Series 79 practice questionhardDue Diligence Defense
An underwriter is named in a registration statement and is being sued under Section 11 of the Securities Act after a material misstatement is discovered post-offering. The underwriter claims a due diligence defense. Which of the following would most likely undermine the underwriter's defense?
- AThe underwriter failed to interview the issuer's key suppliers despite known concerns about supply chain reliability.✓ Correct answer
- BThe underwriter reviewed all audited financial statements and held discussions with management.
- CThe underwriter obtained a comfort letter from the issuer's independent auditor.
- DThe underwriter attended the management presentation and reviewed publicly available information.
Explanation
Why A — The underwriter failed to interview the issuer's key suppliers despite known concerns about supply chain reliability.
Failing to follow up on known areas of concern, such as not interviewing key suppliers, suggests the underwriter did not conduct a 'reasonable investigation.' Passive reliance on management or auditors alone does not suffice for due diligence; missing red flags is a common trap.
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