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ERNST & ERNST v. HOCHFELDER
425 U.S. 185 (1976)
ERNST & ERNST
v.
HOCHFELDER ET AL.
No. 74-1042.
Supreme Court of United States.
Argued December 3, 1975.
Decided March 30, 1976.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT.
Robert L. Berner, Jr., argued the cause for petitioner. With him on the briefs were Francis D. Morrissey, Michael J. Madda, and Kenneth H. Lang.
Willard L. King argued the cause and filed a brief for respondents Hochfelder et al. Willard J. Lassers argued the cause for respondents Allison et al. With him on the brief were Donald L. Vetter, Leon M. Despres, and Alex Elson.
Paul Gonson argued the cause for the Securities and Exchange Commission as amicus curiae urging affirmance. With him on the brief were Solicitor General Bork, Deputy Solicitor General Friedman, Lawrence E. Nerheim, and Charles E. H. Luedde.*
MR. JUSTICE POWELL delivered the opinion of the Court. The issue in this case is whether an action for civil damages may lie under § 10 (b) of the Securities Exchange Act of 1934 (1934 Act), 48 Stat. 891, 15 U. S. C.
§ 78j (b), and Securities and Exchange Commission Rule 10b-5, 17 CFR § 240.10b-5 (1975), in the absence of an allegation of intent to deceive, manipulate, or defraud on the part of the defendant. IPetitioner, Ernst & Ernst, is an accounting firm. From 1946 through 1967 it was retained by First Securities Company of Chicago (First Securities), a small brokerage firm and member of the Midwest Stock Exchange and of the National Association of Securities Dealers, to perform periodic audits of the firm's books and records. In connection with these audits Ernst & Ernst prepared for filing with the Securities and Exchange Commission (Commission) the annual reports required of First Securities under § 17 (a) of the 1934 Act, 15 U. S. C. § 78q (a).1 It also prepared for First Securities responses to the financial questionnaires of the Midwest Stock Exchange (Exchange).
Respondents were customers of First Securities who invested in a fraudulent securities scheme perpetrated by Leston B. Nay, president of the firm and owner of 92% of its stock. Nay induced the respondents to invest funds in "escrow" accounts that he represented would yield a high rate of return. Respondents did so from 1942 through 1966, with the majority of the transactions occurring in the 1950's. In fact, there were no escrow accounts as Nay converted respondents' funds to his own use immediately upon receipt. These transactions were not in the customary form of dealings between First Securities and its customers. The respondents drew their personal checks payable to Nay or a designated bank for his account. No such escrow accounts were reflected on the books and records of First Securities, and none was shown on its periodic accounting to respondents in connection with their other investments. Nor were they included in First Securities' filings with the Commission or the Exchange.This fraud came to light in 1968 when Nay committed suicide, leaving a note that described First Securities as bankrupt and the escrow accounts as "spurious." Respondents subsequently filed this action2 for damages against Ernst & Ernst3 in the United States District Court for the Northern District of Illinois under
§ 10 (b) of the 1934 Act. The complaint charged that Nay's escrow scheme violated § 10 (b) and Commission Rule 10b-5,4 and that Ernst & Ernst had "aided and abetted" Nay's violations by its "failure" to conduct proper audits of First Securities. As revealed through discovery, respondents' cause of action rested on a theory of negligent nonfeasance. The premise was that Ernst & Ernst had failed to utilize "appropriate auditing procedures" in its audits of First Securities, thereby failing to discover internal practices of the firm said to prevent an effective audit. The practice principally relied on was Nay's rule that only he could open mail addressed to him at First Securities or addressed to First Securities to his attention, even if it arrived in his absence. Respondents contended that if Ernst & Ernst had conducted a proper audit, it would have discovered this "mail rule." The existence of the rule then would have been disclosed in reports to the Exchange and to the Commission by Ernst & Ernst as an irregular procedure that prevented an effective audit. This would have led to an investigation of Nay that would have revealed the fraudulent scheme. Respondents specifically disclaimed the existence of fraud or intentional misconduct on the part of Ernst & Ernst.5
