Acting on a ruling that has sent shock waves through the accounting profession, the Supreme Court agreed yesterday to decide whether a securities firm's customers have a right to sue an accountant whose audits of the firm turn out to be false or misleading.
The ruling was handed down last April by a divided 2d U.S. Circuit Court of Appeals in a case involving Weis Securities Inc., a defunct brokerdealer, and its independent auditor from 1969 to 1973, Touche Ross & Co.
In other actions, the court declined to disturb rulings in which lower tribunals held that:
American Telephone & Telegraph Corp, must provide local connections for Execunet, a competitive long-distance phone service that uses microwave transmissions to let 15,000 subscribers connect with each other's phones in the 35 cities in which MCI Telecommunications Corp. operates Execunet.
Michigan doesn't deny due process of law by empowering its secretary of state to fight unfair and deceptive trade practices in the automobile-repair industry with an approach similar to the Federal Trade Commission's.
A legal provision in a collective-bargaining agreement designed to preserve work done by union carpenters wasn't made illegal by an improper secondary boycott involving prefabricated homes.
In the accounting case, the appeals court held 2 to 1 that the Securities and Exchange Act of 1934 implied a right to bring private remedial actions against an accounting firm whose financial statements about a brokerdealer were false or misleading.
This enabled the quasigovernmental Securities Investor Protection Corp. (SIPC) to sue Touche Ross for the $14 million it has paid out to Weis customers, the court held. And it said that Edward S. Redington, trustee in liquidation for Weis, similarly was authorized to sue for an additional $51 million in behalf of Weis's clients.
In the year ended in May 1972, five Weis officers effected a scheme to conceal from the public and the Securities and Exchange Commission that the firm had suffered a heavy loss, estimated at a minimum of $1.5 million. Instead, the officers claimed pre-tax earnings of about $1.7 million. The officers were convicted of fraud.
In July 1972, Touche Ross, using "generally accepted accounting procedures," said it had examined the statements claiming $1.7 million in pretax earnings and found that they represented Weis's condition accurately and fairly.
The dissenting appeals court judge, William H. Mulligan, wrote that Congress hadn't intended to make a private right of action available to a broker's customers.
The AT&T case precipitated a sharp split in the government. The Federal Communications Commission joined the Bell System and the United States Independent Telephone Association in seeking review of the Execunet decisions by the U.S. Court of Appeals here. The Justice Department, speaking "for the United States," sided with MCI.
The appeals court rulings barred AT&T from discontinuing local Execunet connections. Meanwhile, in accord with the rulings, the commission has opened a formal proceeding to determine whether Execunet serves the public interest, convenience and necessity.
In the Michigan case, a state appeals court upheld a 1974 "little FTC" law that empowered a single official and his department to define unfair and deceptive trade practices in auto repair, and to investigate, adjudicate and punich apparent violations.
The prefabricated-homes case involved Boise-Cascade Corp., which makes them on an assembly line in Pocatello, Idaho, manned by workers who aren't members of craft unions; the Butte, Mont., local of the United Brotherhood of Carpenters and Joiners of America, AFL-CIO; the National Labor Relations Board, and the 9th U.S. Circuit Court of Appeals.
After a 90-day strike in 1971, the local and about 50 contractors in Butte signed a collective-bargaining agreement requiring prefab houses to be delivered to the homesite without "either the 'exterior siding or finishing' or ' all wallboards and/or paneling."'
The agreement also provided that union carpenters at the site would install all doors, cabinets and shelving, shingle all roofs, and install all components on the foundation.
The NLRB, upheld by the appeals court, ruled that the lawful work-preservation clause didn't become unlawful merely because the union, single-mindedly trying to protect the jobs of its members from the threat posed by modular homes, had tried to enforce the clause in situations where it had no legal right to do so.