concluding that although “there is sufficient evidence to support the Court’s finding that [the defendant] inadequately tested ... financial figures in certain respects, [ ] the evidence falls far short of proving that [the defendant] intended to deceive the stockholders.”
How later courts described this case
- concluding that although “there is sufficient evidence to support the Court’s finding that [the defendant] inadequately tested ... financial figures in certain respects, [ ] the evidence falls far short of proving that [the defendant] intended to deceive the stockholders.”
- primary function of internal controls is to signal to auditor the extent to which the auditor must test a client's records
- “[W]e conclude that scienter should be an element of liability in private suits under the proxy provisions as they apply to outside accountants.”
- “A build-up of standard costs involves an estimate of costs per unit of goods . . . .”
Written by the judges who cited it.
The opinion
WEICK, Circuit Judge,
dissenting:
I respectfully dissent from the order denying en banc consideration of the petition for rehearing and from the denial of the petition for rehearing.
The Securities and Exchange Commission, the government agency in charge of and primarily responsible for administering the federal securities laws, including the Securities Exchange Act of 1934, has filed in this court, Memoranda, as amicus curiae, in support of the petition for rehearing en banc pointing out that the erroneous decision of the panel “will have serious adverse effects on both the enforcement of the federal securities laws by the Commission and on the maintenance of private rights of action under these laws.”
On Page 3 of its Memorandum, the Commission states:
The Commission submits that the panel decision is premised upon two significant misperceptions concerning the culpability required to be shown in determining the liability of the accounting firm here under the federal securities laws:
1. The panel erred in defining “scienter” as meaning “a desire to deceive, defraud or manipulate” and in searching the record for evidence of a “motive for deception.”
2. The panel erred in concluding that a showing of scienter was required as a prerequisite to recovery of damages in a private action under Section 14(a) of the Securities Exchange Act and Rule 14a-19 thereunder.
The Securities and Exchange Commission, the agency primarily responsible for administering the federal securities laws, including the Securities Exchange Act of 1934, is concerned that this decision will have serious adverse effects both on the enforcement of the federal securities laws by the Commission and on the maintenance of private rights of action under these laws. Such private actions serve as a “necessary supplement” to the Commission’s own enforcement activities and provide an essential means of redress for injured investors. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 382 , 90 S.Ct. 616, 620 , 24 L.Ed.2d 593 (1970); J. I. Case Co. v. Borak, 377 U.S. 426, 432 , 84 S.Ct. 1555, 1559 , 12 L.Ed.2d 423 (1964).
On Pages 6 and 7 the Commission states:
The Commission supports the petition for rehearing and rehearing en banc on the question of the meaning of scienter because the Commission believes that the panel’s erroneous scienter standard will significantly restrict the coverage of the federal securities laws and thus weaken the protections afforded to the investing public.
2. Assuming that even under the proper definition of the term scienter, the panel was correct in reversing the district court’s finding that the accounting firm here acted with scienter, we believe that on rehearing this Court should also reconsider the panel’s conclusion that a finding of scienter is required in order to prove a violation of Section 14(a) and Rule 14a-9.
*447 The panel decision, which is contrary to the authority on this issue, fails to recognize that, unlike Section 10(b), which the Supreme Court in Hochfelder read to require scienter, neither Section 14(a) nor Rule 14a-9 uses language which would even suggest a requirement that the violator must act with scienter.
Section 14(a) grants the Commission authority to prescribe rules relating to proxies as are “necessary or appropriate in the public interest or for the protection of investors * * Rule 14a-9(A) prohibits any proxy solicitation which is “false or misleading with respect to any material fact, or which omits to state any material fact” necessary to make statements not “false or misleading” or to correct earlier statements which have become “false or misleading.”
On Pages 8 and 9 the Commission concludes:
The panel, in concluding that scienter was required in order to hold the accounting firm liable under Section 14(a), placed particular emphasis on its perception of the firm’s liability for the erroneous financial statements as being one of secondary liability. The panel thus appears to have viewed the theory of liability of the accounting firm here as that of an aider and abettor rather than that of a principal. That view, however, is erroneous. Indeed, in Securities and Exchange Commission v. Coffey, 493 F.2d 1304 , 1315 n. 24 (6th Cir. 1974), cert. denied, 420 U.S. 908 , 95 S.Ct. 826 , 42 L.Ed.2d 837 (1975), this Court viewed an accountant who prepares a dishonest financial statement as a “primary participant in a violation” rather than a secondary participant. In- any event, even assuming that liability here must rest on a theory of aiding and abetting, we believe that, rather than the scienter requirement adopted by the panel, a more appropriate analysis may be found in traditional concepts for secondary liability. Cf. Securities and Exchange Commission v. Coffey, supra, 493 F.2d at 1316 ; Securities and Exchange Commission v. Coven, 581 F.2d 1020, 1028 (2d Cir. 1978), cert. denied, 440 U.S. 950 , 99 S.Ct. 1432 , 59 L.Ed.2d 640 (1979); Securities and Exchange Commission v. Management Dynamics, Inc., 515 F.2d 801 (2d Cir. 1975).
There can be no question but that the false and misleading audit certified by Peat violates Rule 14a-9(a) of the Commission.
It is noteworthy that the Commission calls attention to the fact that the panel opinion conflicts with our opinion in Securities and Exchange Commission v. Coffey, 493 F.2d 1304 , 1315 n. 24 (6th Cir. 1974), cert. denied, 420 U.S. 908 , 95 S.Ct. 826 , 42 L.Ed.2d 837 (1975), which is in addition to the conflict with Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017 (6th Cir. 1979) and is contrary to the great weight of authority.
It is well settled that the interpretation of a statute by the agency charged with its administration is entitled to considerable weight. United States v. National Association of Security Dealers, 422 U.S. 694, 719 , 95 S.Ct. 2427, 2442 , 45 L.Ed.2d 486 (1975), followed in Andrus v. Shell Oil Co., - U.S. -, 100 S.Ct. 1932 , 64 L.Ed.2d 593 (1980, opinion written by Chief Justice Burger).
The panel made short shrift of the Commission’s contentions by not even discussing them in its two line order denying the petition for rehearing which stated no reason.
The panel has introduced a new doctrine in securities law namely, of “negligent misrepresentations” which will relieve and exempt a dishonest auditor from legal liability not only from wrongful omissions of pertinent material matters which should have been included as being the very purpose of the audit, but also from the false and fraudulent certification attached to the audit.
In the present case, the victims of the fraud have been deprived of their judgments of restitution against the wrongdoer for over $4,000,000 by the misapplication of the securites law by the panel and its cavalier treatment of the factual findings of a distinguished district judge, which did not deserve that kind of treatment.