Thursday, November 7, 2013

Ernst & Ernst v. Hochfelder case brief

Ernst & Ernst v. Hochfelder case brief summary
425 U.S. 185 (1976)

Petitioner, an accounting firm, sought review of a decision of the United States Court of Appeals for the Seventh Circuit, reversing the grant of summary judgment to petitioner in respondents' action for damages under § 10(b) of the Securities Exchange Act of 1934 (Act),15 U.S.C.S. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1975).

Petitioner, an accounting firm, had been retained by a small brokerage firm for 21 years to perform periodic audits of the brokerage firm's books and records. Respondents were customers of the brokerage firm who had invested in a fraudulent securities scheme perpetrated by the president of the brokerage firm. Respondents filed an action for damages against petitioner under § 10(b) of the Act and Rule 10b-5. Respondents' complaint was based on a theory of negligent nonfeasance. The district court's grant of summary judgment to petitioner, on the basis that a cause of action could not be maintained under § 10(b) of Act and Rule 10b-5 merely on allegations of negligence, was reversed by the circuit court.

  • The Supreme Court reviewed the Act and concluded that the language of § 10(b) clearly connoted intentional misconduct. 
  • The Court stated that the language of a statute controls when it is sufficiently clear in context. 
  • The Court held there could be no private cause of action for damages under § 10(b) of Act and Rule 10b-5 without an allegation of scienter, i.e., intent to deceive, manipulate, or defraud.


The judgment for respondents was reversed. The Court held that a private action for damages alleging the unlawful use or employment of any manipulative or deceptive device or contrivance under the Securities Exchange Act of 1934 (Act), and the rules promulgated under the Act, could not be maintained where there was no allegation of intentional misconduct.

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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