dissenting.
The complaint in this case was filed on October 12, 1972, in the United States District Court for the Eastern District of Tennessee, Northern Division at Knoxville.
Honorable Robert L. Taylor, who had been serving with distinction as a judge of the court for many years since his appointment to the bench on March 9,1950, recused himself. Chief Justice Burger designated Honorable George Boldt, Senior District Judge of the Western District of Washington to serve in the place of Judge Taylor and to preside over this case. Judge Boldt accepted the designation. Judge Boldt, like Judge Taylor, had served with distinction since his appointment to the federal bench on July 27, 1953. He became Chief Judge on March 1,1971 and Senior Judge on October 30,1971. While engaged in the practice of law, he served as Assistant Attorney General of the State of Washington 1940-41 and 1946-1947. He was a Lieutenant Colonel in the United States Army, 1942-1945. He served as Chairman of the Pay Board, United States Economic Stabilization Program, 1971-1973. He served on the Judicial Conference Committee on Criminal Law, 1955-1965; the Coordinating Committee on Multi-District Litigation 1962-1970; the Committee on Multi-District Litigation, 1962-1972; the Committee on Rules of Procedure and Practice, 1960-1972; the Advisory Committee on Appellate Rules since 1973. It would appear that Judge Boldt, because of his vast experience as a trial judge and public service, was eminently well-qualified to try this case and certainly was not a novice. His qualifications are mentioned particularly because, in my opinion, the majority has usurped the fact finding functions of Judge Boldt, who did not deserve that treatment. It was not the province of an appellate court to review the factual findings of a trial judge de novo which is exactly what the majority did in the present case in many instances by stating that they were clearly erroneous when indeed they were not clearly erroneous, but were supported by substantial evidence, the testimony of many witnesses, including expert witnesses, depositions and credibility assessments made by the judge.
The majority obviously did not follow the standards mandated by the Supreme Court in Zenith Corporation v. Hazeltine, 395 U.S. 100, 123, 89 S.Ct. 1562, 1576-1577, 23 L.Ed.2d 129 (1969), where the court in an opinion written by Mr. Justice White stated:
In applying the clearly erroneous standard to the findings of a district court sitting without a jury, appellate courts must constantly have in mind that their function is not to decide factual issues de novo. The authority of an appellate court, when reviewing the findings of a judge as well as those of a jury, is circumscribed by the deference it must give to decisions of the trier of the fact, who is usually in a superior position to appraise and weigh the evidence. The question for the appellate court under Rule 52(a) is not whether it would have made the findings the trial court did, but whether “on the entire evidence [it] is left with the definite and firm conviction that a mistake has been committed.” United *437States v. United States Gypsum Co., 333 U.S. 364, 395, [68 S.Ct. 525, 542, 92 L.Ed. 746] (1948). See also United States v. National Assn. of Real Estate Boards, 339 U.S. 485, 495-496 [70 S.Ct. 711, 717, 94 L.Ed. 1007] (1950); Commissioner v. Duberstein, 363 U.S. 278, 289-291 [80 S.Ct. 1190, 1198-1199, 4 L.Ed.2d 1218] (1960). Trial and appellate courts alike must also observe the practical limits of the burden of proof which may be demanded of a treble-damage plaintiff who seeks recovery for injuries from a partial or total exclusion from a market; damage issues in these cases are rarely susceptible of the kind of concrete, detailed proof of injury which is available in other contexts. The Court has repeatedly held that in the absence of more precise proof, the factfinder may “conclude as a matter of just and reasonable inference from the proof of defendants’ wrongful acts and their tendency to injure plaintiffs’ business, and from the evidence of the decline in prices, profits and values, not shown to be attributable to other causes, that defendants’ wrongful acts had caused damage to the plaintiffs.” Bigelow v. RKO Pictures, Inc., supra, [327 U.S. 251] at 264, [66 S.Ct. 574 at 579, 90 L.Ed. 652]. See also Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359, 377-379 [47 S.Ct. 400, 404-405, 71 L.Ed. 684] (1927); Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 561-566 [51 S.Ct. 248, 250-251, 75 L.Ed. 544] (1931).
