The full case caption appears at the
end of this opinion. OAKES, Senior Circuit Judge: I. Introduction Plaintiffs-appellants AUSA Life Insurance Company, Bankers United Life Assurance Company, Crown Life Insurance Company, General Services Life Insurance Company, Life Investors Insurance Company of America, Modern Woodmen of America, Monumental Life Insurance Company, The Mutual Life Insurance Company of New York, and The Prudential Life Insurance Company of America (collectively, “insurance companies” or “investors”) appeal from the dismissal of their Securities Act and other claims against Ernst & Young (“E & Y”) after a bench trial in the United States District Court for the Southern District of New York (William C. Conner, Judge). II. Facts The appellants are insurance companies that invested in the securities of JWP, Inc., a company which ultimately went belly-up, causing the appellants to lose most of their investments.
[FOOTNOTE 1] The appellee is the accounting firm that served as the independent auditor for JWP from 1985 through 1992, the period during which the appellants invested in JWP and the period during which the allegedly fraudulent activity was occurring. The appellants made their initial purchases of JWP’s notes in November of 1988. Through March 1992, they purchased additional JWP notes, the investments totaling $149 million. The notes were purchased in accordance with agreements (“Note Agreements”) which included, among other things, the financial representations made by JWP at the time of the notes’ issuances, future procedures to which JWP agreed to adhere for certifying JWP’s maintained financial viability, procedures to be followed in the event of a default on the notes, and the like. In purchasing the notes, appellants relied on JWP’s past financial statements, including annual reports certified by E & Y. These financial statements were required, under the Note Agreements, to be kept in accordance with generally accepted accounting principles (“GAAP”). Also, at the time of each annual audit by E & Y, E & Y was required under the Note Agreements to furnish to JWP a letter for JWP to transmit to noteholders,
[FOOTNOTE 2] referred to as a “no-default certificate” or a “negative assurance letter,” which stated that E & Y had audited JWP’s financial statements and that JWP was in compliance with the financial covenants in the Note Agreements. In this instance and consistently, E & Y’s statements about JWP’s financial health were less than accurate and were not always in accordance with GAAP or GAAS (“generally accepted auditing standards”). However, E & Y did not fail to notice that often JWP’s financial representations about itself were not in accordance with GAAP; rather, E & Y consistently noticed, protested, and then acquiesced in these misrepresentations:
E & Y’s failure lay in the seeming spinelessness of John LaBarca [the partner in charge of the JWP audit] and the other E & Y accountants in their dealings with JWP, and particularly with its CEO, Ernest Grendi . . . . Grendi almost invariably succeeded in either persuading or bullying them to agree that JWP’s books required no adjustment. Part of the problem was undoubtedly the close personal relationship between Grendi and LaBarca. Grendi had been a partner of LaBarca in E & Y’s predecessor firm and they continued to be good friends, regularly jogging together in preparation for the New York City Marathon.
AUSA, 991 F. Supp. at 248. “It became a well-worn inside joke to refer to the lax accounting standards at JWP as “EGAAP,” an acronym for Ernest Grendi’s Accepted Accounting Practices.” Id. at 253. JWP rapidly expanded between 1984 and 1992 with many aggressive acquisitions. The expansion was mainly financed by private placements of debt securities, which put JWP in an increasingly leveraged position. JWP’s final, fatal acquisition was that of Businessland, Inc., in 1991. Businessland was a retailer of computers and a supplier of software. It had lost an average of ten million dollars a month over the ten months prior to the acquisition, and its auditors had issued a “going concern” qualification on its most recent audited financial statement, which indicated that the auditors doubted the company could survive. Notwithstanding the gloomy financial picture, JWP executives saw potential. They believed that Businessland’s structure could be converted into that of a “value-added” systems integrator; they thought that Businessland could be meshed into JWP’s existing business which was heavily involved in installing wiring for computer networks; and they intended to capitalize on Businessland’s trained sales force and existing clientele. Unfortunately, this ambitious business venture did not evolve as envisioned. Upon JWP’s acquisition of Businessland, JWP was forced to advance money to Businessland to meet the latter’s operating expenditures. As well, the planned closure of most of Businessland’s retail stores took longer than was initially anticipated. During the same general time period (the early 1990s), the retail computer market was the battleground for the “PC price wars,” periods of intense competition, on bases including price. To nail the coffin shut, there was a downward trend in office construction which negatively impacted the electrical construction division of JWP. In early 1992, David Sokol, JWP’s new President and Chief Operating Officer, took note of what appeared to be serious accounting irregularities in JWP’s records and statements. In August of 1992, JWP retained Deloitte & Touche (“D & T”), another major accounting firm, to review thoroughly JWP’s books and E & Y’s audits. D & T concluded that JWP’s annual reports for 1990-1992 should be restated to reduce the 1990 after-tax net income by 15% (from $59 million to $50 million), that the 1991 after-tax income should be reduced by 52% from $60 million to $29 million, and that 1992 loss of $612 million with a corresponding net worth of negative $176 million should be reflected. E & Y concurred. JWP was able to continue paying the interest due on its notes through 1992, and JWP made partial payments through April 1993. However, JWP ultimately defaulted and was placed in involuntary bankruptcy in December 1993. Some appellants sold their notes at a huge loss in 1993 and 1994, and some appellants partially exchanged some of their notes for cash and securities of a lesser total value than the original notes. At the end of the day, appellants sustained at least a loss of approximately $100 million in lost principal and unpaid interest. Over twenty lawsuits were filed as a result of JWP’s demise. A consolidated suit, comprised of plaintiffs who had purchased JWP common stock in the open market between May 1, 1991, and October 2, 1992, was settled, as was a suit comprised of those who had sold their businesses to JWP in exchange for JWP common stock. Two actions remained: the instant one and AUSA Life Ins. Co. v. Andrew T. Dwyer, 94 Civ. 2201 (WCC). The latter suit appears to be closed, having been settled or otherwise disposed of. See Civil Docket for Case #: 94-CV-2201 (S.D.N.Y. Docket as of March 15, 2000). This case remains. In the district court, plaintiffs made essentially three categories of claims against E & Y: federal securities law claims, New York common law claims for fraud, and negligent misrepresentation claims. A bench trial was conducted over eleven weeks, and, at the conclusion of the trial, after post-trial briefs and proposed findings and conclusions were submitted by the parties, the district court issued an Opinion and Order detailing its findings and dismissing the plaintiffs’ claims. See AUSA, 991 F. Supp. 234. At the same time, the court issued extensive Findings of Fact. See Findings of Fact, Joint Appendix at 2466, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)). The court found the following: From 1988 to 1991, E & Y was aware of serious accounting irregularities with respect to the small tool inventories which increased JWP’s net income, but E & Y did not insist on the correction of the irregularities. See AUSA, 991 F. Supp. at 242. E & Y knew that JWP was recording anticipated future tax benefits of net operating loss (NOL) carryforwards in clear violation of GAAP (presumably for the “purpose of dressing up its year-end consolidated balance sheet”), yet E & Y saw “nothing wrong” with this practice. Id. After discovering more accounting abuses as to NOLs which also seemed to inflate current net operating income, E & Y again “issued unqualified audit reports for the years in question,” those years including the late 1980s. Id. at 243. E & Y was also aware of and acquiesced in numerous other accounting abuses in claims and receivables which inflated JWP’s earnings and assets at least from 1989 forward. See id. at 243-46. In sum, “[t]he annual no-default letters issued by E & Y were . . . false in that they certified that JWP’s books had been kept in accordance with GAAP, which E & Y knew was untrue.” Id. at 246. The court determined that the plaintiffs established the materiality and reliance elements of federal securities law violations. See id. at 246-47. The court determined that it was questionable whether the plaintiffs established the scienter element of both the federal claims and the state claims. See id. at 247-248, 252. The court found definitively that the plaintiffs did not prove the causation element of both the federal and state law claims because the plaintiffs were not able to show loss causation — the plaintiffs could not establish that E & Y’s egregious accounting idiosyncracies caused plaintiffs’ losses because JWP ultimately imploded due to Businessland’s operations and the uncontrollable effects of the PC price wars. See id. at 248-50, 252. The court found that the financial devastation of JWP was a “result of unforeseeable and independent post-audit events and not because of fiscal infirmities which were concealed by JWP’s misleading financial statements.” Id. at 250. With respect to the negligent misrepresentation claims, the court further found both that privity and causation were lacking. See id. at 252-53. This appeal followed. III. Discussion Appellants based their claims on Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b); the rules and regulations promulgated thereunder, including SEC Rule 10b-5; and the common law. Section 10(b) provides that
It shall be unlawful for any person, directly or indirectly, . . . . (b) To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. 78j(b). To prove a violation of 10(b), a plaintiff must prove (1) damage to the plaintiff, (2) which was caused by reliance on the defendant’s misrepresentations or omissions of material facts, (3) which were made with scienter — intent to deceive, manipulate, or defraud, or reckless disregard for the resultant deception, (4) which were made in connection with the purchase or sale of securities, and (5) which were furthered through the defendant’s use of the mails or a national securities exchange. See Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir. 1992). SEC Rule 10b-5 provides that
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. 240.10b-5. To establish a violation of Rule 10b-5, the plaintiff must prove that
in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material misrepresentation or omitted to disclose material information and that plaintiff’s reliance on defendant’s action caused [plaintiff] injury.
