SECURITIES LAW - RULE 10B-5 - COMPLIANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES WILL NOT INSULATE ACCOUNTANTS FROM CIVIL LIABILITY FOR FRAUD. HERZFELD V LAVENTHOL, KREKSTEIN, HORWATH AND HORWATH (SDNY 1974)

• NCJ Number: 19746
• Journal: Catholic University Law Review Volume: 24 Issue: 2 Dated: (WINTER 1975) Pages: 343-352
• Author(s): C FITZPATRICK
• Date Published: 1975
• Length: 10 pages
• Corporate Author: Catholic University of America
• Publication Format: Article
• Language: English
• Country: United States of America

Annotation

SECTION 10B-5 OF THE SECURITIES EXCHANGE ACT OF 1934 PROTECTS INVESTORS AGAINST FRAUDULENT OR MISLEADING PRACTICES EMPLOYED BY ANY PERSON 'IN CONNECTION WITH THE PURCHASE OR SALE OF ANY SECURITY.'

Abstract

IN HERTZFELD, THE COURT HELD THAT AN ACCOUNTANT WAS LIABLE UNDER RULE 10B-5 FOR ISSUING FALSE AND MISLEADING FINANCIAL STATEMENTS DESPITE COMPLIANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. THIS NOTE CONCERNS ITSELF WITH THE DEMISE OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AS A STANDARD OF PROFESSIONAL DUE CARE AND WITH THE DISTRICT COURT'S CONCLUSION THAT THE PLAINTIFF RELIED ON LAVENTHOL'S AUDITED REPORT IN MAKING HIS INVESTMENT DECISION. RELEVANT CASE LAW IS CITED TO ILLUSTRATE THE INCONSISTENT TREATMENT WHICH THE 'GENERALLY ACCEPTED ACCOUNTING PRINCIPLES' STANDARD OF CONDUCT HAS RECEIVED FROM THE COURTS. THE AUTHOR SUGGESTS THAT THE COURT'S CONCLUSION THAT RELIANCE WAS ESTABLISHED IS A TENUOUS ONE SINCE HERZFELD ONLY RELIED ON THE AUDITED REPORT IN DECIDING WHETHER TO TAKE ADVANTAGE OF A REFUND OFFER AND NOT IN HIS ORIGINAL INVESTMENT. HE ALSO POINTS OUT THAT THE REJECTION OF THE 'GENERALLY ACCEPTED ACCOUNTING PRINCIPLES' STANDARD COULD RADICALLY CHANGE THE ROLE ACCOUNTANTS MAY BE WILLING TO PLAY IN INVESTMENT AUDITS. (AUTHOR ABSTRACT MODIFIED)