It is now March 2021. Kae and Jin have formed Kae-Jin, Inc. (“KJI”) and are looking to open a third restaurant in Cabo San Lucas, Mexico. They are thinking of utilizing an issuance of debentures to finance the costs of opening this new restaurant, estimated to be $1,000,000. Kae and Jin ask you to conduct an audit in connection with the planned offering of debentures by KJI. In the course or your audit, you discover the following:

A. A default judgment against KJI in a New Jersey State Court for $5,000,000 arising out of a contract negotiation which took place in Atlantic City, New Jersey. The default judgment was entered against KJI because it failed to answer the complaint. Jin tells you he signed a letter of intent with Moxie Marketing Inc. (“Moxie”) in Atlantic City after three days of negotiations with representatives of Moxie in Atlantic City but never signed the contemplated contract. Jin had hoped to conclude a contract with Moxie to help KJI expand its current advertising in the New Jersey market. While in Atlantic City, Jin stayed in an apartment that KJI rents both for the personal use of its officers and for business meetings in the Atlantic City area. In its complaint, Moxie alleged that the letter of intent signed by Jin is a binding contract of KJI. Jin tells you not to be concerned about the judgment because KJI is not registered to do business in New Jersey, so the court lacked jurisdiction over KJI.

B. An e-mail from Aunt Dahlia requesting US$10,000 cash “to take care of some local politicians” in order to obtain a building permit and zoning variance in Mexico.

C. A brokerage account in the name of KJI showing ownership of 10,000 shares of Dim Bulbs, Inc. with a total value of $250,000. This represents fifty percent of the net assets of KJI. Kae tells you she and Jin decided to buy Dim Bulbs stock on the advice of Sally Scienter, Kae’s cousin and a regular customer of the restaurant. Sally is a securities analyst for a large investment firm and frequently takes customers to dinner at the restaurant. Sally always picks up the tab and leaves a big tip. One evening Sally told Kae that she wanted the best table in the restaurant because her dinner guest was going to be the CEO of Dim Bulbs. Sally ordered two bottles of very expensive wine during dinner and, as usual, paid the check. Afterward Sally thanked Kae for making the evening a success and, as an additional “tip”, suggested that Kae buy stock in Dim Bulbs because Dim Bulbs would soon announce publicly that it was being acquired by Apple, Inc. Jin and Kae bought 10,000 shares of Dim Bulbs’ stock on the New York Stock Exchange on behalf of KJI the next day. A week later they saw an article in the Wall Street Journal reporting that Apple had announced its entry into an agreement to buy Dim Bulbs. The stock of Dim Bulbs increased twenty-five percent after the public announcement of Apple’s agreement to buy Dim Bulbs.

D. A memo from Jin to Kae advising that the planned offering of debentures will not require any filing with the SEC because debentures do not constitute “shares of stock in KJI.”

Write a brief memo summarizing the issues you see arising from the facts in paragraphs A-D.