Press v. Chem. Invest. Servs. Corp., 166 F.3d 529, 534 (2d Cir. 1999) (internal quotations and citation omitted). With respect to the common law claims, plaintiffs made both common law fraud and deceit claims and common law claims for negligent misrepresentations and omissions. In New York state, to prove a fraud claim, a plaintiff must prove “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421, 668 N.E.2d 1370, 1373, 646 N.Y.S.2d 76, 80 (1996). With respect to negligent misrepresentation, the Court of Appeals of New York has stated that
[A] negligent statement may be the basis for recovery of damages, where there is carelessness in imparting words upon which others were expected to rely and upon which they did act or failed to act to their damage, but such information is not actionable unless expressed directly, with knowledge or notice that it will be acted upon, to one to whom the author is bound by some relation of duty, arising out of contract or otherwise, to act with care if he acts at all.
White v. Guarente, 43 N.Y.2d 356, 363-64, 372 N.E.2d 315, 319, 401, 401 N.Y.S.2d 474, 478 (1977) (internal citation omitted). The appellants appeal on five bases, some of which pertain to the federal claims, some of which pertain to the state claims, and some of which pertain to both. These bases boil down to three arguments with the district court’s determinations: (1) the district court’s refusal to find causation between E & Y’s actions or inactions and the appellants’ losses; (2) the district court’s standards for assessing the transaction causation and scienter elements of the appellants’ federal securities claims and the appellants’ common law fraud claims; and (3) the district court’s finding that there was not a near-privity relationship between the investors and E & Y. We hold that transaction causation was established. We vacate and remand the loss causation determination. We hold that scienter was established. We reverse the privity determination. A. Standard of Review As above stated, this case was tried without a jury before United States District Court Judge Conner. In such a posture, the court’s determinations of fact will not be disturbed unless they are “clearly erroneous.” See Scribner v. Summers, 84 F.3d 554, 557 (2d Cir. 1996). Questions of law are reviewed de novo, as are mixed questions of law and fact. See id. at 557. B. Causation We agree with the district court that E & Y did not perform the most efficacious accounting in this situation. See AUSA, 991 F. Supp. at 253-254 (“John LaBarca [senior E & Y accountant] and his associates apparently lacked the backbone to stand up to the intransigent and intimidating Ernest Grendi and insist upon the changes necessary for compliance with GAAP”). However, we part company with the district court on its determination that it was “unforeseeable post-audit developments [that] caused JWP’s insolvency and default even if its financial condition had been fully as healthy as was represented in those reports.” Id. at 254. Causation in this context has two elements: transaction causation and loss causation. See Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380-381 (2d Cir. 1974). Loss causation is causation in the traditional “proximate cause” sense — the allegedly unlawful conduct caused the economic harm. See id. at 380. Transaction causation means that “the violations in question caused the appellant to engage in the transaction in question.” See id. at 380. Transaction causation has been analogized to reliance. See Currie v. Cayman Resources Corp., 835 F.2d 780, 785 (11th Cir. 1988). 1. Transaction Causation The district court determined that “It is by no means clear that plaintiffs have proven even transaction causation . . . . However, this Court need not resolve the issue of transaction causation because the evidence definitively fails to establish the necessary loss causation.” AUSA, 991 F. Supp. at 249-50. There is ample evidence in the record that the appellants relied on E & Y’s certifications of the financial soundness of JWP both in making their note purchases and in continuing to hold the notes. This was not a situation where the notes were marketed en masse, and E & Y had a barely tangential role in the transaction. Rather, the purchasers of these private placement notes specifically required the audits of E & Y before purchasing the notes and as a condition of their purchase. The district court stated as much in the findings of fact: “If the plaintiffs had known the lack of quality of JWP’s notes at the time of the offerings, they likely would not and in some cases could not have bought them.” See 447, Findings of Fact, Joint Appendix at 2606, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (WCC)).[FOOTNOTE 3] Applying to these facts the legal definition of transaction causation, we find that transaction causation was established.[FOOTNOTE 4] Cf. Manufacturers Hanover Trust Co. v. Drysdale Secs. Corp., 801 F.2d 13, 20 (2d Cir. 1986) (describing accountant’s misrepresentations which led financial institutions to do business with a financially unsound company). 2. Loss Causation Addressing loss causation is a more difficult endeavor. How far back should the line be drawn in the causal chain, before which, “because of convenience, of public policy, of a rough sense of justice,” proximate cause cannot be found? Palsgraf v. Long Island R. Co., 248 N.Y. 339, 352, 162 N.E. 99, 103 (1928). In the vernacular, where does the buck stop? We agree with most of the district court’s factual determinations, set out both in the opinion — AUSA, 991 F. Supp. 234 — and in the court’s “Findings of Fact,” Joint Appendix at 2466, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)). Those with which we do not agree are not clearly erroneous. However, given the true nature of the “loss causation” determination, as fully discussed below, the district court did not make all of the specific findings of fact required. We therefore vacate the court’s determination and remand for reconsideration and more pertinent factual findings in light of this opinion. a. The District Court’s Factual Determinations In the section of the “Findings of Fact” labeled “Loss Causation,” the district court made findings focusing on whether the misrepresentations on the financial statements available to the investors prior to their note purchases pertained to JWP’s cash flow, which “is the source of interest and principal payments to lenders.” 453, Findings of Fact, Joint Appendix at 2606, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)); see 451-62, id. at 2607-2611. However, given the legal definition of loss causation, these factual determinations are not the most relevant. Since loss causation is causation in the traditional “proximate cause” sense, an examination by the district court of different facts relevant to whether the allegedly unlawful conduct caused the economic harm would have been more appropriate. The following piecemeal factual determinations made by the district court are relevant: JWP was in default on its notes because it was in violation of the financial covenants in the Note Agreements. See 440, id. at 2607. E & Y knew of these violations, but assisted in concealing them. See 506, id. at 2625. This default could have allowed the plaintiffs to accelerate the due date on the notes. See 471, id. at 2613. Accurate accounting, auditing, and reporting would have at least made the plaintiffs aware of the default and precarious financial position of JWP, though, at oral argument, the appellee maintained that JWP would have had thirty days to cure the default before the plaintiffs could accelerate the notes. At oral argument, the appellee also contended that, had the investors been made aware of the default, they would have waived it, and it would have become a non-issue. We need not speculate on that here. Suffice it to say that the factual findings establish that JWP was in default on its notes prior to its acquisition of Businessland, and the investors would have known of such had E & Y correctly performed their duties. True, the district court found that “JWP would not have defaulted on its debt obligations but for its acquisition of Businessland, which turned out to be a veritable sinkhole for cash.” AUSA, 991 F. Supp. at 250. But, as discussed above, had JWP’s financial situation been accurately represented by E & Y, and had E & Y revealed the undisputed GAAP violations, JWP would have been in default on its notes prior to its acquisition of Businessland. Therefore, the acquisition of Businessland could not have taken place without a cure of the default or the investors’ waivers of the default. b. The District Court’s Application of Law to Fact The appellee maintains — and the district court agreed — that the events leading to the demise of JWP and the loss of appellants’ investments were due to external events for which appellee cannot be held accountable, and therefore loss causation was not established. The district court said specifically that
JWP’s insolvency and resulting default on its note obligations were caused not by the differences between its actual financial condition and that reflected in its audited annual reports, but by much more significant factors, including JWP’s disastrous acquisition of the failing Businessland, in combination with the downturn in commercial construction and fierce competition in the PC market.
