A group of investors brings a class action lawsuit against the Z & R Accounting Firm under Section 10b and Rule 10b-5 of the 1934 Securities Act. Angela, an accountant with the firm, had done an audit of the Pennymart Inc books. The audit failed to

Question

disclose that Orrin, the president of Pennymart, had stolen large amounts of cash from the firm. Pennymart eventually filed for bankruptcy as a result of the thefts. What is the likely result of the suit?

Answer 1

In general, accountants may be held civilly liable for violations of Rule 10b-5 to investors such as those bringing the suit. However, their liability must be for either direct participation in a violation of the rule or for indirect participation resulting from their aiding and abetting others to violate the rule. The rule is extremely broad. However, liability is imposed only if the accountant acted with scienter. An accountant is not liable under Rule 10b-5 for mere negligence. The investors will win if they can show participation in the fraud and scienter. They will lose if they can only establish negligence.