Midterm Essay

The midterm examination consists of 5 essay questions; each question is worth 20 points.  Each question and any subparts of the question must be answered.  The midterm should be 7-10 pages, double spaced, 1-inch margins.  The answer may exceed the page limitations.  This is not a group project.  Each student should work alone.  READ THE QUESTIONS CAREFULLY BEFORE ANSWERING.
In order to do well on this test, you MUST refer to materials in the chapters, including cases, and you may also refer to the handouts and in-class case studies and discussions.  Informal citations are acceptable. Make sure to use the legal and business terms that you have learned in the course and apply them to the facts of the questions.  When you use a legal term, provide an explanation of its meaning and/or any legal test that explains how it is applied to any factual situation.  If there is a case that supports your argument, make sure to explain the reasons.  Do not cut and paste from the internet.  Course readings must be cited.
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1. Do the legal rules (i.e., fiduciary duties of care and loyalty, the business judgment rule, safe harbors, etc.) and the SEC self-regulatory oversight philosophy, both of which define corporate self-regulation in a free enterprise market economy, provide enough protection to stakeholders to prevent corporate misconduct? In this regard, should there be more regulation or less regulation of business?  EXPLAIN your answer. (Drafting hint: use the examples in course materials such as Enron, Refco, Wells Fargo, etc.)

2. Nice Cube ordered a 49-cent cup of coffee from the drive through window of a local restaurant, Sliders, Donuts and Delights (SDD). His girlfriend, Trailer Swift was in the passenger’s seat of his flatbed Ford which did not have cup holders. While the car was idling in park, Swift placed the coffee cup between her knees to add cream and sugar and pulled the far side of the lid toward her to remove it. In the process, she spilled the entire cup of coffee on her lap. Swift was wearing PINK cotton sweatpants; they absorbed the coffee and held it against her skin, scalding her thighs, buttocks, and groin.
Swift was rushed to the hospital, where it was determined that she had suffered third-degree burns on six percent of her skin and lesser burns over sixteen percent of her body. She remained in the hospital for eight days while she underwent skin grafting. During this period, Swift lost 20 pounds (nearly 20% of her body weight), reducing her to 83 pounds. Swift suffered permanent disfigurement after the incident and was partially disabled for two years.
SDD’s coffee was very popular. SDD advertised the “bottomless pit” cup of coffee, meaning that all refills were free to customers. SDD had done a market study which revealed that customers typically visited the restaurant for 10 minutes on average.  If SDD raised the temperature of the coffee, so that it could not cool down within 10 minutes, most customers would leave before drinking the first cup of coffee and asking for a refill.  So, SDD would not have to serve free second cups of coffee to customers.
According to the industry standard, hot beverages such as tea, hot chocolate, and coffee should be served at temperatures between 160 degrees F and 185 degrees F. SDD heated up the coffee to 200 degrees F.
Trailer Swift is suing SDD for negligence and products liability. Count 1 of the civil complaint alleges SDD acted negligently in selling coffee to Swift that was too hot for human consumption.  Count 2 of the complaint alleges strict liability against SDD for selling a product that was dangerous and not fit for the intended purpose which was human consumption.

Part I:  Applying negligence legal principles (duty, breach, proximate cause and damages), how would you decide the case and why? Make sure to explain each of the elements of the negligence cause of action based on these facts. (Drafting hint: don’t forget to mention Palsgraf)
Does the defendant have any defenses? If so, what are they? EXPLAIN your answer.
What damages could Swift recover if she won the case? EXPLAIN your answer.

Part II: Applying strict products liability legal principles, how would you decide the case and why? (Drafting hint: first ask yourself, based on the law, do the strict products liability rules apply to all products?)
Does the defendant have any defenses? What damages could Swift recover if she won the case? EXPLAIN your answers.

3. Using the course readings and materials, explain how legitimate accounting methods facilitate fraud.  Give examples. (Drafting hint: Sec. 108(d) SOX; SPEs; prepayments, round tripping, etc.)

4. Explain what Arthur Leavitt meant by the “erosion” of the quality of financial reporting. Give examples. (Drafting hint: Earnings management; Health South, Sunbeam etc.)

5. As indicated by the course materials, criminal organizations and individual criminals, by necessity, utilize the banking system to launder money derived from illegal criminal activity and are oftentimes successful in doing so as a result of the willingness of banks to turn a “blind eye” to the laundering scheme.  Lucrative fees motivate banks to facilitate laundering.

Part I:  Using the course materials, EXPLAIN how money is laundered and provide examples of the most common forms of laundering schemes.

Part II:  What do you see as an effective compliance system to dis-incentivize banks from engaging in conflicts of interest and facilitating this brand of corporate crime?

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