Securities Regulation Keyed to Coffee
Ernst & Ernst v. Hochfelder
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For just over 20 years, an accounting firm, Ernst, was reserved by First Securities, a littlemidwestern brokerage firm, to completesporadic audits of the firm’s records and books. A year after retention by First Securities was through, the president of First Securities, Nay, left a suicide letter divulging a fraud committed on Hochfelder and other investors, where investors depositedcurrency into nonexistent high yield escrow accounts. Nay instantly transferred that money to his own use by having all investors make checks payable to Nay, keeping it under wraps by employing a rule forbidding anyone to open his mail, even when he was not there. Hochfeldersought damages from Ernst for its careless nonfeasance in failing to uncover the “mail rule” which kept Ernst from leading a suitable audit. The action was filed under § 10(b) of the 1934 Act and SEC Rule 10b-5. The district court dismissed on grounds that negligence alone is inadequate to file suit under those sections. The court of appeals reversed, holding that one who violates a duty of inquiry and disclosure responsible to another is liable for aiding and abetting a third party’s violation of Rule 10b-5 if the fraud would have been exposed or stopped save for the violation. This appeal ensued.
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