See also Strickler v. Pfister Associated Growers, Inc., 319 F.2d 788, 790 (6th Cir. 1963).
As will be pointed out later, this decision is not the only decision of the Supreme Court which a majority of this panel did not follow.
The District Court, after an extensive trial, following discovery and many proceedings in this complex case, filed its “Memorandum Decision” and also “Findings of Fact and Conclusions of Law.” It specifically found that Peat had prepared a proxy statement which contained false and misleading financial statements which proxy statement was to be used in connection with the acquisition of Standard Knitting Mills, Inc. (Standard) a Tennessee corporation, by Chadbourn, Inc., (Chadbourn) a North Carolina corporation, to induce the shareholders of Standard to vote in favor of said merger and to be filed with the SEC.
The Court found that Peat had acted “willfully, with intent to ‘deceive’ and ‘manipulate’ and ‘in reckless disregard of the truth.’ ” The Court further found that Peat’s certificate of an audit of Chadbourn was false and untrue. Because of these findings the Court determined that Peat had violated the Act and said Rules of the Commission.
Peat has appealed to this Court, filing a brief in chief containing 124 pages and a reply brief containing 54 pages, both briefs raising a myriad of questions. A brief of 122 pages was filed by the plaintiff’s class, and briefs by sub-class and intervenors were filed and an amicus brief by American Institute of Certified Public Accountants was filed. In addition, eight large volumes of joint appendices have been filed containing various proceedings, transcripts of evidence at the trial, depositions and exhibits.
In this appeal, as before stated, it was not our function to conduct a de novo hearing. In an action involving claims of fraud, securities violations, and reckless conduct where the testimony at a bench trial was taken before an experienced District Judge who had the opportunity to and did take testimony of witnesses, observe the demeanor of the witnesses and to make credibility assessments, we are not permitted to set aside his factual findings unless we are satisfied and can demonstrate that they are not supported by substantial evidence and are clearly erroneous. Fed.R.Civ.P. 52(a). The majority was unable to demonstrate that the District Judge did not have sufficient evidence to support his findings of intentional fraud or reckless conduct.
In my opinion, the findings of fact adopted by the District Court are supported by substantial evidence and are not clearly erroneous. I would affirm the judgment of the District Court for the reasons herein set forth.
*438I.
In 1969 Chadbourn, a moderately sized Charlotte, North Carolina manufacturer of hosiery and panty hose, enjoyed substantial sales due to the popularity of panty hose, its major product. Between 1967 and 1969 Chadbourn’s earnings had increased many times. For the year ending August 2,1969, it had sales of $68,074,688 and its 3,800,000 shares were listed on the New York Stock Exchange. During this period the market for panty hose was free of foreign competition and price cutting. In the late 60’s Chadbourn embarked upon an aggressive acquisition campaign.
In 1968 and in early 1969 Chadbourn became interested in acquiring Standard Knitting Mills of Knoxville, Tennessee. Standard was a relatively small company whose shares of stock were owned and controlled by Knoxville residents. Its 632,000 shares of common stock were registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and were publicly held by 556 persons and were seldom traded. The sales price of the few shares that did change hands was roughly at $11 a share. Twenty-two percent of its stock was held and controlled by Valley Fidelity Bank and Trust Company of Knoxville in a number of fiduciary accounts. Nineteen percent was held or controlled by officers and directors of Standard and their families. The officers and directors of Standard were considered to be substantial people in Knoxville. Although many of its plants were old, it had for many years run a sound business and paid dividends by manufacturing cotton knitwear. In the late 60’s three large chain store customers bought approximately 50 percent of its output.
Prior to the merger and during the period of negotiation for the shares of Standard, Chadbourn offered for sale to its shareholders and to the public $12,631,000 of 6V2 percent 20 year convertible subordinated debentures due March 15, 1989 pursuant to an Indenture dated March 15, 1969.
On July 28, 1969, Chadbourn and Standard agreed to merge subject to a vote of approval by the Standard shareholders which vote eventually took place at a special meeting of its shareholders held on April 22, 1970. In return for each share of Standard stock Standard shareholders were to receive one and one half shares of Chadb-ourn $.46% Cumulative and Convertible Preferred Stock, Jr., Series A, created specifically for the purpose of consummating the Standard merger. In addition, Chadb-ourn specifically agreed to repurchase the preferred from shareholders of Standard who desired to sell at $11 per share in five yearly installments from 1975 to 1979.
