Prospect High Income Fund and other investors bought high-yield bonds from Epic Resorts LLC, a vacation timeshare operator. The bonds were secured by Epic’s assets and protected by an indenture requiring an escrow agreement that covered the interest payments on the bonds. Epic also had to obtain a statement from its auditor, Grant Thornton, confirming Epic’s compliance with the indenture. Grant Thornton issued a report that showed Epic had placed more than $12 million cash in escrow at U.S. Trust and that it maintained $8.45 million at all times in escrow to cover the next required interest payment. U.S. Trust acted as the escrow agent for the benefit of Prospect and other bondholders. U.S. Trust allowed Epic to reduce the amount in the escrow account below the amount permitted by the indenture and the amount attested to by Grant Thornton. Nonetheless, U.S. Trust never objected to the absence of funds in the U.S. Trust account, because Epic periodically transferred funds to U.S. Trust to make the interest payment. On June 15, 2001, Epic missed its scheduled interest payment to Prospect and other bondholders. Prospect and the other bondholders sued Grant Thornton alleging that its reports negligently or fraudulently misrepresented the escrow account’s status. What was Prospect required to prove to be able to recover from Grant Thornton for negligent misrepresentation or for fraud?
