Part 10- Corporations, Chapter 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals, Doc 6

Key Points: 1. Dodd-Frank Act Amendments: o The Dodd-Frank Act introduces significant amendments, including Section 9(a)(4) to the 1934 Securities Exchange Act. This section makes it unlawful for brokers, dealers, or others involved in securities transactions to make false or misleading statements that could induce securities purchases or sales, provided they knew or should have known the statement was false. This addition mitigates some of the consequences of the Janus case, discussed earlier in the text. o The Act also empowers the SEC to impose a fiduciary duty on brokers and investment advisers toward their customers. Though this duty isn’t immediately enacted, the SEC is tasked with studying existing standards of care. 2. Liability under the 1933 and 1934 Acts: o The 1933 Act holds issuers, underwriters, directors, and experts (such as auditors) liable for misstatements in registration statements. The issuer, however, is strictly liable without regard to fault. Defendants, excluding issuers, may avoid liability by proving they exercised due diligence. o The 1934 Act imposes liability for fraudulent statements made in connection with securities transactions. It specifically addresses the sale and solicitation of securities, focusing on negligence and scienter (intentional or knowing violations). Liability can also extend to misstatements or omissions of material facts in filings, such as annual reports and proxy statements. 3. Limited Liability Partnerships (LLPs) and Professional Corporations: o Professionals, including lawyers and accountants, can form Limited Liability Partnerships (LLPs), which limit personal liability for the professional misconduct of partners, unless the partner directly supervised or participated in the wrongful conduct. This model has become widespread, especially among non-incorporating professionals. o The formation of professional corporations also offers some limited liability protections, but professionals remain liable for their own malpractice. 4. Liability in Conflict of Interest Cases: o Several major securities firms have faced significant penalties for conflicts of interest. For example:  Goldman Sachs agreed to a $100 million settlement after its analysts were accused of being influenced by the firm's investment banking operations.  Merrill Lynch was penalized for failing to disclose that its analysts were recommending stocks of companies they disparaged privately, as part of an effort to win investment banking business.  Morgan Stanley was fined $2 million for improperly incentivizing brokers with gifts to promote mutual fund sales. 5. Criminal and Civil Liability: o Professionals can face criminal liability under both the 1933 and 1934 Securities Acts for willful violations, such as making false statements or omissions in registration statements or filings with the SEC. o Penalties for violations under these Acts include fines and imprisonment, with the maximum penalty for a violation of the 1933 Act being a $10,000 fine and five years’ imprisonment. The 1934 Act carries a potential fine of $5 million and up to 20 years in prison for individuals. 6. Auditor Liability for Opinions on Financial Statements: o After auditing financial statements, auditors issue an opinion letter. If the auditor qualifies their opinion or disclaims liability for certain issues, they are not completely relieved of responsibility. They must still exercise ordinary skill and care in conducting the audit, even if they limit their opinion. o For instance, if an auditor qualifies their opinion on a company's financial statements due to uncertainties (like an ongoing lawsuit), they can be liable for other issues that should have been uncovered during the audit. 7. Criminal Liability Example (United States v. Natelli): o The case United States v. Natelli highlights criminal liability for accountants involved in fraudulent financial reporting. In this case, auditors from Peat, Marwick, Mitchell & Co. were found guilty of aiding in the falsification of financial statements for National Student Marketing Corporation, including making unverified sales commitments and failing to disclose material information in a proxy statement. This led to criminal charges under the Securities Exchange Act of 1934 for making false and misleading statements. In summary, professionals in the securities and auditing industries are held to high standards of care and can face significant civil, criminal, and administrative penalties for failing to meet those standards. The introduction of the Dodd-Frank Act and the concept of Limited Liability Partnerships reflect ongoing efforts to balance professional liability with business and operational needs.