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Question
West & Co., a large CPA firm, was engaged by Sand Corp. to audit its financial statements. West issued an unqualified opinion on Sand's financial statements. Reed is a securities investor who relied upon the statements when purchasing Sand stocks. After incurring major losses on Sand stocks, Reed accused Sand of making negligent misrepresentations in the financial statements. West was not aware of the misrepresentations nor was it negligent in performing the audit. If Reed sues West for damages, based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, West will:
A. lose, because Reed relied upon the financial statements.
B. lose, because the statements contained negligent misrepresentation.
C. prevail, because some element of scienter must be proved.
D. prevail, because Reed was not in privity of contract with West.
Answer
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