20-29 Sleek Corporation is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek's financial statements. Sleek needed the audit to obtain bank loans and to offer public stock so that it could expand. Before the engagement, Fred Hedge, Sleek's president, told Garson's managing partner that the audited financial statements would be submitted to Sleek's banks to obtain the necessary loans. During the course of the audit, Garson's managing partner found that Hedge and other Sleek officers had embezzled substantial amounts of money from the corporation. These embezzlements threatened Sleek's financial stability. When these findings were brought to Hedge's attention, Hedge promised that the money would be repaid and begged that the audit not disclose the embezzlements. Hedge also told Garson's managing partner that several friends and relatives of Sleek's officers had been advised about the projected business expansion and proposed stock offering and had purchased significant amounts of Sleek's stock based on this information. Garson submitted an unqualified opinion on Sleek's financial statements, which did not include adjustments for or disclosures about the embezzlements and insider stock transactions. The financial statements and audit report were submitted to Sleek's regular banks, including Knox Bank. Knox, relying on the financial statements and Garson's report, gave Sleek a $2 million loan. Sleek's audited financial statements were also incorporated into a registration statement prepared under the provisions of the Securities Act of 1933. The registration statement was filed with the SEC in conjunction with Sleek's public offering of 100,000 shares of its common stock at $100 per share. An SEC investigation of Sleek disclosed the embezzlements and the insider trading. Trading in Sleek's stock was suspended, and Sleek defaulted on the Knox loan. As a result, the following legal actions were taken: Knox sued Garson. The general-public purchasers of Sleek's stock offering sued Garson. Required: Answer the following questions and give the reasons for your conclusions. a. Would Knox recover from Garson for fraud? b. Would the general-public purchasers of Sleek's stock offerings recover from Garson 1. Under the liability provisions of Section 11 of the Securities Act of 1933? 2. Under the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?