Ernst & Ernst (defendant) is an accounting firm, which had conducted audits for First Securities Company of Chicago (First Securities) for over twenty years. From 1942 until 1966, Leston Nay, the president of First Securities, obtained funds from investors (Hochfelder) (plaintiffs), which he immediately transferred to his own personal account. In 1968, Nay committed suicide, leaving a note detailing the fraud he had committed. Hochfelder then brought suit against Ernst & Ernst, claiming that it was guilty of securities fraud under § 10(b) by not diligently conducting its audits of First Securities. The district court ruled in favor of Ernst & Ernst. Hochfelder appealed, with the court of appeals ruling in the investors’ favor. Ernst & Ernst then petitioned for certiorari to the United States Supreme Court.