Id. at 250. We disagree, however, with this conclusion of the district court to the extent that the district court did not fully consider the legal definition of “loss causation” and the requisite factual points in determining whether loss causation was established. A good starting point for our analysis of this case is Marbury Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir. 1980). In Marbury Management, the plaintiffs were purchasers of stock who sued the brokerage house (Wood, Walker) and the brokerage employee (Alfred Kohn) from whom they purchased the stock. Kohn, who induced the plaintiffs to purchase the stock and to continue to hold it, was not a licensed, registered representative broker as he had represented to the purchasers. Instead, he was a trainee. See id. at 707. The stock lost value, and the plaintiffs, upon discovering that the selling employee was not a “security analyst,” as his business card portrayed, sued for the money lost on the securities. See id. The district court dismissed the plaintiffs’ claims as to the brokerage firm, holding that the plaintiffs failed to prove scienter vis-a-vis either conscious wrongful participation or negligence in supervision. See id. With respect to Kohn, the district court held him liable under 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b). See id. Kohn and the plaintiffs cross-appealed, and this court reversed the judgment in favor of Wood, Walker, and affirmed the judgment against Kohn. See id. A dissent, see id. at 716-723, argued that the majority ignored the fact that
the injury averred must proceed directly from the wrong alleged and must not be attributable to some supervening cause. This elementary rule precludes recovery in the case at bar since Kohn’s misrepresentations as to his qualifications as a broker in no way caused the decline in the market value of the stocks he promoted.
Id. at 717. The majority, however, held that this was simply a matter of imposing liability for losses resulting from fraudulent representations that “induce[d] the retention of securities as an investment” and resulted in “damages flowing from retention.” Id. at 709. The majority focused on both the fact that the unlicensed seller caused the plaintiffs to purchase securities that they otherwise might not have purchased and that the seller also encouraged the plaintiffs to hold the securities past a point at which they might have otherwise sold the securities. See id. at 709-10. Manufacturers Hanover Trust Co., 801 F.2d 13, relied upon Marbury. We there defined our task as the quantification of “the role of the accountant, and the scope of his liability, in presenting to the financial community information about a financial institution seeking to attract or maintain business in transactions involving agreements to repurchase (or resell) government securities.” Id. at 18. We noted that the requirement of loss causation “derives from the common law tort concept of ‘proximate causation.’” Id. at 20 (internal citation omitted). Going further, we relied on the language in Marbury, 629 F.2d at 708, which provided that loss causation “‘in effect requires that the damage complained of be one of the foreseeable consequences of the misrepresentation.’” Manufacturers Hanover Trust, 801 F.2d at 21 (internal citations omitted). Returning, then, to Marbury, while the complained of “fraud,” as it were, in Marbury was factually different from that here — an unlicensed seller falsely purporting to be registered versus the auditor falsely certifying financial health — the analysis in Marbury is broad enough to apply to our situation. We were concerned in Marbury with the facts that the fraud both induced the investors to make the investment and induced the investors not to abandon it. See Marbury, 629 F.2d at 709-10. The relatively tangential feel to the fact that the fraud causation was traced to a career misrepresentation disappeared once the court considered the context of the fact and its import in the causal chain. The same can be said here. The majority in Marbury analyzed cases — including David v. Belmont, 291 Mass. 450, 197 N.E. 83 (1935); Rothmiller v. Stein, 143 N.Y. 581, 38 N.E. 718 (1894); and Continental Ins. Co. v. Mercadante, 222 A.D. 181, 225 N.Y.S. 488 (1st Dept. 1927) — which found liability premised on assurances by a broker or seller which induced continued retention of a stock which ultimately plummeted in value, regardless of the cause of the final plunge in price. Id. at 709. These cases are equally applicable here. The careful analysis in Continental Insurance Co., while certainly not binding, is worth noting. In that case, the plaintiff insurance companies sued the defendants (apparently stock brokers or company officers) for both inducing the plaintiffs to buy and inducing the plaintiffs to continue to hold securities that later became worthless. See Continental Ins. Co., 222 A.D. at 182, 225 N.Y.S. at 489-90. The defendants induced the plaintiffs to buy and retain the securities by conveying false financial information as to the earnings and solvency of the underlying obligor on the securities. See id. The court considered whether the defendants could be held liable for the plaintiffs’ decision not to sell the securities prior to the underlying obligor’s default when the plaintiffs presented no proof that they intended to sell the securities until the defendants told them not to sell. See Id. at 184, 225 N.Y.S. at 491-92 (“We come, then, to the more difficult question of whether this inaction can be said to have been caused by the false representations, in view of the circumstances that the plaintiffs had not previously determined upon action.”). In resolving the issue, the court quoted Smith v. Kay, 7 H.L.C. 750, 770 (Lord Cranworth) (1859)
It does not lie in the mouths of these persons to say what he would have done if they had not concocted the fraud, and if there had never been any deception at all practiced. That is not the question. The question rather is what this young man would have done, if he had known all that had really taken place.
Continental Ins. Co., 222 A.D. at 185, 225 N.Y.S. at 492. Moreover, the court noted that
The defendants intended that their misrepresentations should cause the plaintiffs to keep their bonds, desist from further inquiry, and remain passive . . . . Where [the defendant] accomplishes his dishonest purpose, and his misrepresentation can fairly be said to have contributed to this result, he should compensate for the loss which he intended to cause, and which by fraudulent conduct he induced. The test should not be whether the defrauded party might conceivably still have lost, had the fraud not been practiced, but whether there was a reasonable probability that the fraud actually accomplished the result it was intended to bring about.
