Case 27-3 Great Neck Capital

• Fact: Harnischfeger’s external auditor was PwC. They had PwC review their financial condition and advised them that their information conformed with GAAP.
• However after some year end transactions; largest order included fine paper machines in Indonesia resulting in a 600 million dollar order.
• Company subsequently went bankrupt.
• Issue: Whether PwC, or outside auditor, can be held liable under sections 10B and rule 10B-5. Can they be a primary violator?
• Rationale: The court referenced a prior case, Central Bank of Denver. To support the rationale for this case, “an accountant liability for aiding and abetting is hard to distinguish from primary liability.” This rationale supports the Central Bank ruling therefore PwC cannot be held liable under S10(b) but can be held liable for statements in the audit report.
• Conclusion: PwC’s motion to dismiss granted in part and denied in part.