After extensive discovery the District Court granted Ernst & Ernst's motion for summary judgment and dismissed the action. The court rejected Ernst & Ernst's contention that a cause of action for aiding and abetting a securities fraud could not be maintained under § 10 (b) and Rule 10b-5 merely on allegations of negligence. It concluded, however, that there was no genuine issue of material fact with respect to whether Ernst & Ernst had conducted its audits in accordance with generally accepted auditing standards.6
* Kenneth J. Bialkin and Louis A. Craco filed a brief for the American Institute of Certified Public Accountants as amicus curiae urging reversal. 1. Section 17 (a) requires that securities brokers or dealers "make . . . and preserve . . . such accounts . . . books, and other records, and make such reports, as the Commission by its rules and regulations may prescribe as necessary or appropriate in the public interest or for the protection of investors." During the period relevant here, Commission Rule 17a-5, 17 CFR § 240. 17a-5 (1975), required that First Securities file an annual report of its financial condition that included a certificate stating "clearly the opinion of the accountant with respect to the financial statement covered by the certificate and the accounting principles and practices reflected therein." See SEC Release No. 3338 (Nov. 28, 1942), X-17A-5 (h). The Rule required Ernst & Ernst to state in its certificate, inter alia, "whether the audit was made in accordance with generally accepted auditing standards applicable in the circumstances" and provided that nothing in the Rule should "be construed to imply authority for the omission of any procedure which independent accountants would ordinarily employ in the course of an audit for the purpose of expressing the opinions required" by the Rule. 2. Two separate, but substantially identical, complaints initially were filed by different members of the present group of respondents. Subsequently the respondents jointly filed a First Amended Complaint. The two cases were treated by the District Court as if they were consolidated, and they were consolidated formally on appeal. 3. The first count of the complaint was directed against the Exchange, charging that through its acts and omissions it had aided and abetted Nay's fraud. Summary judgment in favor of the Exchange was affirmed on appeal. Hochfelder v. Midwest Stock Exchange,503 F.2d 364 (CA7), cert. denied, 419 U.S. 875 (1974). 4. Immediately after Nay's suicide the Commission commenced receivership proceedings against First Securities. In those proceedings all of the respondents except two asserted claims based on the fraudulent escrow accounts. These claims ultimately were allowed in SEC v. First Securities Co.,463 F.2d 981, 986 (CA7), cert. denied, 409 U.S. 880 (1972), where the court held that Nay's conduct violated § 10 (b) and Rule 10b-5, and that First Securities was liable for Nay's fraud as an aider and abettor. The question of Ernst & Ernst's liability was not considered in that case. 5. In their response to interrogatories in the District Court respondents conceded that they did "not accuse Ernst & Ernst of deliberate, intentional fraud," merely with "inexcusable negligence." App. 81. 6. The District Court also held that respondents' action was barred by the doctrine of equitable estoppel and the applicable Illinois statute of limitations of three years. See n. 29, infra. As customers of First Securities respondents were sent confirmation forms as required under § 17 (a) and Rule 17a-5 requesting that they verify the accuracy of the statements and notify Ernst & Ernst as to any exceptions. Although the confirmation forms contained no reference to the escrow accounts, Ernst & Ernst was not notified of this fact. The last audit of First Securities by Ernst & Ernst was completed in December 1967 and the first complaint in this action was not filed until February 1971. 7. In support of this holding, the Court of Appeals cited its decision in Hochfelder v. Midwest Stock Exchange, supra, where it detailed the elements necessary to establish a claim under Rule 10b-5 based on a defendant's aiding and abetting a securities fraud solely by inaction. See n. 3 supra. In such a case the plaintiff must show "that the party charged with aiding and abetting had knowledge of or, but for a breach of a duty of inquiry, should have had knowledge of the fraud, and that possessing such knowledge the party failed to act due to an improper motive or breach of a duty of disclosure." 