Reves v. Ernst & Young

494 U.S. 56 (1990)

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Reves v. Ernst & Young

United States Supreme Court
494 U.S. 56 (1990)

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Facts

To raise funds for business operations, Farmer’s Cooperative of Arkansas and Oklahoma (the co-op) sold promissory notes to members and nonmembers. The notes were payable on demand and offered a higher-than-usual interest rate. The co-op advertised the notes as an investment, stating that although the notes were not insured or secured by collateral, they were safe because of the co-op’s extensive assets. However, the co-op eventually filed for bankruptcy. At the time, over 1,600 people held notes totaling over $10 million. A class of the note holders (plaintiffs) sued Ernst & Young (defendant), the firm that audited the co-op’s financial statements. The note holders argued that Ernst & Young violated the antifraud provisions of the Securities Exchange Act of 1934 (1934 act) by failing to follow generally accepted accounting principles when valuing one of the co-op’s major assets. The district court held in the note holders’ favor, but the court of appeals reversed, holding that the notes did not constitute securities under the 1934 act and, consequently, the antifraud provisions did not apply. The United States Supreme Court granted certiorari.

Rule of Law

Issue

Holding and Reasoning (Marshall, J.)

Concurrence (Stevens, J.)

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