Feng & Co., CPAs, was engaged by Golden Corp. to audit its financial statements. Feng issued an unqualified opinion on Golden’s financial statements. Golden has been accused of making negligent misrepresentations in the financial statements which Silver relied upon when purchasing Golden stock. Feng was not aware of the misrepresentations nor was it negligent in performing the audit. If Silver sues Feng for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Feng will
A. Lose, since the statements contained negligent misrepresentations.
B. Lose, since Silver relied upon the financial statements.
C. Prevail, since some element of scienter must be proved.
D. Prevail, since Silver was not in privity of contract with Feng.
Answer: C
This answer is correct because in an action brought under the Securities Exchange Act of 1934, Section 10(b) and Rule 10b-5 the plaintiff (Silver) must prove that damages were incurred as a result of the act, that there was a material misstatement or omission, that s/he relied upon the financial information, and that scienter exists. Scienter is generally defined as the knowledge of or the intent to deceive, defraud, or manipulate. Thus, Feng will prevail if Wisk is unable to prove that Feng had knowledge of the misrepresentations or that Feng had intended to deceive or defraud (scienter).