503 F. 2d, at 374. The court explained in the instant case that these "elements comprise a flexible standard of liability which should be amplified according to the peculiarities of each case." Id., at 1104. In view of our holding that an intent to deceive, manipulate, or defraud is required for civil liability under § 10 (b) and Rule 10b-5, we need not consider whether civil liability for aiding and abetting is appropriate under the section and the Rule, nor the elements necessary to establish such a cause of action. See, e. g., Brennan v. Midwestern United Life Ins. Co.,259 F.Supp. 673 (1966) and 286 F.Supp. 702 (ND Ind. 1968), aff'd, 417 F.2d 147 (CA7 1969), cert. denied, 397 U.S. 989 (1970) (defendant held liable for giving active and knowing assistance to a third party engaged in violations of the securities laws). See generally Ruder, Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting, Conspiracy, In Pari Delicto, Indemnification and Contribution, 120 U. Pa. L. Rev. 597, 620-645 (1972). 8. See n. 1, supra. 9. The court concluded that the duty of inquiry imposed on Ernst & Ernst under § 17 (a) was "grounded on a concern for the protection of investors such as [respondents]," without reaching the question whether the statute imposed a "direct duty" to the respondents. 503 F. 2d, at 1105. The court held that Ernst & Ernst owed no common-law duty of inquiry to respondents arising from its contract with First Securities since Ernst & Ernst did not specifically foresee that respondents' limited class might suffer from a negligent audit, compare Glanzer v. Shepard, 233 N.Y. 236, 135 N. E. 275 (1922), with Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N. E. 441 (1931); see, e. g., Rhode Island Hospital Trust Nat. Bank v. Swartz,455 F.2d 847, 851 (CA4 1972). Moreover, respondents conceded that they did not rely on the financial statements and reports prepared by Ernst & Ernst or on its certificate of opinion. 503 F. 2d, at 1107. 10. In their briefs respondents allude to several other alleged failings by Ernst & Ernst in its audit of First Securities, principally its failure to inquire into the collectibility of certain loans by First Securities to Nay and and its failure to follow up on a 1965 memorandum that characterized First Securities' overall system of internal control as weak because of the centralization of functions in the cashier. The Court of Appeals mentioned none of these alleged deficiencies in its opinion in this case, although it did discuss the loans to Nay and certain other related matters in its opinion in Hochfelder v. Midwest Stock Exchange, 503 F. 2d, at 370-371, holding that the existence of these facts was insufficient to put the Exchange on notice that further inquiry into First Securities' financial affairs was required. 11. The Court of Appeals also reversed the District Court's holding with respect to equitable estoppel and the statute of limitations. See n. 6, supra. In view of our disposition of the case we need not address these issues. 12. Although the verbal formulations of the standard to be applied have varied, several Courts of Appeals have held in substance that negligence alone is sufficient for civil liability under § 10 (b) and Rule 10b-5. See, e. g., White v. Abrams,495 F.2d 724, 730 (CA9 1974) ("flexible duty" standard); Myzel v. Fields,386 F.2d 718, 735 (CA8 1967), cert. denied, 390 U.S. 951 (1968) (negligence sufficient); Kohler v. Kohler Co.,319 F.2d 634, 637 (CA7 1963) (knowledge not required). Other Courts of Appeals have held that some type of scienter—i. e., intent to defraud, reckless disregard for the truth, or knowing use of some practice to defraud—is necessary in such an action. See, e. g., Clegg v. Conk,507 F.2d 1351, 1361-1362 (CA10 1974), cert, denied, 422 U.S. 1007 (1975) (an element of "scienter or conscious fault"); Lanza v. Drexel & Co.,479 F.2d 1277, 1306 (CA2 1973) ("willful or reckless disregard" of the truth). But few of the decisions announcing that some form of negligence suffices for civil liability under § 10 (b) and Rule 10b-5 actually have involved only negligent conduct. Smallwood v. Pearl Brewing Co.,489 F.2d 579, 606 (CA5), cert. denied, 419 U.S. 873 (1974); Kohn v. American Metal Climax, Inc.,458 F.2d 255, 286 (CA3 1972) (Adams, J., concurring and dissenting); Bucklo, Scienter and Rule 10b-5, 67 Nw. U. L. Rev. 562, 568-570 (1972).