As a result of the merger, Chadbourn acquired a relatively conservative textile manufacturing company that was well entrenched in the Knoxville community. For many years Standard had operated as a sound business enterprise, and indeed, it reported its first operating loss in recent history in the months just prior to the merger with Chadbourn, and also reported earnings weakness for the period immediately after the merger. Three of its customers were large chain stores that were valuable clients. The $.46% dividend, $10 par cumulative convertible preferred financed the acquisition by Chadbourn without any immediate outlay of a large sum of money. Chadbourn thus obtained beneficial control of the company and its earning power. Further, Chadbourn did not need to resort to a bank or to the competitive money markets for financing the merger at a high rate of interest which allowed it to use any bank credit that was available to it for other purposes. Because of the relatively small dividend the most valuable feature of the preferred was its ability to be converted into .6 share of Chadbourn common which fluctuated in value between $8 and $14 per share before the merger. From the point of view of the plaintiff class and sub-class, former Standard common shareholders, the merger offered some advantages. In return for their common, plaintiffs were to receive cumulative preferred dividends larger than dividends declared historically on Standard common, each share of preferred was convertible into Chadbourn com*439mon, the preferred was readily marketable on the New York Stock Exchange for cash, a small amount of Chadbourn common would be distributed pro rata among holders of the preferred if Standard achieved certain earnings goals, and Chadbourn promised to redeem the preferred at $11 per share in installments from 1975 to 1979 to shareholders desiring redemption.
In September, 1969, approximately two months after the agreement to merge was signed but before it was approved by Standard’s shareholders, Chadbourn borrowed six million dollars from North Carolina National Bank, First National Bank of Boston, and the First National Bank of Atlanta. The loan agreement called for twenty consecutive quarterly installment payments of $150,000 and a final lump sum payment of any remaining balance so that the entire loan would be retired on October 1, 1974, if the payments were made several months before Chadbourn agreed to begin redeeming the preferred stock.
An internal Peat memorandum acknowledged on July 24, 1969, the engagement of its services by Chadbourn in preparing a “[p]roxy statement to be filed [with the SEC] for stockholders of Standard Knitting Mills, Inc. in connection with the proposed acquisition of Standard and its subsidiaries by Chadbourn.” It was also to be used to solicit votes of Standard shareholders favoring the proposed merger. Peat made the audit during the July 4th 1969 holiday as was customary in the textile industry. It was ultimately dated August 2, 1969.
Peat received $194,424 for its services from Chadbourn in 1969-70. Peat charged $105,000 for the audit and $26,000 for the Standard proxy work. Peat charged a fee that was 125% of its usual fee because “SEC work does require a higher degree of risk,” however, Peat admits that it exercised no different degree of care in performing its services for Chadbourn..
The Standard proxy materials in issue were mailed to Standard shareholders on March 27, 1970. The merger was approved by the shareholders at a special meeting for that purpose held on April 22, 1970. At the meeting Mr. Kramer, General Counsel and a Director of Standard, represented that there were no restrictions on the payment of dividends on the $.46% cumulative and convertible preferred. This representation conformed to Footnote 7 of the Chadbourn financial statement contained in Standard proxy materials which was written and certified as correct by Peat. Footnote 7 in pertinent part reads as follows:
(7) Long-Term Debt:
(c) As to the note payable to three banks, the Company has agreed to various restrictive provisions including those relating to maintenance of minimum stockholders’ equity and working capital, the purchase, sale or encumbering of fixed assets, incurrence of indebtedness, the leasing of additional assets and the payment of dividends on common stock in excess of $2,000,000 plus earnings subsequent to August 2, 1969.
