Case Problem with Sample Answer In 1997, WTS Transnational, Inc., required fi nancing to develop a prototype of an unpatented fi ngerprint-verifi cation system. At the time, WTS had no revenue, $655,000 in liabilities, and only $10,000 in assets. Thomas Cavanagh and Frank Nicolois, who operated an investment banking company called U.S.

Milestone (USM), arranged the fi nancing using Curbstone Acquisition Corp. Curbstone had no assets but had registered approximately 3.5 million shares of stock with the Securities and Exchange Commission (SEC). Under the terms of the deal, Curbstone acquired WTS, and the resulting entity was named Electro-Optical Systems Corp. (EOSC). New EOSC shares were issued to all of the WTS shareholders. Only Cavanagh and others affi liated with USM could sell EOSC stock to the public, however. Over the next few months, these individuals issued false press releases, made small deceptive purchases of EOSC shares at high prices, distributed hundreds of thousands of shares to friends and relatives, and sold their own shares at infl ated prices through third party companies they owned.

When the SEC began to investigate, the share price fell to its actual value, and innocent investors lost more than $15 million.

Were any securities laws violated in this case? If so, what might be an appropriate remedy? [SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006)]

—After you have answered Problem 31–5, compare your answer with the sample answer given on the Web site that accompanies this text. Go to www.cengage.com/blaw/blt, select “Chapter 31,” and click on “Case Problem with Sample Answer.”