Managers and the Legal Environment 7th Edition by David Madsen, Constance Bagley

Exercise 2

In January, Arbor Corporation, a paper company with annual sales of more than $2 billion and assets of more than $5 billion, issued 4 million registered common shares at an average price of $50 per share. In preparing the registration statement, Charles Controller relied on a report by Acme Appraisers, which stated that the company's woodlands were worth $900 million. Acme's report was not included in the registration statement, and Acme was not mentioned in the prospectus. Ollie Olson, the company's newly elected outside director (and Controller's brother-in-law) questioned whether the woodland estimate might be too high. Controller reassured him that "if the numbers are good enough for our CPAs, they're good enough for me."
In February, the company discovered that the woodland appraisal was overstated by $150 million. Management and the directors were livid about the error. To add to Arbor's problems, a major competitor shocked the industry by announcing that it will double its paper production capacity. Arbor's stock price is now $20 per share.
Do the shareholders have a basis for a suit? Who can they sue? What problems or defenses will they likely encounter? Assuming that the suit is otherwise successful, how will damages be determined?