In this opinion the term "scienter" refers to a mental state embracing intent to deceive, manipulate, or defraud. 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 § 10 (b) and Rule 10b-5. Since this case concerns an action for damages we also need not consider the question whether scienter is a necessary element in an action for injunctive relief under § 10 (b) and Rule 10b-5. Cf. SEC v. Capital Gains Research Bureau,375 U.S. 180 (1963). 13. Respondents further contend that Ernst & Ernst owed them a direct duty under § 17 (a) of the 1934 Act and Rule 17a-5 to conduct a proper audit of First Securities and that they may base a private cause of action against Ernst & Ernst for violation of that duty. Respondents' cause of action, however, was premised solely on the alleged violation of § 10 (b) and Rule 10b-5. During the lengthy history of this litigation they have not amended their original complaint to aver a cause of action under § 17 (a) and Rule 17a-5. We therefore do not consider that a claim of liability under § 17 (a) is properly before us even assuming respondents could assert such a claim independently of § 10 (b). 14. See, e. g., S. Rep. No. 792, 73d Cong., 2d Sess., 5-6 (1934); Note, Implied Liability Under the Securities Exchange Act, 61 Harv. L. Rev. 858, 860 (1948). 15. SEC Release No. 3230 (May 21, 1942); Birnbaum v. Newport Steel Corp.,193 F.2d 461, 463 (CA2), cert. denied, 343 U.S. 956 (1952). 17. See cases cited in n. 12, supra. Compare, e. g., Comment, Scienter and Rule 10b-5, 69 Col. L. Rev. 1057, 1080-1081 (1969); Note, Negligent Misrepresentations under Rule 10b-5, 32 U. Chi. L. Rev. 824, 839-844 (1965); Note, Securities Acts, 82 Harv. L. Rev. 938, 947 (1969); Note, Civil Liability Under Section 10B and Rule 10B-5: A Suggestion for Replacing the Doctrine of Privity, 74 Yale L. J. 658, 682-689 (1965), with, e. g., 3 L. Loss, Securities Regulation 1766 (2d ed. 1961); 6 id., at 3883-3885 (1969). 18. The Commission would not permit recovery upon proof of negligence in all cases. In order to harmonize civil liability under § 10 (b) with the express civil remedies contained in the 1933 and 1934 Acts, the Commission would limit the circumstances in which civil liability could be imposed for negligent violation of Rule 10b-5 to situations in which (i) the defendant knew or reasonably could foresee that the plaintiff would rely on his conduct, (ii) the plaintiff did in fact so rely, and (iii) the amount of the plaintiff's damages caused by the defendant's conduct was definite and ascertainable. Brief for SEC as Amicus Curiae 23-33. The Commission concludes that the present record does not establish these conditions since Ernst & Ernst could not reasonably have foreseen that the financial statements of First Securities would induce respondents to invest in the escrow accounts, respondents in fact did not rely on Ernst & Ernst's audits, and the amount of respondents' damages was unascertainable. Id., at 33-36. Respondents accept the Commission's basic analysis of the operative language of the statute and Rule, but reject these additional requirements for recovery for negligent violations. 19. "To let general words draw nourishment from their purpose is one thing. To draw on some unexpressed spirit outside the bounds of the normal meaning of words is quite another. . . . After all, legislation when not expressed in technical terms is addressed to the common run of men and is therefore to be understood according to the sense of the thing, as the ordinary man has a right to rely on ordinary words addressed to him." Addison v. Holly Hill Fruit Products, Inc., 322 U. S., at 617-618. See Frankfurter, Some Reflections on the Reading of Statutes, 47 Col. L. Rev. 527, 536-537 (1947). 20. Webster's International Dictionary (2d ed. 1934) defines "device" as "[t]hat which is devised, or formed by design; a contrivance; an invention; project; scheme; often, a scheme to deceive; a stratagem; an artifice," and "contrivance" in pertinent part as "[a] thing contrived or used in contriving; a scheme, plan, or artifice." In turn, "contrive" in pertinent part is defined as "[t]o devise; to plan; to plot . . . [t]o fabricate . . . design; invent . . . to scheme . . . ." The Commission also ignores the use of the terms "[t]o use or employ," language that is supportive of the view that Congress did not intend § 10 (b) to embrace negligent conduct. 21. Webster's International Dictionary, supra, defines "manipulate" as "to manage or treat artfully or fraudulently; as to manipulate accounts . . . . 4. Exchanges. To force (prices) up or down, as by matched orders, wash sales, fictitious reports . . . ; to rig." 22. See infra, at 208, and n. 26. 23. See n. 21, supra. 