(d) The 6% debentures are . Further, the indenture has certain restrictive covenants but they are less restrictive than those contained in the note agreement with the three banks. [Emphasis ours]
The footnote incorrectly stated that the restriction upon the payment of dividends contained in the bank loan agreement applied only to Chadbourn common stock. Further, the exact provisions of the restrictive covenants of the Indenture are not set out but are characterized as “less restrictive than those contained in the note agreement with the three banks,” implying that only restrictions on payment of dividends on common were contained in the Indenture. There is no mention of restrictions on the payment of dividends on Chadbourn preferred stock contained in the bank loan agreement or the Indenture, and there is no mention whatsoever of any restrictions on redemption of the preferred stock contained in either the bank loan agreement or the Indenture.
Approximately one month after the merger was approved plaintiffs received a proxy from Chadbourn soliciting their votes *440for approval of a loan and option agreement involving the acquisition of United Hosiery Mills by Chadbourn (the UHM proxy materials). Footnote 7(c) of the financial statement in the UHM proxy materials, which corresponded to footnote 7(c) contained in the Standard proxy materials, supra, had been altered so that the word “common” hereinbefore referred to was changed to the word “capital,” thus indicating that restrictions on payment of dividends contained in the bank loan agreement applied to both common and preferred stock. This change was not brought to the attention of the reader in Peat’s certification of the Chad-bourn financial statement contained in the UHM proxy materials and the change was located on the 55th page of 77 pages of the UHM proxy materials.
Several months after plaintiffs received the UHM proxy materials plaintiffs received the 1970 Chadbourn Annual Report, which contained a financial statement for Chadbourn prepared by Peat. Footnote 6(c) of this financial statement returned to the use of the word “common.” A quick reference to the 1969 Chadbourn Annual Report for the purpose of resolving this ambiguity would reveal that the pertinent footnote in the 1969 Chadbourn Annual Report used the word “common” as well. Footnote 7(c) in the UHM materials, therefore, was the only footnote in the certified financial statements in issue received by plaintiffs which indicated that restrictions on the payment of dividends in the bank loan agreement and Indenture applied to both common stock and preferred stock. The 1969 Chadbourn Annual Report, the financial statement in the Standard proxy materials, and the 1970 Chadbourn Annual Report uniformly indicated that the restrictions on the payment of dividends applied to common stock only, and none of the financial statements in issue, including the one in the UHM proxy materials, mentioned any existence of restrictions upon redemption contained in the bank loan agreement and the Indenture.
The loan agreement and the Indenture in fact contained covenants which restricted the payment of dividends upon common and preferred stock and the redemption of common and preferred stock. The bank loan agreement in pertinent part provided that Chadbourn would not:
5.3 Declare or pay any dividend on its capital shares of any class or make any distribution to any shareholders as such (other than dividends or distributions payable solely in common stock of the Company and other than cash paid in lieu of fractional shares in connection with any such dividend payable solely in common stock of the Company), or purchase, redeem or otherwise acquire for value any shares of its stock of any class, if, after giving effect to such action, the aggregate of:
(a) all dividends, other than in common stock of the Company, on its capital shares of all classes, preferred and common, and all other distributions to shareholders as such (other than cash paid in lieu of fractional shares in connection with any dividend payable solely in common stock of the Company) between August 2, 1969 and the time of taking such action; plus
(b) all amounts paid out for any redemp-tions, purchases or other acquisitions of its stock of any class (other than amounts for redemption of any shares of the Company’s 6% Cumulative Preferred Stock, $50 par value) between August 2, 1969 and the time of taking such action; plus
(c) the amount of all payments required to be made, and of all prepayments made, on principal of the Note prior to the time of taking such action;
would exceed the sum of:
(y) $2,000,000; plus
(z) the consolidated net earnings (including special items) of the Company and its subsidiaries accumulated subsequent to August 2, 1969;
provided that any subsidiary may declare and pay dividends.
The pertinent text of the Indenture is less precise. The text in pertinent part reads as follows:
*441Section 5.05. The Company will not declare or pay any dividends or make any distribution on or with respect to its capital stock, except for dividends payable solely in capital stock of the Company and except for cash paid in lieu of fractional shares in connection with any such dividend payable solely in capital stock of the Company, and will not permit any subsidiary to, directly or indirectly purchase, redeem, or otherwise acquire for a consideration any capital stock of the Company if the aggregate amount of all such payments or distributions after August 3, 1968 would exceed the sum of
(i) $2,000,000 plus
(ii) the net proceeds (exclusive of any underwriting discounts or commissions or other expenses paid or incurred by the Company in connection therewith) of the sale for cash by the Company of any shares of its capital stock after August 3, 1968 less the amount paid by the Company for the purchase with cash of any shares of its capital stock after August 3, 1968 plus
(iii) Consolidated Net Income realized after August 3, 1968.
