Escott and other investors brought suit to recover the loss of their investment in debentures issued by BarChris Construction Corporation. BarChris became bankrupt when the owners of bowling alleys built by the corporation failed to make their payments. The defendants were those who had signed the registration statement filed with the SEC. In its prospectus for the debentures, BarChris overstated sales and earnings and its current assets. It also understated its liabilities on some sales contracts and failed to disclose that a large part of the proceeds from the sale of the debentures would be used to pay off the old debts. 

It also failed to disclose that it was in the business of operating bowling alleys. (It had begun operating some of the alleys when the owners defaulted on their payments to the corporation.) Some of the defendants were unaware of the misleading statements and omissions. Auslander was an outside director who had just joined the board before the debentures were registered and had not read the registration statement. Trilling, a junior officer who was controller, also claimed that he had been unaware of the false and misleading statements. Another defendant was Peat, Marwick, Mitchell & Co., the public accounting firm that had prepared an audit for the corporation. Were those who had signed the registration statement liable because of the misleading statements and omissions even if they were unaware of them?