Week Four - Appeals saying that one who breaches a duty of...

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Part A: A precedence was set in Hochfelder v. Ernst & Ernst back in 1976 when the US Supreme Court ruled that knowledge and intent to deceive are required before CPA’s can be held liable for violation of Rule 10b-5. The fact that Brown and Associates had no knowledge of the embezzlement and their conduct was not considered reckless precludes them from sharing responsibility to Johnson under Rule 10b-5. However, it was a fight all the way to the Supreme Court. It was alleged by Hochfelder that if Ernst and Ernst had conducted a proper audit, the fraud would have been exposed. The district court dismissed the case against Ernst and Ernst, but the ruling was overturned by the Court of
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Unformatted text preview: Appeals saying that one who breaches a duty of inquiry and disclosure owed another is liable for damages for aiding a third party’s violation of Rule 10b-5 if the fraud would have been discovered or prevented had the breach not occurred. The ruling was overturned again by the US Supreme Court which held to the “intent to deceive, manipulate or defraud” aspect of the Securities Exchange Act of 1934 which simply wasn’t present in Ernest and Ernest, nor is it present in the current example of Brown and Associates. This limits their liability to Johnson, despite the fact that their audit was deficient and should have uncovered a “huge embezzlement.”...
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This note was uploaded on 10/18/2011 for the course LITERATURE LIT 101 taught by Professor Stault during the Spring '11 term at Albany State University.

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