Consolidated Net Income from August 3, 1968, to August 2, 1969, was $3.01 million. This language can be read to restrict redemption by Chadbourn subsidiaries only. Peat Marwick argues that the latter interpretation is correct and that Chadbourn itself was never under the terms of the Indenture restricted in its ability to redeem the preferred. There is evidence, however, that the Indenture was drawn with the intent to restrict redemption by Chadbourn. For example, Mr. Johnston, counsel for Chadbourn, disagreed with Peat on precisely this issue. He published a text in a note 8(d) of the financial statement contained in the 1971 Chadbourn Annual Report which indicated that the Indenture restrictions upon redemption also applied to Chadbourn. That footnote in pertinent part reads as follows:
(8) Long-Term Debt:
(d) The 614% debentures are .
Further, the indenture contains a restrictive provision under which the Company cannot declare any dividends or make any distribution (other than capital stock dividends), or acquire any of its stock if, after such action, the aggregate of all dividends (other than stock dividends), other distributions to stockholders and all amounts paid for the acquisition of its stock would exceed the sum of (i) $2,000,-000 plus (ii) the net proceeds of the sale for cash by the Company of any shares of its capital stock after August 3,1968 plus (iii) consolidated net income realized after August 3, 1968.
This same text was published in the 1972 and 1973 Chadbourn Annual Reports. These restrictions in effect limited the amount available for future dividends and future redemptions by Chadbourn to $2 million plus post-1969 earnings under the bank loan agreement, and $5.1 million plus post-1969 earnings under the Indenture. The promised redemption of the preferred from 1975 to 1979 would cost roughly $10 million if all of the preferred shareholders requested redemption. In the interim Chadbourn was obligated, inter alia, to pay the dividends on the preferred, to carry the debt service on the $12,631,000 Indenture, and to pay off the $6 million bank loan completely.
Chadbourn had to deal with approximately $18.5 million of new indebtedness before it could redeem plaintiffs’ preferred as promised. Undisclosed was the fact that Chadbourn had to either earn approximately $16 million before taxes and $8 million after taxes, refinance the $18.5 million of indebtedness, or sell an additional $8 million of new equity securities.
It is clear that Peat had full knowledge of these restrictions when it prepared the Standard proxy financial statements and certified that the financial statements accurately described the financial condition and debt structure of Chadbourn. This certification was false and fraudulent as found by the District court. Furthermore, between March 23, 1970, and April 1, 1970, prior to the merger, Hugh Freeze, the Peat manager in charge of the Chadbourn audit, re*442ceived a phone call from Chadbourn’s attorney Herbert Browne, Jr., a member of the law firm of Helms, Mullís & Johnston, the firm that prepared parts of the proxy. Brown informed Freeze that the use of the word “common” in footnote 7(c) of the Peat audit was erroneous. Freeze then crossed out the word “common” on his copy of a preliminary draft of the Standard proxy footnote and wrote the word ‘capital’ underneath it. Peat, however, did not alter the proxy, or, if the proxy had already been mailed, Peat took no steps to notify Standard shareholders or the SEC to correct the alleged error before the Standard shareholders voted on the acquisition of Standard by Chadbourn. The District Court could rightly infer that the reason Freeze did not correct the original was because it would have defeated the merger as the Standard shareholders would not have approved it.
There is other direct evidence that Peat had actual knowledge of the alleged error in footnote 7 of the proxy statement before the merger vote was taken. At approximately the same time it was preparing the Standard proxy Peat was also drafting a proxy containing the same financial statement for use in soliciting votes for the acquisition of Continental Strategics Corporation by Chadbourn (the Continental proxy materials). The Continental proxy, like the UHM proxy, contained the correct word “capital” in footnote 7(c). The Continental proxy was mailed on April 8, 1970, approximately two weeks before the vote on the Standard merger. The Continental proxy was not mailed to Standard shareholders because the Standard merger had not yet been consummated.
