Thursday, November 7, 2013

Adams v. Standard Knitting Mills, Inc. case brief

Adams v. Standard Knitting Mills, Inc. case brief summary
623 F.2d 422 (1980)

Plaintiff stockholders brought a class, securities fraud action against defendants, two corporations, management, lawyers, and accounting firm, alleging that a false proxy solicitation was issued to gain approval of a corporate merger. The accounting firm appealed from a judgment of the United States District Court for the Eastern District of Tennessee that awarded the stockholders damages, pre-judgment interest, and attorneys' fees.

The stockholders contended that the accounting firm was liable for failing to point out in a proxy statement sent to the stockholders that certain restrictions on the payment of dividends by the acquiring corporation applied to preferred as well as common stock.

  • The court reversed the district court's judgment for the stockholders and held that the accounting firm was not liable for such conduct. 
  • The court found that the accounting firm's omissions in the proxy statement were the result of negligence but did not arise from an intent to deceive; therefore, it was not liable under S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5 (1979), which required "intentional misconduct." 
  • The court found that § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78n(a), and S.E.C. Rule 14-9, 17 C.F.R. § 240.14a-9(a) (1979), were silent regarding the proper standard of liability. 
  • The court concluded that they also required proof of scienter for imposition of liability on the accounting firm for a false or misleading proxy statement.


The court reversed the district court's judgment for the stockholders in their securities fraud action against the accounting firm.

Suggested Study Aids For Securities Regulation Law
Securities Regulation in a Nutshell, 10th (Nutshell Series)
Securities Regulation: Examples & Explanations, 5th Edition
Securities Regulations: The Essentials

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