Ernst & Ernst v. Hochfelder

Mr. Justice Blackmun,

with whom Mr. Justice Brennan joins, dissenting.

Once again — see Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 730 (1975) — the Court interprets *216 § 10 (b) of the Securities Exchange Act of 1934, 15 U. S. C. § 78j (b), and the Securities and Exchange Commission’s Rule 10b-5, 17 CFR § 240.10b-5 (1975), restrictively and narrowly and thereby stultifies recovery for the victim. This time the Court does so by confining the statute and the Rule to situations where the defendant has “scienter,” that is, the “intent to deceive, manipulate, or defraud.” Sheer negligence, the Court says, is not within the reach of the statute and the Rule, and was not contemplated when the great reforms of 1933, 1934, and 1942 were effectuated by Congress and the Commission.

Perhaps the Court is right, but I doubt it. The Government and the Commission doubt it too, as is evidenced by the thrust of the brief filed by the Solicitor General on behalf of the Commission as amicus curiae. The Court’s opinion, to be sure, has a certain technical consistency about it. It seems to me, however, that an investor can be victimized just as much by negligent conduct as by positive deception, and that it is not logical to drive a wedge between the two, saying that Congress clearly intended the one but certainly not the other.

No one questions the fact that the respondents here were the victims of an intentional securities fraud practiced by Leston B. Nay. What is at issue, of course, is the petitioner accountant firm’s involvement and that firm’s responsibility under Rule 10b-5. The language of the Rule, making it unlawful for any person “in connection with the purchase or sale of any security”

“(b) To make any untrue statement of a material *217 fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

“(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,”

seems to me, clearly and succinctly, to prohibit negligent as well as intentional conduct of the kind proscribed, to extend beyond common-law fraud, and to apply to negligent' omission and commission. This is consistent with Congress' intent, repeatedly recognized by the Court, that securities legislation enacted for the purpose of avoiding frauds be construed “not technically and restrictively, but flexibly to effectuate its remedial purposes.” SEC v. Capital Gains Research Bureau, 375 U. S. 180, 195 (1963); Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U. S. 6, 12 (1971); Affiliated Ute Citizens v. United States, 406 U. S. 128, 151 (1972).

On motion for summary judgment, therefore, the respondents' allegations, in my view, were sufficient, and the District Court’s dismissal of the action was improper to the extent that the dismissal rested on the proposition that suit could not be maintained under § 10 (b) and Rule 10b-5 for mere negligence. The opposite appears to be true, at least in the Second Circuit, with respect to suits by the SEC to enjoin a violation of the Rule. SEC v. Management Dynamics, Inc., 515 F. 2d 801 (1975); SEC v. Spectrum, Ltd., 489 F. 2d 535, 541 (1973); SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833, 854-855 (1968), cert. denied sub nom. Coates v. SEC, 394 U. S. 976 (1969). I see no real distinction between that situation and this one, for surely the question whether negligent conduct violates the Rule should not depend upon the plaintiff’s identity. If negligence is a violation factor *218 when the SEC sues, it must be a violation factor when a private party sues. And, in its present posture, this case is concerned with the issue of violation, not with the secondary issue of a private party’s judicially created entitlement to damages or other specific relief. See Rondeau v. Mosinee Paper Corp., 422 U. S. 49 (1975).

The critical importance of the auditing accountant’s role in insuring full disclosure cannot be overestimated. The SEC has emphasized that in certifying statements the accountant’s duty “is to safeguard the public interest, not that of his client.” In re Touche, Niven, Bailey & Smart, 37 S. E. C. 629, 670-671 (1957). “In our complex society the accountant’s certificate and the lawyer’s opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar.” United States v. Benjamin, 328 F. 2d 854, 863 (CA2), cert. denied sub nom. Howard v. United States, 377 U. S. 953 (1964). In this light, the initial inquiry into whether Ernst & Ernst’s preparation and certification of the financial statements of First Securities Company of Chicago were negligent, because of the failure to perceive Nay’s extraordinary mail rule, and in other alleged respects, and thus whether Rule 10b-5 was violated, should not be thwarted.

But the Court today decides that it is to be thwarted, and so once again it rests with Congress to rephrase and to re-enact, if investor victims, such as these, are ever to have relief under the federal securities laws that I thought had been enacted for their broad, needed, and deserving benefit.*

The Court, understandably, does not resolve a number of other issues suggested by the briefs. See ante, at 191-192, n. 7; 193 n. 11; 194 n. 12; 194 n. 13; and 214-216, n. 33. In view of the result reached by the Court, no purpose would be served by my considering those issues in dissent.