As indicated, supra, Peat also prepared the UHM proxy which contained the correct word “capital” in footnote 7(c). In a letter to the SEC dated April 20, 1970, two days before the Standard merger vote, counsel for Chadbourn sent to SEC copies of the UHM proxy containing the proper word.
Early drafts of the footnotes from the summer of 1969 when the audit was conducted indicate that Peat originally intended to disclose verbatim the Indenture restrictions on dividend payment. When the existence of the bank loan agreement for $6 million required a revision of the financial statement the following fall, Peat’s auditing manager Freeze wrote footnote 7(c) using the word “common.” For footnote 7(d) Freeze discarded the verbatim language of the Indenture restricting dividend payment and characterized the Indenture restrictive covenants as “less restrictive than those contained in the note agreement with the three banks.” This characterization of the Indenture covenants appeared in all of the certified financial statements in issue until counsel for Chadbourn stated the Indenture dividend restriction in full in the 1971 Chadbourn Annual Report and stated the Indenture restrictions on redemption as well.
Despite all this evidence of deliberate fraud, Peat has the audacity to assert that the false, untrue and misleading statements in footnotes 7(c) and 7(d) of its audit were only “lapsus calami” (Br. at 5), “slip of the pen” (Br. at 29), and a “footnote mistake” (Br. at i). It is unbelievable that the majority of this panel would swallow with hook, line and sinker such an outrageous and ridiculous proposition and to hold that Peat’s misrepresentation was only negligent and use it as a basis for reversing a well reasoned opinion of the District Court thereby depriving the many shareholders of Standard of millions of dollars of compensation in which they were justly entitled because of the fraud perpetrated on them by Peat. If it originally was only a slip of the pen, it became a deliberate fraud when Chad-bourn’s own lawyer called this to the attention of Peat’s manager in charge of the audit and the manager corrected the alleged mistake in his copy and did not correct the original because it would have defeated the merger. The characterization of Peat’s misrepresentation as a “negligent misrepresentation” adds something new and unheard of in our jurisprudence.
The District Court characterized it differently. It found that Peat’s Certificate that it had performed its 1969 Chadbourn audit in accordance with generally accepted *443accounting standards and auditing practices and false and untrue and that Peat Acted “willfully, with intent to ‘deceive’ and ‘manipulate’ and ‘in reckless disregard of the truth’ in respect to footnotes 7(c) and 7(d) in said audit. In my opinion, the majorities holding should be rejected and the factual findings of the District Court upheld.
In imposing liability the District Court followed the standards of Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) with respect to the necessity of proof of scienter as mere negligence is not enough to violate the Act. The District Court in finding scienter stated:
[notwithstanding this stringent element of proof, the court concludes that in all the facts and circumstances of this case, scienter on behalf of defendant has been established by a preponderance of the evidence.
On two occasions when it counted most, with full knowledge of the correct term, Peat, deliberately, did not correctly describe the stock which was restricted in the payment of dividends by the bank loan which stock also was the particular class plaintiffs would receive by the merger. Furthermore, defendant never fully described either the dividend restrictions on preferred stock contained in the indenture or the redemption restrictions contained in the indenture or the redemption restrictions contained in the indenture and loan agreement. Defendant’s agents documented Chadbourn’s numerous edp defects at the time of the 1969 audit and approximately one year later some corrections had been made but a considerable number of deficiencies still remained — yet defendant did not feel obliged to report this to plaintiffs. Finally with full knowledge of Chadbourn’s deficient edp and other internal weaknesses, defendant conducted its 1969 audit as though Chadbourn was as sound as a dollar used to be — clearly deviating from GAAP, GAAS and the provisions of Peat’s own audit manual. The court finds and holds the proof in this case clearly established that, with the knowledge defendant possessed prior to, during and after the 1969 audit compared against the content of the [sic] Peat’s 1969 Chadbourn financial statements, defendant acted willfully, with intent to “deceive” and “manipulate” and in “reckless disregard for the truth.” App. 389a-90a.
