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relatively low percentage of culpability. We advocate a proportional several only rule be adopted for those cases on the grounds of equity and economic efficiency.

We cannot predict whether adoption of this proposal will provide much relief for the accounting profession; juries, after hearing evidence and argument may consistently choose to assess high percentages of fault against negligent auditors. But, under this rule, auditors can be assured of having their full day in court: they will be permitted to argue that their culpability--if any--is less than the totality of the plaintiff's damages, and, as a result, they should be required to pay no more than their proper share of those damages.(n403)

(n1) 425 U.S. 185 (1976).

(n2) 48 Stat. 891, 15 U.S.C. Section 78j(b) (1981) [hereinafter 1934 Act]. The implementing regulation for Section 10(b) is Rule 10(b)-5, 17 C.F.R. Section 240.10b-5 (1991).

(n3) 425 U.S. at 193. The Court analyzes the language of Section 10(b) which "makes unlawful the use or employment of 'any manipulative or deceptive device or contrivance in contravention of Commission rules" and concludes that the SEC is incorrect when it argues that the above language does not limit the rule's operation to knowing practices. Id. at 197-98. The Court finds support for equating the prohibition of manipulative devices and contrivances exclusively with the scienter element in the legislative history of the 1934 Act. Id. at 201-14.

(n4) Misfeasance or negligent performance of a contract -- in this case, a contract of audit engagement -- has long been actionable as a tort under common law, but it is said that "the duty is an incident of the relationship rather than the contract." W. PACE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS 660 (5th ed. 1984) [Hereinafter PROSSER & KEETON]. However, "the American courts have extended the tort liability for misfeasance to virtually every type of contract where defective performance may injure the promissee." Id.

(n5) A third party's reliance on the audit opinion would be necessary to establish that the auditor's negligence proximately caused the plaintiff's loss. Presumably, something more than the third party's knowledge that an unqualified audit opinion existed would be required to establish proximate cause. A trade creditor, for example, would probably have to show that its credit department had reviewed the financial statements in some detail before recommending that the auditor's client be advanced a line of credit. See Lee Berton and Stephen Adler, How Audit of a Bank Cost Price Waterhouse $338 Million Judgment, WALL ST. J., Aug. 14, 1992, at A1 (noting that an important issue on appeal of this massive jury verdict will be whether the non- client plaintiff's Chief Financial Officer had relied on the defendant's audit opinions: "Other than his testimony, there was no proof he had relied on the audits.").

(n6) The rule was first enunciated in Ultramares v. Touche, 174 N.E. 441 (N.Y. 1931). See infra notes 10-14 and accompanying text. States following this restrictive privily approach through judicial adoption are Colorado, Idaho, Indiana, Nebraska, and New York. See Paul J. Herskovitz, Auditors and Third Party Negligence Suits: Judicial Approaches and Legislative Reforms, OHIO C.P.A. J. 20, 21 (Winter 1990). (for Colorado and Indiana, federal courts sitting in diversity have


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