24. In support of its position the Commission cites statements by Corcoran in the Senate hearings that "in modern society there are many things you have to make crimes which are sheer matters of negligence" and "intent is not necessary for every crime." Hearings before the Subcommittee on Stock Exchange Practices before the Senate Committee on Banking and Currency, 73d Cong., 2d Sess., 6509-6510 (1934). The comments, taken in context, shed no light on the meaning of § 10 (b). Corcoran's remarks were made during a discussion of whether criminal violations could arise under § 8 (a) (3) of S. 2693, 73d Cong., 2d Sess., which in material part was incorporated in § 9 of the 1934 Act, 15 U. S. C. § 78i, in the absence of specific intent to influence security prices for personal gain. The remarks, moreover, were not addressed to the scope of § 8, but were general observations concerning activity society might proscribe under criminal law. Ferdinand Pecora, counsel to the committee and a draftsman of S. 2693, Foremost-McKesson, Inc. v. Provident Securities Co.,423 U.S. 232, 249-250, n. 24 (1976), described the language as "[e]xcluding from its scope an act that is not done with any ulterior motives or purposes, as set forth in the act." Hearings before the Subcommittee on Stock Exchange Practices, supra, at 6510. Further, prior to the passage of the 1934 Act, proposed § 8 was amended to require willful behavior as a prerequisite to civil liability for violations. Compare § 9 (e) of the 1934 Act with § 8 (c) of S. 2693. See H. R. Rep. No. 1383, 73d Cong., 2d Sess., 21 (1934).
The Commission also relies on objections to a draft version of § 10 (b)—§ 9 (c) of S. 2693 and H. R. 7852, see supra, at 201-202 —raised by representatives of the securities industry in the House and Senate hearings. They warned that the language was so vague that the Commission might outlaw anything. E. g., Hearings before the Subcommittee on Stock Exchange Practices, supra, at 6988; Hearings on H. R. 7852 and H. R. 8720 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 2d Sess., 258 (1934). Remarks of this kind made in the course of legislative debate or hearings other than by persons responsible for the preparation or the drafting of a bill are entitled to little weight. See, e. g., United States v. United Mine Workers,330 U.S. 258, 276-277 (1947); United States v. Wrightwood Dairy Co.,315 U.S. 110, 125 (1942). This is especially so with regard to the statements of legislative opponents who "[i]n their zeal to defeat a bill . . . understandably tend to overstate its reach." NLRB v. Fruit Packers,377 U.S. 58, 66 (1964). See Schwegmann Bros. v. Calvert Distillers Corp.,341 U.S. 384, 394-395 (1951). 25. "Wash" sales are transactions involving no change in beneficial ownership. "Matched" orders are orders for the purchase/sale of a security that are entered with the knowledge that orders of substantially the same size, at substantially the same time and price, have been or will be entered by the same or different persons for the sale/purchase of such security. Section 9 (a) (1) of the 1934 Act, 15 U. S. C. § 78i (a) (1), proscribes wash sales and matched orders when effectuated "[f]or the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or . . . with respect to the market for any such security." See In re J. A. Latimer & Co., 38 S. E. C. 790 (1958); In re Thornton & Co., 28 S. E. C. 208 (1948). 26. Other individuals who sign the registration statement, directors of the issuer, and the underwriter of the securities similarly are accorded a complete defense against civil liability based on the exercise of reasonable investigation and a reasonable belief that the registration statement was not misleading. §§ 11 (b) (3) (A), (C), (D), (c). See, e. g., Feit v. Leasco Data Processing Equipment Corp.,332 F.Supp. 544, 575-583 (EDNY 1971) (underwriters, but not officer-directors, established their due-diligence defense). See generally R. Jennings & H. Marsh, Securities Regulation 1018-1027 (3d ed. 1972), and sources cited therein; Folk, Civil Liabilities Under the Federal Securities Acts: The Barchris Case, 55 Va. L. Rev. 199 (1969). 27. Section 12 (2) creates potential civil liability for a seller of securities in favor of the purchaser for misleading statements or omissions in connection with the transaction. The seller is exculpated if he proves that he did not know, or, in the exercise of reasonable care, could not have known of the untruth or omission. Section 15 of the 1933 Act, as amended by § 208 of Title II of the 1934 Act, makes persons who "control" any person liable under § 11 or § 12 liable jointly and severally to the same extent as the controlled person, unless he "had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist." 15 U. S. C. § 77o. See Act of June 6, 1934, c. 404, § 208, 48 Stat. 908. 