Question

What precedent was set in the Ernst & Ernst vs Hochfelder case? What actions would be necessary to change the precedent?

Answer 1

In Ernst & Ernst vs Hochfelder case, the defendant (Ernst), and accounting firm were not able to expose an escrow accounting fraud plan made by the president of the brokerage firm who retained Ernst, that lead plaintiff (Hochfelder) to seek negligence damages under § 10(b) of the 1934 Act. However the Supreme Court set the precedent that an action for civil damages would not fall under SEC Rule 10(b) and SEC Rule 10b-5 when lacking an accusation of intent to manipulate, mislead, or deceive on the defendant's part. The Supreme Court ruled that under this section of the act in order for auditors to be found guilty there need to be an intent and knowledge to deceive. The ruling in this case set a precedent that the auditor can still be held liable when proved that they could have been aware of the fraud if a thorough audit was conducted. To change the precedent in the Ernst & Ernst vs Hochfelder case it need to be proved that recklessly or intentionally the information was misrepresented for third-party use