Continental Ins. Co., 222 A.D. at 186-87, 225 N.Y.S. at 493-94. This line of reasoning can be extended to our situation. If the question is “did the fraud actually accomplish the result it was intended to achieve,” the answer is yes: E & Y certified financial statements that induced the investors not to abandon JWP. As in Continental Insurance Co., it is not determinative that the insurance companies did not present evidence that they were not intending to purchase more of JWP’s notes or that they were intending to unload their JWP notes until E & Y provided rosy financial statements. See id., 222 A.D. at 186-87, 225 N.Y.S. at 494. Rather, it is sufficient to say that “there was a reasonable probability that the fraud actually accomplished the result it was intended to bring about.” Id. The district court below primarily relied upon Citibank, N.A. v. K-H Corp., 968 F.2d 1489 (2d Cir. 1992) and First National Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994) in reaching its conclusion that loss causation was not proved. See AUSA, 991 F. Supp. at 249. The court also cited Revak v. SEC Realty Co., 18 F.3d 81 (2d Cir. 1994). See AUSA, 991 F. Supp. at 250. A careful reading of these cases, however, indicates that they do not compel the outcome reached by the district court. In Citibank, plaintiff Citibank agreed to extend credit in the amount of approximately $140 million to Grabill Aerospace Industries, Ltd. (“GAIL”) for the acquisition from the defendants of aerospace subsidiaries. See 968 F.2d at 1491. Citibank was not told that there was a $7 million three-week loan existing between GAIL’s sole stockholder and the defendants that would technically violate the credit agreement Citibank had agreed to with GAIL. See id. at 1492. When GAIL later defaulted to Citibank and Citibank was unable to recover the loaned amount from the sale of GAIL’s collateral, Citibank filed suit against the defendants for their role in concealing the initial fraud. See id. at 1492-93. Specifically, Citibank maintained that the defendants, by delivering to Citibank at the closing opinion letters from defendants’ General Counsel indicating that the full closing price was received (as opposed to indicating that the full price less the $7 million loan was received), assisted in inducing Citibank to participate in this losing, fraudulent transaction. This, Citibank contended, violated, among other things, Section 10(b) of the Securities and Exchange Act of 1934, and constituted common law fraud. See id. at 1492. The district court granted the defendants’ motion to dismiss, basing its decision in part on the determination that the plaintiffs failed to allege proximate causation between the default of GAIL and the undisclosed $7 million three-week loan. See id. at 1493. With respect to the loss causation qua proximate causation issue, the Second Circuit Court of Appeals affirmed. See id. at 1495-96. We did not create a new test of causation; rather, we re-articulated that “this Court . . . requires the plaintiff to allege that the misrepresentation . . . was the cause of the actual loss suffered.” Id. at 1495. More specifically, we recognized that “[w]e have on occasion likened loss causation to the tort concept of proximate cause, because, similar to proximate cause, in order to establish loss causation, a plaintiff must prove that the damage suffered was a foreseeable consequence of the misrepresentation.” Id. (internal citation omitted). We held that “because the fourth amended complaint did not properly allege proximate causation between the alleged fraud and the loss Citibank subsequently suffered, it failed to satisfy the loss causation requirement under 10(b) and Rule 10b-5.” Id. at 1496. In the instant case, however, the complaint did allege proximate causation, and, given the facts found by the district court and discussed above, proximate cause was established. For example, in 136 and 137 of the complaint, the plaintiffs alleged causation, claiming that E & Y violated GAAP, concealed accounting abuses, and did other manipulative things which resulted in the actual loss by preventing “the plaintiffs from exercising their rights and remedies under the note purchase agreements, which exercise would have inhibited JWP from continuing to raise financing for JWP’s acquisitions and operations; and . . . avoid[ing] the acceleration of outstanding notes owned by plaintiffs.” The plaintiffs in Citibank made no such parallel allegations. In First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994), also relied upon by the district court, the plaintiff-appellant was First Nationwide Bank (“FNB”). It had done business with commercial mortgage broker defendant Gelt Funding Corp. and Gelt principals, defendants Gross and Herzka. Gelt served as the mortgage broker between FNB and borrowers for nonrecourse loans of approximately $900 million. See id. at 765-66. Given that the loans were nonrecourse, the value of the collateral property was critical to FNB’s decisions to make the loans. See id. at 766. After a higher number of the Gelt- brokered loans defaulted than other loans, FNB filed suit against Gelt, Gross, Herzka, and other borrowers, alleging that the defendants had engaged in a conspiracy in violation of RICO, 18 U.S.C. 1962(c) and (d) and other pendent state laws. See id. at 765. FNB alleged that “the defendants misrepresented the value of properties pledged as collateral to secure nonrecourse loans, and thereby fraudulently induced FNB to make loans it otherwise would not have made.” Id. The district court dismissed the claim under Federal Rule of Civil Procedure 12(b)(6). See id. The court held that the misrepresentation allegedly prohibited under RICO was not the proximate cause of the injuries. See id. at 766-67. On appeal, the Second Circuit Court of Appeals affirmed, agreeing that FNB did not adequately plead injury and proximate cause. In affirming, we agreed that the three-part test articulated by the district court was a useful guide in evaluating FNB’s proximate cause allegations. See id. at 770. The test stated that
[A] borrower who misstates the value of loan property or its rental income proximately causes injury to a bank when (1) the misrepresented value of the property was substantially above its actual value at the time of the misrepresentation, (2) the injury was sustained soon after the misrepresentation, and (3) external factors did not contribute to the injury.
Id. (quoting the district court). With regard to this test, we said that
While these factors do not constitute an exhaustive list of the considerations that go into the proximate cause calculus, they do provide a useful guide for evaluating the sufficiency of [the] proximate cause allegations. In determining whether the required directness is present in the context of a fraudulently induced loan, important considerations are the magnitude of the misrepresentations, the amount of time between the loan transaction and the loss, and the certainty with which the loss can be attributed to the defendant’s conduct.
Id. We went on to determine that the methodology employed by FNB in assessing the magnitude of the defendants’ overstatements of income was faulty, and the conclusions thereby reached defied logic. See id. at 772. Further, we found that FNB did not allege injury sufficiently close in time to the misrepresentations to infer a nexus between the two. See id. Tying the temporal connection to the presence of intervening factors — namely, the real estate market collapse during the time when many of the borrowers defaulted — we said that
When a significant period of time has elapsed between the defendant’s actions and the plaintiff’s injury, there is a greater likelihood that the loss is attributable to events occurring in the interim. Similarly, when the plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud decreases.
Id. The significant period of time between the alleged misrepresentations and the loss, coupled with the external factor of the real estate market crash, supported the conclusion that the alleged misrepresentations were not a substantial cause of FNB’s injury. See id. Nothing in our determination in First Nationwide precludes a different outcome on our different facts. Rather, we specifically noted there that we did not intend to bar a plaintiff from successfully pleading “proximate cause when the claim follows a market collapse.” Id. What is particularly important here, however, is the proximate cause and foreseeability language in First Nationwide Bank. We used the phrase “proximate cause” interchangeably with “loss causation,” and we said that the plaintiff “must also show that the misstatements were the reason the transaction turned out to be a losing one.” Id. at 769. By way of guidance on the inquiry, we said that
The purpose of the proximate cause requirement is to fix a legal limit on a person’s responsibility, even for wrongful acts. Central to the notion of proximate cause is the idea that a person is not liable to all those who may have been injured by his conduct, but only to those with respect to whom his acts were “a substantial factor in the sequence of responsible causation,” and whose injury was “reasonably foreseeable or anticipated as a natural consequence.” . . . Many considerations enter into the proximate cause inquiry including “the foreseeability of the particular injury, the intervention of other independent causes, and the factual directness of the causal connection.”
Id. at 769 (internal citations omitted). The district court below also cited Revak v. SEC Realty Corp., 18 F.3d 81, 89-90 (2d Cir. 1994) to support the conclusion that
It would be manifestly unfair, as well as contrary to law, to hold E & Y jointly and severally liable to reimburse in full losses that JWP’s noteholders sustained as a result of unforeseeable and independent post-audit events and not because of fiscal infirmities which were concealed by JWP’s misleading financial statements.