Unlike the present case, in Ernst & Ernst, “the respondents specifically disclaimed the existence of fraud or intentional misconduct on the part of Ernst & Ernst.” The Supreme Court did not determine whether reckless behavior is sufficient for civil liability under section 10(b) and Rule 10b-5.
In Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1024 (6th Cir. 1979), however, we upheld the sufficiency of recklessness to establish civil liability under the Act and that such claims should be liberally construed in order to effectuate the policies underlying the federal securities laws.1
The District Court was correct in finding that the deliberate misstatements and fraudulent omissions in the proxy statement were material. It is clear that no prudent Standard shareholder in his right mind would ever have voted for the merger if he had known of the restrictions on the payment of dividends and on the redemption of the cumulative preferred stock which he was to receive under the terms of the merger. The Standard stockholder had been receiving regular dividends on his Standard common stock. Because of the restrictions on the preferred stock which he was to receive in exchange he would not receive any dividends on the preferred stock for a long time and possibly he would never receive either the dividends or secure the redemption of the preferred shares. Under the law it was not necessary to prove that *444each shareholder of Standard relied on the representations contained in the proxy statement and financial statement mailed to them and to SEC. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972); Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384-85, 90 S.Ct. 616, 621-622, 24 L.Ed.2d 593 (1970). The majority opinion is inconsistent with the holdings in these cases and with the reasoning of the Supreme Court in Chiarella v. United States, - U.S. -, pages---, 100 S.Ct. 1108, page 1115, 63 L.Ed.2d 348.
As before stated 22 percent of the outstanding Standard common shares was held in trust by a Knoxville bank in fiduciary accounts.
Because of the finding of liability by the District Court on the basis of section 10(b) of the Act and Rule 10b-5, I need not address the issues of Peat’s liability under section 14(a) and Rule 14a-9, as an aider and abetter.
I also approve of the findings and conclusions of the District Court with respect to causation because materiality was established.
The majority does not discuss issues raised by Peat on the statute of limitations, damages and attorneys fees. I will therefore not discuss them.
In my opinion, the majority should have treated these matters so that it would not be necessary to remand the case to our court in the event the Supreme Court reversed this court on the issues of liability. This ease has already been pending too long in the federal courts.
II.
Although my dissent with respect to violations of section 10(b) of the Act and Rule 10b-5 is dispositive of the issue of liability, I also approve the findings and conclusions of the District Court as additional support with respect to Peat’s false Certificate of the Chadbourn 1969 audit and the electronic data processing (edp).
The District Court found that Peat violated generally accepted auditing standards and generally accepted accounting principles (GAAS and GAAP) during the audit. Specifically, he found that Peat violated the following standards taken from Statements on Auditing Procedure No. 33 (SAP 33): the second and third general standards:
2. In all matters relating to the assignment an independence in mental attitude is to be maintained by the auditor or auditors.
3. Due professional care is to be exercised in the performance of the examination and the preparation of the report.
the second standard of field work:
There is to be proper study and evaluation of the existing internal control as a basis for reliance thereon and for the determination of the resultant extent of the tests to which auditing procedures are to be restricted.
the third standard of field work:
Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination.
The Court further found Peat violated Statement on Auditing Procedure No. 41 (SAP 41), which sets forth a procedure for accountants to follow upon discovery of new material information to inform management and others known to be relying on such information. We believe that there is substantial evidence in the record to support such findings, and that they are not clearly erroneous. With respect to the conduct of the audit, no working papers exist to verify that important auditing steps were performed during the audit. Peat’s valuation of Chadbourn’s inventory was poorly performed. Peat’s employee Mar-ston’s working papers on the efficacy of Chadboum’s internal controls stated, “[c]on-trols is out of control!” Two letters from Peat to Chadbourn dated September 17, 1969, and December 22, 1970, show that Chadbourn’s electronic data processing *445(edp) problems were widespread and pervasive in all internal accounting systems, yet Peat failed to adequately take these problems into consideration, or to demand a full manual audit at financial year end, only one month later, as required by Peat’s own audit manual; indeed, Peat instead relied upon Chadbourn’s internal accounting systems to adjust the audit figures so that the financial statement read as of August 2, 1969, instead of July 4, 1969. With respect to the discovery of new material, Peat failed to inform the Standard shareholders of its footnote mistake in the financial statement even though Peat had full knowledge of the alleged mistake well before the merger vote and the accounting profession in SAP 41 specifically set forth a procedure for disseminating such information. Obviously Peat did not correct its mistake because if it had corrected it, Standard would have rejected the merger.
