Gordon & Groton, CPAs, were the auditors of Jordan & Company, a brokerage firm and member of several national and international stock exchanges. Gordon & Groton audited and reported on the financial statements of Jordan, which were filed with the Securities and Exchange Commission.

Several of Jordan's customers were swindled by a fraudulent scheme perpetrated by Jordan's president, who owned 90 percent of the voting stock of the company. The facts established that Gordon & Groton were negligent, but not reckless nor grossly negligent, in conducting the audit, and neither participated in, nor knew of, the fraudulent scheme.

The customers are suing Gordon & Groton under the anti-fraud provisions of Section 10(b) and Rule lOb-5 of the Securities Exchange Act of 1934 for aiding and abetting the president's fraudulent scheme. The customers' suit for fraud is grounded on the auditors' failure to conduct a proper audit under generally accepted auditing standards and, therefore, on failure to discover the fraudulent scheme.

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