AUSA, 991 F. Supp. at 250. While we do not disagree with the legal principles set out in Revak, we disagree with its application by the district court in this case. In Revak, we said that
the only detriment asserted by plaintiffs is that they “were saddled with notes and deeds of trust whose default terms were far more onerous than they had been prepared to agree to.” Accordingly, plaintiffs have not identified any loss attributable to the changed terms of the debt instruments, much less a loss that was the direct result of such changes.
18 F.3d at 90. The same cannot be said in this case. The GAAP violations and the resulting concealments by E & Y were not latent faults that never manifested themselves, as were the misrepresentations about the default terms of the notes in Revak. Rather, the misrepresentations and concealed facts did become problematic, in part by allowing JWP to continue to make acquisitions because its default was never acknowledged. Having been told that JWP was in default on its notes would have at least made the investors aware of JWP’s true financial picture. Whether or not the investors would have then waived the default and allowed the aggressive acquisition strategy to continue is not a question for us to ponder. Suffice it to say that the district court’s reliance on Revak in this situation is misplaced because the fraud and misrepresentations here were not latent time bombs, as in Revak, but rather were bombs the fuses of which were burning brightly. The appellants cite, among other cases, Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57 (2d Cir. 1985); DiLeo v. Ernst & Young, 901 F.2d 624 (2d Cir. 1990); McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992); and Bastian v. Petren Resources Corp., 892 F.2d 680 (7th Cir. 1990). None of these cases mandate an outcome different than that we have reached. Bloor involved a bankruptcy trustee claiming that the corporate counsel of a bankrupt company should be liable for the company’s ultimate demise. See generally Bloor, 754 F.2d 57. The securities laws would not reach the counsel’s conduct, we determined, because “the failure of the corporation to use proceeds wisely or the theft of corporate funds by officers was hardly a reasonably forseseeable result, let alone the direct result, of any of [the law firm's] alleged actions.” Id. at 62. DiLeo v. Ernst & Young, 901 F.2d 624 (2d Cir. 1990), can be distinguished as well. In that case, the purchasers of securities of a company that suffered financial devastation sued the accountant for that company. The Seventh Circuit Court of Appeals, in affirming the district court’s dismissal of the plaintiffs’ claims, noted that the complaint did not identify financial problems or issues that the accountant should have caught. See DiLeo, 901 F.2d at 627. The court found that a claim for fraud was not pled, and the court stated that
The story in this complaint is familiar in securities litigation. At one time the firm bathes itself in a favorable light. Later the firm discloses that things are less rosy. The plaintiff contends that the difference must be attributable to fraud. “Must be” is the critical phrase, for the complaint offers no information other than the differences between the two statements of the firm’s condition . . . . Investors must point to some facts suggesting that the difference is attributable to fraud . . . . That ingredient is missing in the [plaintiffs'] complaint.
Id. at 627-28 (internal citations omitted). As discussed above, the district court in this case found that E & Y knew about JWP’s accounting abuses, and ultimately E & Y blessed those abuses, despite misgivings, by certifying that various financial documents were in accordance with GAAP and that certain covenants in the Note Agreements were not violated. This is not DiLeo, where the court was asked to accept on blind faith that there “must have been fraud.” To where the above discussion brings us is: Loss causation is a separate element from transaction causation, and, in situations such as the instant one, loss causation cannot be collapsed with transaction causation. See, e.g., First Nationwide Bank, 27 F.3d at 769. Loss causation embodies notions of “the common law tort concept of ‘proximate causation.’” Manufacturers Hanover, 801 F.2d at 20; see Citibank, 968 F.2d at 1495. Foreseeability is tied into loss causation, as well. See Manufacturers Hanover, 801 F.2d at 21. We have consistently said that “loss causation in effect requires that the damage complained of be one of the foreseeable consequences of the misrepresentation.” Manufacturers Hanover, 801 F.2d at 21 (internal citations omitted); accord Citibank, 968 F.2d at 1495 (citing Manufacturers Hanover). However, Prosser and Keeton on the Law of Torts [FOOTNOTE 5] states that “it must be repeated that the question [of foreseeability or reasonably foreseeable risk] is primarily not one of causation, and never arises until causation has been established.” W. Page Keeton, et al., Prosser and Keeton on the Law of Torts 43, at 280-81 (5th ed. 1984). In essence, this position contends that the foreseeability question need not be reached until causation is established, and foreseeability should then be used as a curb on all-encompassing liability, as a determination “of the fundamental policy of the law, as to whether the defendant’s responsibility should extend to such results.” Id. at 281. This position strikes us as entirely sensible. However, given the language in Citibank and Manufacturers Hanover that seems to collapse the foreseeability inquiry into the proximate cause inquiry, and given that we are disinclined to retreat from an analysis that we have consistently employed, we will continue to treat loss causation qua proximate causation as a concept which embodies notions of foreseeability. In Paragraph 506(e) of the district court’s Findings of Fact, the court states that the plaintiffs’ reliance on JWP’s annual audited reports for the years prior to their purchases “was not a proximate cause of the plaintiffs’ losses.” Joint Appendix at A-2625. A proximate cause determination in situations where “circumstances permit varying inferences as to the foreseeability of the intervening act” is generally a factual determination. See Woodling v. Garrett Corp., 813 F.2d 543, 555 (2d Cir. 1987). A foreseeability determination in and of itself is also a question of fact for resolution by the finder of fact. See United States v. Molina, 106 F.3d 1118, 1121 (2d Cir. 1997); see also Snyder v. Four Winds Sailboat Centre, Ltd., 701 F.2d 251, 253 (2d Cir. 1983). But see United States v. Ekwunoh, 12 F.3d 368, 372 (2d Cir. 1993) (Newman, Chief Judge, concurring) (“The ‘reasonable foreseeability’ standard is a legal standard that needs to be applied to the specific facts of a case. Any standard involving a determination of what is reasonable involves a legal standard. Application of a legal standard to facts is normally an issue of law.”). However, we do not find in the record a discussion of facts indicating that the district court undertook to make findings of fact specifically pertinent to the foreseeability component of the proximate cause inquiry. The foreseeability query is whether E & Y could have reasonably foreseen that their certification of false financial information could lead to the demise of JWP, by enabling JWP to make an acquisition that otherwise would have been subjected to higher scrutiny, which led to harm to the investors. [FOOTNOTE 6] Given that the district court did not make factual findings as to foreseeability specifically, we remand for more factual findings. [FOOTNOTE 7] In accordance with the factual findings, the court is then instructed to reconsider proximate cause in the context of its factual determinations on foreseeability. By way of offering a tow rope to assist the district court through this Serbonian Bog,[FOOTNOTE 8] we note the following: A foreseeability finding turns on fairness, policy, and, as before, “a rough sense of justice.” Palsgraf, 248 N.Y. at 352, 162 N.E. at 103. “A ‘reasonably foreseeable act’ might well be regarded as an act that a reasonable person who knew everything that the defendant knew at the time would have been able to know in advance with a fair degree of probability.” United States v. LaCroix, 28 F.3d 223, 229 (1st Cir. 1994). Where foreseeability is less than immediately obvious, it is appropriate to make a judgment based on “some social idea of justice or policy.” First Nationwide Bank, 27 F.2d at 770; id. at 772 (“proximate cause determination necessarily involves a component of policy”). These considerations should be coupled with the recognition that proximate cause is a common law concept, and such concepts evolve in a manner that reflects “economic, social, and political developments.” Cullen v. BMW of North America, Inc., 691 F.2d 1097, 1102 (2d Cir. 1982) (Oakes, J. dissenting). Therefore, it is appropriate to examine the underlying policy of the securities laws involved and the climate of securities regulation as it has evolved and as it currently exists. “During the Great Depression, Congress enacted the 1933 and 1934 [Securities] Acts to promote investor confidence in the United States securities markets and thereby to encourage the investment necessary for capital formation, economic growth, and job creation.” Private Securities Litigation Reform Act of 1995, P.L. 104-67, S. Rep. No. 104-98 (June 19, 1995), reprinted in 1995 U.S.C.C.A.N. 679, 683. The 1934 Act was intended “to impose regular reporting requirements on companies whose stock is listed on national securities exchanges.