The Accountant's Liability under Rule 10b-5 and Section 10(b) of the Securities Exchange Act of 1934: The Hole in Hochfelder .

ABSTRACT: The potential legal liability of the accounting profession re lack of diligence or auditor negligence supposedly was answered by the U.S. Supreme Court decision in Ernst & Ernst v. Hochfelder et al. in March 1976. The Court concluded that damages will not lie under Section 10(b) and Rule 10b-5 ".... in the absence of any allegation of 'scienter'--intent to deceive, manipulate, or defraud." Simple negligence therefore, will be insufficient grounds for liability. This simple solution was clouded by a footnote stating, "In certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some Act. We need not address here the question whether, in some circumstances, reckless behavior is sufficient for civil liability under Section 10(b) and Rule 10b-5." Therefore, it is my opinion that aggravated conduct, a subjective matter of all of the facts and circumstances of each individual case, shall be the focus of future legal attacks on the professional accountant.