Academic journal article Journal of Accountancy

Supreme Court Defines "Security" in Malpractice Litigation

Academic journal article Journal of Accountancy

Supreme Court Defines "Security" in Malpractice Litigation

Article excerpt

The U.S. Supreme Court reversed a court of appeals ruling in favor of Ernst & Young and held the firm could be tried for violations of the Securities Exchange Act of 1934.

To raise funds for its operations, the Farmers' Cooperative of Arkansas and Oklahoma sold uncollateralized demand promissory notes to investors. Subsequently, the Cooperative went bankrupt and the note holders filed suit in U.S. district court against AY (Ernst & Young's predecessor), the Cooperative's auditor. The suit alleged AY violated the antifraud provisions of the 1934 Act by intentionally failing to comply with generally accepted accounting principles in its audit.

The plaintiffs alleged AY inflated the value of a gasohol plant that was a major asset of the Cooperative. Had the plaintiffs known the true value of the Cooperative's assets, they alleged they would not have purchased the promissory notes.

At the trial, the plaintiffs prevailed on their claims and were awarded a $6,100,000 judgment. …

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