28. Each of the provisions of the 1934 Act that expressly create civil liability, except those directed to specific classes of individuals such as directors, officers, or 10% beneficial holders of securities, see § 16 (b), 15 U. S. C. § 78p (b), Foremost-McKesson, Inc. v. Provident Securities Co.,423 U.S. 232 (1976); Kern County Land Co. v. Occidental Petroleum Corp.,411 U.S. 582 (1973), contains a state-of-mind condition requiring something more than negligence. Section 9 (e) creates potential civil liability for any person who "willfully participates" in the manipulation of securities on a national exchange. 15 U. S. C. § 78i (e). Section 18 creates potential civil liability for misleading statements filed with the Commission, but provides the defendant with the defense that "he acted in good faith and had no knowledge that such statement was false or misleading." 15 U. S. C. § 78r. And § 20, which imposes liability upon "controlling person[s]" for violations of the Act by those they control, exculpates a defendant who "acted in good faith and did not . . . induce the act . . . constituting the violation . . . ." 15 U. S. C. § 78t. Emphasizing the important difference between the operative language and purpose of § 14 (a) of the 1934 Act, 15 U. S. C. § 78n (a), as contrasted with § 10 (b), however, some courts have concluded that proof of scienter is unnecessary in an action for damages by the shareholder recipients of a materially misleading proxy statement against the issuer corporation. Gerstle v. Gamble-Skogmo, Inc.,478 F.2d 1281, 1299 (CA2 1973). See also Kohn v. American Metal Climax, Inc., 458 F. 2d, at 289-290 (Adams, J., concurring and dissenting). 29. Since no statute of limitations is provided for civil actions under § 10 (b), the law of limitations of the forum State is followed as in other cases of judicially implied remedies. See Holmberg v. Armbrecht,327 U.S. 392, 395 (1946), and cases cited therein. Although it is not always certain which state statute of limitations should be followed, such statutes of limitations usually are longer than the period provided under § 13. 3 Loss, supra, n. 17, at 1773-1774. As to costs see n. 30, infra. 30. Congress regarded these restrictions on private damages actions as significant. In introducing Title II of the 1934 Act, Senator Fletcher indicated that the amendment of § 11 (c) of the 1933 Act, providing for potential payment of costs, including attorneys' fees, "is the most important [amendment] of all." 78 Cong. Rec. 8669 (1934). One of its purposes was to deter actions brought solely for their potential settlement value. See ibid.; H. R. Conf. Rep. No. 1838, 73d Cong., 2d Sess., 42 (1934); Blue Chip Stamps v. Manor Drug Stores,421 U.S. 723, 740-741 (1975). This deterrent is lacking in the § 10 (b) context, in which a district court's power to award attorneys' fees is sharply circumscribed. See Alyeska Pipeline Service Co. v. Wilderness Society,421 U.S. 240 (1975) ("bad faith" requirement); F. D. Rich Co. v. United States ex rel. Industrial Lumber Co.,417 U.S. 116, 129 (1974). 31. Section 18 of the 1934 Act creates a private cause of action against persons, such as accountants, who "make or cause to be made" materially misleading statements in reports or other documents filed with the Commission. 15 U. S. C. § 78r. We need not consider the question whether a cause of action may be maintained under § 10 (b) on the basis of actions that would constitute a violation of § 18. Under § 18 liability extends to persons who, in reliance on such statements, purchased or sold a security whose price was affected by the statements. Liability is limited, however, in the important respect that the defendant is accorded the defense that he acted in "good faith and had no knowledge that such statement was false or misleading." Consistent with this language the legislative history of the section suggests something more than negligence on the part of the defendant is required for recovery. The original version of § 18 (a), § 17 (a) of S. 2693, H. R. 7852 and H. R. 7855, see supra, at 201-202, provided that the defendant would not be liable if "he acted in good faith and in the exercise of reasonable care had no ground to believe that such statement was false or misleading." The accounting profession objected to this provision on the ground that liability would be created for honest errors in judgment. See Senate Hearings on Stock Exchange Practices, supra, n. 24, at 7175-7183; House Hearings on H. R. 7852 and H. R. 8720, supra, n. 24, at 653. In subsequent drafts the current formulation was adopted. It is also significant that actions under § 18 are limited by a relatively short statute of limitations similar to that provided in § 13 of the 1933 Act. § 18 (c). Moreover, as under § 11 (e) of the 1933 Act a district court is authorized to require the plaintiff to post a bond for costs, including attorneys' fees, and to assess such costs at the conclusion of the litigation. § 18 (a). 