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Question: Dolan Company specializes in professional services


Dolan Company specializes in professional services and business information from its base in Minneapolis, Minnesota. Discover Ready—a subsidiary of Dolan Company—performed litigation support [discovery management and document review services, including technology services related to processing and hosting discovery data], working mostly for Bank of America. In May or June 2013, Bank of America met with James Dolan (Chief Executive Officer of Dolan Company) and other Discover Ready representatives. Bank of America noted concerns about Dolan Company’s finances and indicated it would send no new work to Discover Ready until the financial concerns were resolved. Dolan reported what transpired at the meeting to Dolan Company’s Board of Directors, which proceeded to authorize Discover Ready for sale. Bank of America stopped sending new work to Discover Ready in June.
On August 1, Dolan Company released a Form 10-Q for the second quarter, which stated:
To operate profitably on a continuous basis in the future, the Company must increase revenue and eliminate costs. These challenges make it probable that the Company will be unable to comply with certain of its financial covenants.
Also on August 1, Dolan spoke with stock analysts. Dolan made the following statements during the conference:
For 2013, we expect Discover Ready to grow at double-digit rates over the prior year However, we must point out that we expect Discover Ready’s third quarter revenues to be below last year’s all time record revenue quarter. We make this comment not to dampen enthusiasm about our growth prospects for Discover Ready, but to set proper expectations for a business that may experience lumpiness on a quarter-to-quarter basis.
Asked to elaborate about “lumpiness,” Dolan stated:
Well, it’s hard to be very specific about the lumpiness now without getting into details we normally do not disclose. These things do come and they come sometimes unexpectedly, sometimes quickly. So we have to be cautious in how we describe things.
On November 12, 2013, Dolan filed its Form 10-Q ending September 30. Form 10-Q is a quarterly report required by the Securities and Exchange Commission. The 10-Q reported that the decline in revenue “exceeded our expectations,” largely due to “a reduction in new work from Discover Ready’s largest customer, a reduction that we identified towards the end of the quarter. We believe this reduction resulted from the customer’s evaluation of the Company’s overall financial condition.” The closing price for Dolan Company stock fell to $2.08 on November 11, to $1.05 on November 12, to $0.90 on November 13.
On January 2, 2014, Dolan Company issued a final press release announcing the appointment of a Chief Restructuring Officer. Share prices then fell by $0.14. In March, Dolan Company filed a Chapter 11 bankruptcy.
Rand-Heart of New York, Inc. brought a class action suit [in a federal district court on behalf of purchasers of Dolan Company’s securities between August 1, 2013, and January 2, 2014, alleging Dolan made material misrepresentations and omissions about Discover Ready’s financial stability [in violation of Section 10(b) and Rule 10b–5]. The district court granted Dolan’s motion to dismiss. It found that Rand-Heart failed to allege scienter……………………………………..

Required:
1. Scienter can be established by showing a defendant’s motive to commit fraud. In the context of the Rand-Heart case, what act might have established motive on Dolan’s part?
2. When Bank of America met with Dolan to discuss his company’s financial situation, it demanded that the company be restructured. Dolan did not disclose this fact in the Form 10–Q or in his conference with stock analysts. Was this omission misleading?
3. Suppose that Dolan had disclosed Bank of America’s action with respect to Discover Ready in the Form 10–Q and the conference. Would the result have been different? Explain.


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4.99

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