LOCATION:District Court of Lincoln County
DOCKET NO.: 74-1042
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: United States Court of Appeals for the Seventh Circuit
CITATION: 425 US 185 (1976)
ARGUED: Dec 03, 1975
DECIDED: Mar 30, 1976
Paul Gonson – for the Securities and Exchange Commission as, Amicus curiae, by special leave of Court
Robert L. Berner, Jr. – for petitioner
Willard L. King – for respondents Hochfelder and others
Willard J. Lassers – for respondents Allison and others
Media for Ernst & Ernst v. Hochfelder
Audio Transcription for Opinion Announcement – March 30, 1976 in Ernst & Ernst v. Hochfelder
Warren E. Burger:
The judgment and opinion of the Court in 74-1042, Ernst & Ernst against Hochfelder will be announced by Mr. Justice Powell.
Lewis F. Powell, Jr.:
Respondents in this case were customers of a small brokerage firm largely owned by its president Leston B. Nay. Respondents were induced by Nay to invest in a fraudulent security scheme.
The firm went bankrupt and Nay committed suicide.Petitioners in this case, Ernst & Ernst, had audited firm’s books for many years and they did not discover the fraud because Nay was capable to maintain no records.
His technique included a rule that he alone was authorized to open mail, addressed to the firm, to his attentions.
After the bankruptcy, respondents sued the accounting firm alleging that it was negligent in failing to have discovered Nay’s rule with respect to opening mail.
The theory was that, if discovered, that rule should have aroused the suspicion of the auditors and upon investigation the fraud would have been discovered.
This suit was brought under Section 10B and rule of 10B-5 of the Securities Exchange Act of 1934.
The Court of Appeals for the Seventh Circuit, reversing the District Court, held that respondents had stated a valid cause of action for damages, even though no negligence had been alleged — I have that a bit wrong — even though only negligence was alleged.
There was no allegation of fraud and no allegation of willful misconduct by Ernst & Ernst.
Section 10B speaks of manipulative and deceptive devices or contrivances.
These word reflect a congressional intention to proscribe a type of conduct quite different from negligence.
Indeed the language Congress chose in other sections of the Securities Act that are directed to negligent conduct, stand in sharp contrast to the language of 10B-5.
The legislative history of the 1934 Act, as well as the overall pattern that expressed civil liabilities created by the acts, also supports the view that Section 10B is not directed at merely negligent conduct.
For reasons more fully set forth in the opinion of the Court filed today with the clerk, we conclude that the Court of Appeals erred in reading a negligent standard into Section 10B and rule 10B-5.
Accordingly, we reverse its judgment.
Mr. Justice Blackmun has filed a dissenting opinion in which Mr. Justice Brennan has joined.
Mr. Justice Stevens took no part in the consideration or decision of the case.
Warren E. Burger:
Thank you Mr. Justice Powell.