Dryden, a certified public accountant, audited the books of Elixir, Inc., and certified incorrect financial statements in a form that was filed with the Securities and Exchange Commission.
Shortly thereafter, Elixir, Inc., went bankrupt. Investigation into the bankruptcy disclosed that through an intricate and clever embezzlement scheme, Kraft, the president of Elixir, had siphoned off substantial sums of money that now support Kraft in a luxurious lifestyle in South America. Investors who purchased shares of Elixir have brought suit against Dryden under Rule 10b-5.
At trial, Dryden produces evidence that demonstrates that his failure to discover the embezzlement resulted merely from negligence on his part and that he had no knowledge of the fraudulent conduct. Is Dryden liable under the Securities Exchange Act of 1934? Why?