Question

Hamish purchased the securities of the ABC Corporation (ABC), whose stock is traded on the New York Stock Exchange. Hamish believes he lost over $100,000 on those securities after ABC's president admitted that ABC’s financial statements contained statements about the profitability of ABC which were significantly exaggerated. Andy Accountant (AA) had audited those statements and had issued an unqualified opinion that they complied with GAAP. Hamish has now brought an action against AA under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. To succeed, Hamish must prove that:

A. Hamish was in privity of contract with ABC and/or AA.

B. Hamish was a foreseeable user of the financial statements audited by AA.

C. AA's actions materially aided and abetted the wrongful acts of ABC.

D. AA acted with scienter.

Answer 1

Option (d) is correct. Scienter is a legal word for knowledge or intention of wrongdoing. To succeed, Hamish must prove that: AA acted with scienter or guilty knowledge.

Option (a) is incorrect. Hamish cannot succeed by proving that Hamish was in privity of contract with ABC and/or AA.

Option (b) is incorrect. Hamish cannot succeed by proving that Hamish was a foreseeable user of the financial statements audited by AA.

Option (c) is incorrect. Hamish cannot succeed by proving that AA's actions materially aided and abetted the wrongful acts of ABC as there is no proof of it.