32. Apparently the Rule was a hastily drafted response to a situation clearly involving intentional misconduct. The Commission's Regional Administrator in Boston had reported to the Director of the Trading and Exchange Division that the president of a corporation was telling the other shareholders that the corporation was doing poorly and purchasing their shares at the resultant depressed prices, when in fact the business was doing exceptionally well. The Rule was drafted and approved on the day this report was received. See Conference on Codification of the Federal Securities Laws, 22 Bus. Law. 793, 922 (1967) (remarks of Milton Freeman, one of the Rule's codrafters); Blue Chip Stamps, supra, at 767 (BLACKMUN, J., dissenting). Although adopted pursuant to § 10 (b), the language of the Rule appears to have been derived in significant part from § 17 of the 1933 Act, 15 U. S. C. § 77q. E. g., Blue Chip Stamps, supra, at 767 (BLACKMUN, J., dissenting); SEC v. Texas Gulf Sulphur Co.,401 F.2d 833, 867 (CA2 1968) (Friendly, J., concurring), cert. denied sub nom. Coates v. SEC, 394 U.S. 976 (1969). There is no indication in the administrative history of the Rule that any of the subsections was intended to proscribe conduct not involving scienter. Indeed the Commission's release issued contemporaneously with the Rule explained:
"The Securities and Exchange Commission today announced the adoption of a rule prohibiting fraud by any person in connection with the purchase of securities. The previously existing rules against fraud in the purchase of securities applied only to brokers and dealers. The new rule closes a loophole in the protections against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase." SEC Release No. 3230 (May 21, 1942). That same year, in its Annual Report, the Commission again stated that the purpose of the Rule was to protect investors against "fraud": "During the fiscal year the Commission adopted Rule X-10B-5 as an additional protection to investors. The new rule prohibits fraud by any person in connection with the purchase of securities, while the previously existing rules against fraud in the purchase of securities applied only to brokers and dealers." 1942 Annual Report of the Securities Exchange Commission 10. 33. As we find the language and history of § 10 (b) dispositive of the appropriate standard of liability, there is no occasion to examine the additional considerations of "policy," set forth by the parties, that may have influenced the lawmakers in their formulation of the statute. We do note that the standard urged by respondents would significantly broaden the class of plaintiffs who may seek to impose liability upon accountants and other experts who perform services or express opinions with respect to matters under the Acts. Last Term, in Blue Chip Stamps, 421 U. S., at 747-748, the Court pertinently observed:
"While much of the development of the law of deceit has been the elimination of artificial barriers to recovery on just claims, we are not the first court to express concern that the inexorable broadening of the class of plaintiff who may sue in this area of the law will ultimately result in more harm than good. In Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N. E. 441 (1931), Chief Judge Cardozo observed with respect to `a liability in an indeterminate amount for an indeterminate time to an indeterminate class: " `The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.' Id., at 179-180, 174 N. E., at 444." This case, on its facts, illustrates the extreme reach of the standard urged by respondents. As investors in transactions initiated by Nay, not First Securities, they were not foreseeable users of the financial statements prepared by Ernst & Ernst. Respondents conceded that they did not rely on either these financial statements or Ernst & Ernst's certificates of opinion. See n. 9, supra. The class of persons eligible to benefit from such a standard, though small in this case, could be numbered in the thousands in other cases. Acceptance of respondents' view would extend to new frontiers the "hazards" of rendering expert advice under the Acts, raising serious policy questions not yet addressed by Congress. 34. See 503 F. 2d, at 1104, 1119; n. 5, supra. * 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.
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