Moreover, the credible evidence overwhelmingly established that at all times during this audit the PW auditors in general and Messrs. Jerbasi, Perks, and LeRoy, in particular, acted in good faith and conducted what they honestly believed to be a professional and thorough audit of a troubled company with poor internal controls. E.g. Tr. at 392-93. Since "there is no indication that Congress intended anyone to be made liable [under Section 10(b) and Rule 10b-5] unless he acted other than in good faith," Ernst & Ernst, supra, 427 U.S. at 206, this Court's finding of good faith precludes a finding of liability here.
The Commission's contention that PW's alleged concern for maintaining and keeping a client and the fees associated with that relationship permits an inference of fraud is unconvincing. It is highly improbable that an accountant would risk surrendering a valuable reputation for honesty and careful work by participating in a fraud merely to obtain increased fees. See DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir.), cert. denied, 112 L. Ed. 2d 312, 111 S. Ct. 347 (1990). The Court therefore declines the Commission's invitation to look with a jaundiced eye at each accounting decision made during a complex audit merely because of an accountant's economic motivation in maintaining an ongoing relationship with a client.
It follows that the Commission has also failed to establish the PW defendants liability for aiding and abetting violations of the securities laws by AMI officials. The well-known elements for aiding and abetting a violation of the securities laws are:
(1) the existence of a securities law violation by the primary (as opposed to the aiding and abetting) party;
(2) "knowledge" of this violation on the part of the aider and abettor; and
(3) "substantial assistance" by the aider and abettor in the achievement of the primary violation.
Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 551-52 (S.D.N.Y. 1990) (quoting IIT v. Cornfeld, 619 F.2d 909, 913 (2d Cir. 1980)). The Court's conclusion that the PW defendants did not act recklessly is dispositive on this issue. Although it is uncertain whether recklessness is sufficient to establish the scienter required for aiding and abetting liability, see, e.g., Sirota, supra, 673 F.2d at 575; Mishkin, supra, 744 F. Supp. at 552, it is nonetheless obvious that an absence of recklessness precludes liability for aiding and abetting a fraud. See Oleck v. Fischer, 623 F.2d 791, 795 (2d Cir. 1980). Thus, since scienter has not been established here, the Court need not decide whether a primary violation was committed by company management or whether the PW defendants substantially assisted that primary violation.
In any event, even if the Commission had demonstrated a violation of those provisions of the laws, such as § 17(a)(2)-(3) of the Securities Act, which do not require scienter, the SEC would still have to demonstrate the need for injunctive relief under Section 20(b) of the Securities Act and Section 21(d) of the Exchange Act. See Aaron, supra, 446 U.S. at 696-700; Tome, supra, 638 F. Supp. at 628; Scott, 565 F. Supp. at 1535-36. The test for injunctive relief is "whether the defendant's past conduct indicates that there is a reasonable likelihood of further violation in the future." SEC v. Monarch Fund, 608 F.2d 938, 943 (2d Cir. 1979); see SEC v. Bausch & Lomb, 565 F.2d 8, 14 (2d Cir. 1977); see also United States v. W.T. Grant Co., 345 U.S. 629, 633, 97 L. Ed. 1303, 73 S. Ct. 894 (1953). In weighing whether or not to grant an injunction a court may also consider the degree of scienter involved in the violation, the sincerity of a defendant's assurances against future violations, and the isolated or recurrent nature of the violations. See Bausch & Lomb, supra, 565 F.2d at 14; SEC v. Universal Major Indus., 546 F.2d 1044, 1048 (2d Cir. 1977), cert. denied, 434 U.S. 834, 98 S. Ct. 120, 54 L. Ed. 2d 95 (1977). Moreover, the presence or absence of scienter would still be an "important" factor to be considered by a district court "in exercising its equitable discretion to decide whether or not to grant injunctive relief." Aaron, supra, 446 U.S. at 701; see id. at 703 (Burger, C.J., concurring); see also SEC v. Haswell, 654 F.2d 698, 699 (10th Cir. 1981).
The Commission has shown no basis for injunctive relief in this case. As noted above, the PW defendants acted in good faith and made reasonable professional judgments in connection with the issues that arose during the audit. In view of that circumstance, there is no basis for an injunction. See SEC v. Arthur Young & Co., 590 F.2d 785, 789 (9th Cir. 1979). Moreover, since it is uncontroverted that the Commission has not alleged any other violations of federal law by Jerbasi, Perks and LeRoy either prior to or subsequent to the conduct complained of herein, see JPTO at 6-8, PP 12-14; Tr. at 261, 392, 533, it would be irrational for the Court to conclude that they are the type of persistent securities law violators who should be enjoined.
Similarly, the Court can discern no basis upon which an injunction should be entered against PW. The Commission has put forth no evidence that PW as a firm acted recklessly or has engaged in a persistent pattern of reckless auditing which would justify the conclusion that the firm will violate the securities laws in the future.
Indeed, the SEC contends only that one allegedly improper audit performed over ten years ago by individual partners warrants a firmwide injunction. However, there has been no evidence that the firm's national leadership ignored audit issues brought to its attention or otherwise unduly pressured any accountant to placate corporate management. Thus, the Court sees no basis for an injunction against the firm on the basis of these isolated acts, even assuming arguendo that a violation of any provision of the securities laws had been established. Cf. SEC v. World Gambling Corp., 555 F. Supp. 930, 933 (S.D.N.Y.), aff'd, 742 F.2d 1440 (2d Cir. 1983).
Furthermore, the Commission seeks injunctive relief based upon events which occurred in 1980. However, it took the Commission approximately five years to file its complaint and another six years for the action to proceed to trial. This delay weighs heavily against an injunction, especially where, as here, the intervening years have seen a large scale change in the firm's leadership. Affidavit of Eleanor C. Mertson P 5. See Monarch Fund, supra, 608 F.2d at 943; SEC v. John Adams Trust Corp., 697 F. Supp. 573, 578 (D. Mass. 1988); SEC v. Warner, 674 F. Supp. 836, 839 (S.D. Fla. 1987). For all of these reasons the Commission's request for injunctive relief is in all respects denied. See SEC v. Unifund Sal, 910 F.2d 1028 (2d Cir. 1990).
For the reasons set forth above, judgment shall be entered in favor of the defendants dismissing the complaint in this action with prejudice. The Clerk of the Court shall enter an appropriate judgment and close the above-captioned action.
It is SO ORDERED.
Dated: New York, New York
July 29, 1992
John E. Sprizzo
United States District Judge