First Security Case

question 4. Assume that the investors defrauded by Nay could have filed their lawsuit against Ernst & Ernst under the Securities Act of 1933. How, if at all, do you believe the outcome of their suit would have been affected?

Yes, I believe if the investors defrauded by Nay could have filed their lawsuit against Ernst & Ernst under the Securities Act of 1933, the outcome of their suit would have been affected.

Under the 1933 Act, the plaintiffs, investors defrauded by Nay, only have to prove that they lost money, and the registration statement contained an important misstatement or omission. "They need not prove that they relied upon the registration or that the auditors were negligent" (Principle of Auditing, Pg.115). On the other hand, the defendant, Ernst & Ernst bears much more burden of proof. They need not only to prove their diligent work on auditing, but also prove that the misleading statements did not cause the investors' lose. According to the fact that "the SEC pointed out that the end result of investors' acting on false financial statements is the same whether the errors in the statements result from fraud or negligence." (First Securities Case, Pg. 422), Ernst &Ernst did liable for losses of those investors. Therefore, I believe the outcome of their suit would have been affected under the Securities Act of 1933. Under the Securities Act of 1933, the investors would win the case.

Pany, Kurt and Whittington, Ray, Principle of Auditing, 2011

First Securities case, Class Litigation Cases