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976). This was part of an overall broad scheme of federal regulation enacted in the early 1930s, through which Congress wanted investors to have access to comprehensive, accurate information about the companies in which they were investing.[FOOTNOTE 9] See id. (citing legislative reports of both the Securities Act of 1933 and the Securities Act of 1934). In recent years, concern over potentially meritless securities lawsuits filed by “professional” plaintiffs abounded. See S. Rep. No. 104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 683. It was feared that these suits were filed in the hopes of obtaining quick settlements by anxious defendants who were adverse to litigation. See id. It was further feared that these suits and the potential resultant settlements would increase the cost of raising capital and would chill corporate disclosure. See id. Therefore, in response to these and other concerns, Congress enacted the Private Securities Litigation Reform Act of 1995 (the “1995 Act”).[FOOTNOTE 10] See Private Securities Litigation Reform Act of 1995, H.R. 1058, 104th Cong. (1995) (codified in various provisions of 15 U.S.C. 77 (1997)). The purposes of the 1995 Act are threefold: “(1) to encourage the voluntary disclosure of information by corporate issuers; (2) to empower investors so that they — and not their lawyers — exercise primary control over private securities litigation; and (3) to encourage plaintiffs’ lawyers to pursue valid claims for securities fraud and to encourage defendants to fight abusive claims.” See S. Rep. No. 104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 683. The first and the third of the purposes merit our consideration from a policy standpoint in addressing the instant factual situation. The first purpose makes clear that Congress continues to be concerned with disclosure. The third purpose indicates that Congress recognizes that not all plaintiffs’ claims are valid, plaintiffs are often disinclined to come forward and make otherwise valid claims, and defendants sometimes fail to aggressively fight abusive claims. These two considerations weigh in favor of finding loss causation has been established in the instant case. As to the first purpose, E & Y specifically hindered disclosure. As to the third purpose, though some might argue that the risk of abusive claims would increase should the district court ultimately find loss causation here, we disagree. Certainly there may be claims against an auditor that are meritless and abusive. However, this opinion, and a potential finding of loss causation by the district court on remand, will not open the barn door for such. The Restatement (Second) of Torts (1977), sheds light on foreseeability and causation in the instant case. Section 548A of the Restatement provides that “[a] fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance.” Id. at 106. Comment a to 548A helpfully provides that
Causation, in relation to losses incurred by reason of a misrepresentation, is a matter of the recipient’s reliance in fact upon the misrepresentation in taking some action or in refraining from it. . . . Not all losses that in fact result from the reliance are, however, legally caused by the representation. In general, the misrepresentation is a legal cause only of those pecuniary losses that are within the foreseeable risk of harm that it creates.
Id. at 106-7. Comment b 548A provides that
Pecuniary losses that could not reasonably be expected to result from the misrepresentation are, in general, not legally caused by it and are beyond the scope of the maker’s liability. This means that the matter misrepresented must be considered in the light of its tendency to cause those losses and the likelihood that they will follow. . . . In determining what is foreseeable as a result of the misrepresentation, the possibility of intervening events is not to be excluded altogether. Thus, when the financial condition of a corporation is misrepresented and it is subsequently driven into insolvency by reason of the depressed condition of an entire industry, which has no connection with the facts misrepresented, it may still be found that the misrepresentation was a legal cause of the recipient’s loss, since it may appear that if the company had been in sound condition it would have survived the depression, and hence that a loss of this kind might reasonably have been expected to follow.
Id. at 107. The oracular drafters of 548A further composed an illustration to assist us. Illustration 2 to 548A provides that
A, seeking to buy bonds for investment, approaches B. B offers A the bonds of X Oil Corporation, fraudulently misrepresenting its financial condition. In reliance upon these statements, A buys the bonds. After his purchase conditions in the oil industry become demoralized and as a result of financial losses the X Oil Corporation becomes insolvent. Because of the insolvency A suffers a pecuniary loss greater than that which would have resulted from the deterioration of conditions in the industry alone. It is found that if the financial condition of the Corporation had been as represented it would probably have weathered the storm and not become insolvent. B is subject to liability to A for the additional pecuniary loss resulting from the insolvency.
Id. at 108. While E & Y did not “offer” the insurance companies the bonds as directly as B offered A the bonds in the above illustration, E & Y knew the insurance companies were investors, at least after the insurance companies’ first notes purchases, and E & Y certified to the inaccurate conditions necessary for the insurance companies to be able to purchase the notes. Moreover, E & Y continued to conceal the fact that JWP was not in default, and E & Y continued to give its imprimatur to the misrepresentations in JWP’s financial reports. So while E & Y is not “B” in the above illustration to the extent that E & Y did not directly offer the notes to the insurance companies, E & Y is indisputably “B” to the extent that E & Y made the needed misrepresentations by giving the false statements the certified authority the insurance companies needed before they could invest in JWP notes. In David, 291 Mass. at 453, 197 N.E. at 85, the court stated that
If the defendant fraudulently induced the plaintiff to refrain from selling his stock when he was about to sell it, he did him a wrong; and a natural consequence of the wrong, for which he was liable, was the possibility of loss from diminution in the value of the stock from any one of numerous causes. Most, if not all, of the causes which would be likely to affect the value of the stock, would be acts of third persons, or at least conditions for which neither the plaintiff nor the defendant would be primarily responsible. * * * The defendant, if he fraudulently induced the plaintiff to keep his stock, took the risk of all such changes [in value].
(internal citations and quotations omitted). We agree. The court in Continental Insurance Co. noted that
It may be that this holding extends the content of what has thus far been defined as actionable deceit. If this be so, we think the extension is based upon a proper commercial morality and the logical import of the precedents that the purpose of the law is, wherever possible, to afford a remedy to defeat fraud.
222 A.D. at 187, 225 N.Y.S. at 494. We agree. We conclude that the district court failed to make sufficient factual findings relevant to the foreseeability aspects of loss causation. We therefore vacate and remand. C. Scienter The district court did not fully address the scienter issue since the court was able to dispose of the case on the loss causation ground. Specifically, the court said
It is a close question whether the justifications which Grendi advanced for JWP’s accounting treatments with respect to each of the audit differences raised by E & Y were so unreasonable and whether the total amount involved was so substantial that E & Y’s ultimate acceptance of those treatments would fairly support an inference that E & Y intended to deceive investors. As it happens, this is an issue which the Court need not resolve, for there is another reason why plaintiffs’ claims of fraud must fail.
