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In April 1970, Chadbourn, Inc. acquired all of the common stock of Standard Knitting Mills, Inc., a smaller, publicly-held textile manufacturer, whose stock traded from time to time, although infrequently, in the over-the-counter market. Standard's stockholders at a special meeting agreed to exchange their stock for a package of Chadbourn securities. The meeting occurred after the stockholders received the proxy statement a month earlier from Standard transmitting information about the proposed merger and Chadbourn's financial condition. The proxy statement contained a recommendation by Standard's management favoring the merger, as well as financial statements of Chadbourn prepared by its accountants, D. Before the merger, Standard's stock traded at around $12.00 a share, and Chadbourn's stock fluctuated between $ 8.00 and $ 14.00 a share. Standard's stockholders exchanged each share of Standard common for 1/10 of a share of Chadbourn common, plus 11/2 shares of Chadbourn convertible, cumulative, preferred stock. Each share of Chadbourn preferred stock given in exchange was supposed to pay annual cash dividends of $.462/3 a share, and Chadbourn was supposed to redeem 20% of these preferred shares each year at $ 11.00 a share, beginning in 1975. Each preferred share carried a conversion privilege allowing the preferred stockholder to convert a share of preferred into 6/10 of a share of Chadbourn common. The general purpose of the package appears to have been to give each Standard shareholder a set of Chadbourn securities with approximately the same market value as their Standard shares but with more liquidity and higher dividends. A year after the merger, Chadbourn suffered a loss of $17 million. It was left with a capital deficit of $ 7 million. Chadbourn now was unable to redeem or pay dividends on the preferred stock. Ps sued Chadbourn, Standard, their management, their lawyers and D. D had prepared and certified Chadbourn's financial statements in the proxy materials. Ps settled with everyone but D. The court ruled against D for violating §14 of the Exchange Act. D appealed.

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