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In Ernst & Ernst v. Hochfelder, the U. S. Supreme Court held that an action for civil damages cannot be maintained under §10(b) of the Securities and Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, unless there is an allegation of the defendant's intent to deceive, manipulate or defraud. Thus, some element of scienter is required, and liability cannot be imposed for negligent conduct alone.

The suit arose following exposure of a fraudulent securities scheme perpetrated by Leston B. Nay, president and principal stockholder of First Securities Company of Chicago (First Securities), a member of the Midwest Stock Exchange and of the National Association of Securities Dealers. The petitioner, Ernst & Ernst, an accounting firm, had been retained by First Securities to perform periodic audits of the records of the firm and to prepare for filing with the Securities and Exchange Commission the annual reports required under §17(a) of the 1934 Act. The respondents were customers of First Securities and had been induced by Nay to invest funds in "escrow" accounts represented as yielding a high rate of return. They made payments by personal checks, payable to Nay or to a designated representative, between 1942 and 1966. These payments were not shown on the books and records of First Securities, nor were they reflected in the periodic accounting to the respondents on other investments or in reports from First Securities to the SEC. In reality, the funds invested were converted upon receipt to Nay's personal use.