AUSA, 991 F. Supp. at 248. We turn now to address whether E & Y had the requisite intent to sustain the fraud claims. Though we could remand this issue to the district court for reconsideration, see Brocklesby Transport, 904 F.2d at 134, we instead, in the interest of judicial efficiency, resolve the issue now on appeal by finding that the appellants did prove scienter, see Commercial Union Assurance, 17 F.3d at 615. In a section 10(b) action under the Securities Exchange Act of 1934, the complaining party must prove scienter by establishing that the offending party had the intent to “deceive, manipulate, or defraud.” Hochfelder, 425 U.S. at 193. While we have “resisted accepting general allegations of scienter that would lead to the presumption of motive,” we also recognize that intent is not easy to establish, particularly when “the ‘intent’ of a corporation is at issue.” See Press, 166 F.3d at 538. We have presumed, in different factual circumstances, that the requisite intent exists “[w]hen it is clear that a scheme, viewed broadly, is necessarily going to injure.” United States v. Chacko, 169 F.3d 140, 148 (2d Cir. 1999); cf. Restatement (Second) of Torts 8A comment b (1965) (“If the actor knows that the consequences are certain, or substantially certain, to result from his act, and still goes ahead, he is treated by the law as if he had in fact desired to produce the result.”). Such a presumption is appropriate in circumstances such as these, where a large entity, firm, institution, or corporation is acting in a manner that easily can be foreseen to result in harm. See generally United States v. Regent Office Supply Co., 421 F.2d 1174, 1181 (2d Cir. 1970). Based on E & Y’s financial certifications, it seemed that JWP was not a company teetering on the edge of demise. It seemed that, when faced with a “PC price war,” JWP was healthy enough to sustain itself through a period of losses, perhaps attracting new capital or obtaining a loan, if needed. The risk that JWP would still collapse, even with the ability to sustain itself through losses and attract new capital, was a loss the investors assumed, based on the information E & Y provided to them. The higher likelihood of collapse given JWP’s tenuous financial position was not a risk of which the investors were appraised and were intending to fully assume. Had the E & Y accountants contemplated for a moment the results to which their questionable accounting could lead, they could have imagined that saddling the investors with an undisclosed risk would harm[FOOTNOTE 11] the investors, should the risk be realized. Therefore, we can easily find that E & Y possessed the requisite intent to deceive, manipulate, or defraud. Moreover, it is sufficient to show that the defendant “‘intentionally engaged’ in ‘manipulative conduct.’” Securities and Exch. Comm’n v. U.S. Environmental, Inc., 155 F.3d 107, 111 (2d Cir. 1998). Such is the case here, given that E & Y protested and then agreed to JWP’s accounting abuses, knowing, as the district court found, that the insurance companies and others would be receiving and relying upon the manipulated financial reports. The district court was concerned that E & Y lacked the motivation to commit fraud. See AUSA, 991 F. Supp. at 247-48.[FOOTNOTE 12] The court indicated that, while E & Y did receive a fee for its auditing of JWP, it seemed “highly unlikely that E & Y would deliberately jeopardize its priceless reputation and expose itself to expensive and potentially disastrous litigation in order to retain such a small account.” Id. at 247. This, however, inappropriately makes the scienter issue one of “what did the defendant want to happen” as opposed to “what could the defendant reasonably foresee as a potential result of his action.” See Restatement (Second) of Torts 8A comment a (1965) (“‘Intent,’. . . , has reference to the consequences of an act rather than the act itself.”). E & Y is not an accounting dilettante. It knows well that its opinions and certifications are afforded great weight, and it must have known that its financial certifications with regard to JWP would be compelling to the investors. Given that it is sufficient for a plaintiff to allege and prove that a defendant could have foreseen the consequences of his actions but forged ahead nonetheless, see Restatement (Second) of Torts 8A (1965), the district court’s concerns are not legally determinative of the scienter issue. D. Privity With respect to the appellants’ negligent misrepresentation claims, the district court held that there was no privity between the investors and E & Y. See AUSA, 991 F. Supp. at 253. The court so held because it found that the second prong of New York’s three-prong test for determining whether a “near-privity” relationship exists was not met. See id. at 253. We disagree, and we reverse the district court. The New York State Court of Appeals held in Credit Alliance Corp. v. Arthur Andersen & Co., 465 N.Y.2d 536, 483 N.E.2d 110, 493 N.Y.S.2d 435, 443 (N.Y. 1985) that
Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance.
Id. at 551, 483 N.E.2d at 118, 493 N.Y.S.2d at 443. Credit Alliance Corp. actually involved two companion cases, and the Court of Appeals affirmed one and reversed the other. The factual distinction between the two cases is determinative here. In the two cases in Credit Alliance Corp., lenders brought separate actions against their borrowers’ accountants, in the first action negligence and fraud, and in the second action negligence and gross negligence. In the second action, the Court of Appeals determined the relationship did approach privity, and in the first action the Court determined that there was no such relationship. See id. at 541, 483 N.E.2d at 111-112, 493 N.Y.S.2d at 436-37. The first action — Credit Alliance Corp. v. Arthur Andersen & Co. — involved a situation where Arthur Andersen & Co., the auditors for L.B. Smith & Co., prepared the audited financial statements for Smith, which allegedly overstated Smith’s net worth, assets, and financial health. See id. at 543, 483 N.E.2d at 112-13, 493 N.Y.S.2d at 437-38. These statements were provided to plaintiff Credit Alliance Corp., and Credit Alliance relied on these statements in deciding whether to finance, and continue financing, Smith. See id. However, the Court of Appeals determined that, because the plaintiff did not make an “adequate allegation of either a particular purpose for the [financial] reports’ preparation or the prerequisite conduct on the part of the accountants,” a privity or approaching privity relationship was not established. Id. at 553. In the second action, European American Bank and Trust Co. v. Strauhs & Kaye, the plaintiff bank European American Bank and Trust Company (“EAB”) alleged that they made substantial loans to Majestic Industries and its subsidiaries (collectively, “Majestic”) in reliance on the interim and year-end reports prepared by the accounting partnership Strauhs & Kaye (“S & K”). See id. at 112-113. They alleged that the information in the reports was purported to be in accordance with GAAP, but was not. See id. at 113. When a Majestic subsidiary later defaulted on a loan, EAB began to discover that S & K’s reports were seriously exaggerated in favor of Majestic. See id. EAB brought suit for damages resulting from their reliance on the S & K reports which led to their losses. See id. They alleged that S & K was negligent in performing accounting and auditing services for Majestic because S & K knew at all relevant times that EAB was the primary lender, EAB was relying on S & K’s financial statements and inventory valuations in determining what amount to lend to Majestic, and E & K was familiar with the terms of Majestic’s lending agreements with EAB. See id. Additionally, EAB alleged that representatives of itself and S & K were in direct communication throughout the entire course of the lending relationship between EAB and Majestic, and EAB representatives met together to discuss Majestic’s inventory and accounts receivables. See id. The Court of Appeals determined that “[b]ecause EAB’s complaint and affidavit posit a direct nexus between the parties, to wit: the direct communications between them concerning EAB’s intended reliance upon S & K’s financial evaluation of Majestic Electro, the causes of action for negligence and for gross negligence or reckless indifference are adequately alleged.” Id. at 114. The instant situation is more like European American than Credit Alliance. The district court made the factual determination that E & Y knew that the insurance companies qua investors existed. See 438, Findings of Fact, Joint Appendix at 2602, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)) (“Pursuant to JWP’s Note Agreements, Ernst & Young issued its ‘Independent Auditor’s Reports on Compliance’ to the plaintiffs identified by name in those no-default certificates.”). Moreover, the district court implicitly found that E & Y knew the insurance companies were relying on the no-default letters. See 438, Findings of Fact, Joint Appendix at 2602, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)) (“Each no-default certificate specifically recited the names of the ‘Insurance Company’ noteholders that were entitled to ‘use’ and rely on Ernst & Young’s certification of JWP’s debt compliance.”) However, the district court determined that
E & Y had no way of knowing that its audit reports could be relied upon by these plaintiffs in making a decision to purchase JWP’s notes. However, E & Y’s annual no-default letters were a somewhat different matter. They were sent to JWP for the express purpose of being forwarded to the noteholders . . . . It therefore must [have] been aware of the possibility that some of those who received its no-default letters might be influenced by them in deciding whether to purchase such notes in the future. However, it could not possibly know even whether JWP would sell notes in the future, much less which of the recipients of its letters would buy them. Thus it appears clear that at least the second requirement of the Credit Alliance test was not satisfied and that there was no relationship of near-privity between E & Y and the future purchasers as defined in that case.