The court further found that Peat’s failure to disclose dividend restrictions on payment thereof and redemption of the $.46% preferred stock violated both Regulation S-X (Plf’s Ex. 225-A) and Accounting Series Release No. 35. (Plf’s Ex. 224).
James Quigley, a full partner of Peat’s, admitted on cross-examination that it was mandatory that redemption restrictions be disclosed.
In arriving at its factual findings with respect to the audit, the materiality of the omissions and misrepresentations by Peat and in internal control, the District Court was supported by the testimony of Larry E. Rittenberg, as assistant professor, in the department of accounting of the University of Tennessee and George J. Benston, a distinguished professor of accounting and finance at the University of Rochester Graduate School of Management.
Professor Benston testified that Peat’s footnote in the financial statement was incorrect because it did not disclose important aspects in the indenture and note agreement and violated Regulation S-X and Accounting Series Release No. 35.
Peat admitted it made a mistake but claimed it was inadvertent. The District Court found no mistake but a fraudulent omission of material facts. It was a fraud not only on Standard’s stockholders but also on SEC.
The amicus brief of American Institute of Certified Public Accountants is noteworthy in its failure to discuss the main issue in this appeal, on which our decision is based, namely, the fraudulent footnote 7 of the Chadboum financial statement contained in the Standard proxy materials written and certified as correct by Peat and mailed to Standard stockholders and filed with SEC. Instead, the Institute treats only one of the many issues in this case, namely, the liability of Peat for failure to disclose in its audit, weaknesses in the internal control of Chadboum or require Chadboum to make such disclosure.
If Peat desired to limit its liability it should have never attached to its audit the Certificate which it executed and was found by the District Court to be a false and fraudulent certification.
The District Court made a number of specific findings of fact with supporting record references with respect to Electronic Data Processing (EDP) deficiencies being Nos. 45 to 53 and held that Peat had a duty to disclose them to Standard’s stockholders as prudent investors would be entitled to this information. Peat’s failure to disclose this material information on its audit constituted a breach of duty of disclosure.
The District Court further made many specific findings of fact with supporting record references with respect to Generally Accepted Auditing Principles and Standards (GAAP and GAAS) being Nos. 54 to 102 from which it can be gleaned that the work performed by Peat was anything but a reliable audit. Finding (102) concludes: “The misrepresentation and omissions of defendant which have been fully documented in the Memorandum Decision and herein, were committed or omitted by Peat willfully, deliberately, with intent to deceive and manipulate and with reckless disregard for the truth.”
*446Conclusion
The requirement by law of the proxy statement with its certified audit and financial statement to be sent to the shareholders of an acquired company in a merger and filed with SEC, forms an important function for the protection of investors in the administration of the Securities Act by the Securities and Exchange Commission.
The Act can never be properly administered if deliberate, fraudulent, deceitful and recklessly made proxy statements such as were prepared by Peat for use in a corporate merger and for filing with SEC are ever tolerated. Its characterization by the majority as a “negligent misrepresentation” does not excuse the fraudulent omission by an auditor who owes a duty to disclose the truth. The District Court was correct in pointing out the many glaring deficiencies and fraudulent omissions in Peat’s proxy statement and audit for which it was well paid. It should be required to compensate the victims of its frauds as ordered by the District Court.
The judgment of the District Court should be affirmed.
. The majority opinion impliedly overrules our decision in Mansbach but this is not an uncommon practice in our court for one panel to overrule the decision of another panel. See article in Harvard Law Review Volume 92:931, 934, 935 on Appealability of Orders Relating to Ongoing Grand Jury Procedures. General Motors Corp. v. United States. Also as pointed out herein, the applicable decisions of the Supreme Court were not even followed.