rudolph to open a franchise in the United States. The franchise

agreement requires that Carl make a substantial investment of funds to open the franchise in the

United States. Furthermore, the franchise agreement requires that Carl’s franchise employ only US

residents as employees and that the franchise funds be used to purchase land and construct a

building in the United States
Rudolph realizes that Carl does not have the business acumen to run the franchise in the

United States. Randolph sends Robert, a resident of country X, to manage and direct the franchise

on a temporary basis until Carl is competent to run the franchise in the United States. To make

sure the franchise complies with US accounting laws, Robert contracts with Flo (who has a small

accounting firm) in the United States. However, Robert requires that Flo work for the franchise

exclusively and full time, that Flo maintain an office on the premises of the franchise and Robert

constantly reviews the records and documents of Flo to make sure they are accurate. Since Flo

spends a lot of time at the franchise, Robert is always asking Flo out for a date and is always

making “sexual comments” about her. What is the immigration status of Carl? What is the

immigration status of Robert? What is the legal status of Robert? What is the legal status of Flo?

Can Flo maintain a “sexual harassment” action against Robert.

F. Corporation
Arthur is the vice president of Finance at Inco Incorporated. Arthur is responsible for determining

if the corporation will give out dividends. The dividends are to be given in the next quarter.

Arthur reviews the financial status of the corporation and determines that no dividends could be

given in the next quarter. Arthur and his staff decides to remove some funds from the “employee

retirement accounts”, also the “unemployment compensation payments”, workers compensation

premium accounts and the quarterly tax statement accounts (manipulating the books) to show a

profit for the current quarter. Based on Arthur’s report, the Board of Directors declares a

dividend. When the dividend is declared, the market price of the stock increases and Inco receives

paid in surplus and allows Arthur to replenish the accounts where the funds were withdrawn. Also,

Arthur exercises his stock options when the price of shares in Inco increased. Has Arthur violated

any laws? Are the Directors liable for Arthur’s action? What are the proper sources for dividends?

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