AUSA, 991 F. Supp. at 253. We disagree with the district court’s legal conclusion that “the second requirement of the Credit Alliance test was not satisfied.” Id. Again, the second requirement of that test required the accountant to be aware its report would be used for a particular investor purpose, “in the furtherance of which a known party or parties was intended to rely.” Credit Alliance Corp., 65 N.Y.2d at 551, 483 N.E.2d at 118, 493 N.Y.S. at 443. To the extent that the “no-default” letters were intended to serve the purpose of conveying to the investors that the notes which they held were not in default, E & Y knew what the letters were for and E & Y knew for whom the letters were intended, as the district court so found. Therefore, the district courts could not hold that the second prong under Credit Alliance Corp. was not satisfied. We reverse the district court’s determination that there was no privity, and we remand so that the district court can consider whether the other elements of common law fraud were established. E. Damages Given that the district court found no loss causation, the court did not address the damages issue. On remand, when and if appropriate, the district court can address damages. IV. Conclusion The United States financial market is phenomenal. It can make poor people rich and rich people poor, it gives the United States international power, and it is a continual source of awe. While there is huge risk when dealing with the market, our legislators have consistently tried to at least ensure that the relevant information is conveyed accurately to those who want to assume the risk of jumping into the financial pool. Given that such a policy increases investor confidence, allows money to flow both in and out of the market in an honest way, and assists investors in maximizing their participation in the American economy, it is likely that this policy will endure. To this end, while we are far from holding auditors generally and absolutely liable to the investing public at large, the information publicly available to these market participants and certified as accurate needs to be just that. For the above stated reasons, we reverse the district court in part, we vacate the district court in part, and we remand for reconsideration where appropriate in light of this opinion. FOOTNOTES FN1 Our recitation of the facts comes from the district court’s findings of facts with which we find no fault, in AUSA Life Ins. Co. v. Ernst & Young, 991 F. Supp. 234 (S.D.N.Y. 1997), and Findings of Fact, Joint Appendix at 2466, AUSA Life Ins. Co. v. Ernst & Young, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)). FN2 The letters were labeled “Independent Auditor’s Reports on Compliance.” See 383, Findings of Fact, Joint Appendix at 2586, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)). FN3 Paragraph 450 of the district court’s findings of fact might seem, at first blush, to be contradictory to the findings in Paragraph 447. Paragraph 450 states that
However, as long-term debt holders, plaintiffs’ primary concern was whether JWP would be able to repay the principal and interest owed under the notes . . . . As indicated below, even given E & Y’s misrepresentations, plaintiffs likely would have concluded that JWP’s accounting abuses did not materially affect its ability to make good on the notes.
447, Findings of Fact, Joint Appendix at 2607, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)). However, given the narrowness and specificity of the determination in Paragraph 447, quoted in the text immediately above, it is not at odds with the findings in Paragraph 450. To the extent that Paragraph 447 provides that the plaintiffs “likely would not and in some cases could not have bought” the notes, that is compelling. See 447, Findings of Fact, Joint Appendix at 2606, AUSA, 991 F. Supp. 234 (S.D.N.Y. Dec. 5, 1997) (94 Civ. 3116 (WCC)) (emphasis added). FN4 Although we could remand this issue to the district court for reconsideration, see Brocklesby Transport v. Eastern States Escort Servs., 904 F.2d 131, 134 (2d Cir. 1990), we instead, in the interest of judicial efficiency, resolve the issue ourselves, see Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 615 (2d Cir. 1994). FN5 Given the usefulness of analogizing loss causation and related concepts in securities law to their common law counterparts, we continue to consult general tort law and related commentary. FN6 As discussed in footnote 11, infra, by “harm” to the investors we are referring to losses incurred for risks which the investors did not intend to take nor of which they should have (or, in this case, even could have) been aware. FN7 The facts discussed in Section III(B)(2)(a), above, merit re-consideration in the foreseeability context. FN8 “‘Proximate cause,’ in short, has been an extraordinarily changeable concept. ‘Having no integrated meaning of its own, its chameleon quality permits it to be substituted for any one of the elements of a negligence case when decision on that element becomes difficult. * * * No other formula * * * so nearly does the work of Aladdin’s lamp.’” Prosser and Keeton on Torts, 42, 276 (quoting Green, Proximate Cause in Texas Negligence Law, 28 Tex. L. Rev. 471 (1950)). With respect to foreseeability, “[t]here is perhaps no other one issue in the law of torts over which so much controversy has raged . . . .” Id. at 43, 280. FN9 To this point, the Securities Act of 1933 (Fletcher-Rayburn Securities Act of 1933) was also entitled the “Truth in Securities Act.” See United States Code Annotated, Popular Name Table for Acts of Congress (1997). FN10 The Private Securities Litigation Reform Act became law in 1995 over a Presidential veto. FN11 In using the word “harm” in this instance, we mean losses resulting from risks that were deliberately hidden from the investors, of which the investors in this case could not have otherwise been aware. We do not mean losses generally. FN12 The district court analyzed the evidence sustaining a factual finding of scienter under the rhetoric usually employed in addressing 10(b) pleading requirements, see In re Time Warner Inc. Securities Litig., 9 F.3d 259, 269 (2d Cir. 1993), determining that the plaintiffs needed to have shown “motive and opportunity” to commit fraud in order to allow the court to infer scienter. See AUSA, 991 F. Supp. at 247. We do not feel compelled to employ exclusively that terminology given that the issue before us is the sufficiency of the evidence in the procedural posture of a bench trial.
AUSA Life Insurance Company, et al. v. Ernst and Young UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 1998 (Argued: December 7, 1998 Decided: March 17, 2000 ) Docket No. 98-7162 AUSA Life Insurance Company, BankersUnited Life Assurance Company, CrownLife Insurance Company, GeneralServices Life Insurance Company, LifeInvestors Insurance Company of America,Modern Woodmen of America, MonumentalLife Insurance Company, The Mutual LifeInsurance Company of New York, and ThePrudential Insurance Company of America, Plaintiffs-Appellants, v. Ernst and Young, Defendant-Appellee. Before WINTER, Chief Judge, OAKES and JACOBS, Circuit Judges. Appeal from dismissal by the United States District Court for the Southern District of New York (William C. Conner, Judge) of the plaintiffs-appellants’ Securities Act and other claims against the defendant-appellee after a bench trial, in a holding that loss causation had not been proven. The district court’s judgment is vacated and remanded in part, and reversed in part. Judge Jacobs concurs in the mandate of the opinion for the court in a separate opinion. Chief Judge Winter dissents in a separate opinion. Peter Buscemi, Washington, DC (Morgan, Lewis & Bockius, LLP; Debra Brown Steinberg, Cadwalader, Wickersham & Taft, New York, NY, of counsel), for Plaintiffs-Appellants. Kenneth S. Geller, Washington, DC (Mayer, Brown & Platt; Alan N. Salpeter, Michele Odorizzi, Howard J. Roin, Caryn Jacobs, Bradley J. Andreozzi, Linda T. Coberly, Mayer, Brown & Platt, Chicago, IL; Kathryn A. Oberly, Patricia A. Connell of Ernst & Young LLP, New York, NY, of counsel), for Defendant-Appellee. (Alan I. Horowitz, Gerald Goldman, Jeffrey J. Swart, Miller & Chevalier, Chartered; Phillip E. Stano, Senior Counsel, Litigation, American Council of Life Insurance, Washington, DC, of counsel), for American Council of Life Insurance as Amicus Curiae in support of Plaintiffs-Appellants.
