Gulf Resources & Chemical Corporation retained Peat Marwick to audit its financial statements. The completed auditor’s report was included in Gulf’s annual report, which became publicly available the following February. One year before that date, D. S. Kennedy & Company had reported to the SEC that it had acquired over two million shares of Gulf common stock and that it intended to acquire a controlling interest in Gulf. Peat Marwick was aware of this SEC filing. In fact, Gulf’s management discussed with Peat Marwick the potential for purchasing Kennedy’s shares. Thus, Peat Marwick was aware of Kennedy’s interest in acquiring a controlling interest in Gulf and that Gulf intended to treat Kennedy as a hostile takeover threat. 

In March, Kennedy entered into discussions with Gulf concerning the possible purchase of a large block of Gulf shares, and during the course of those discussions, Gulf provided Kennedy with a copy of its annual report. Thereafter, Kennedy purchased almost four million shares of Gulf and gained operating control of the corporation. Peat Marwick first learned of this transaction a few days prior to the July closing. Gulf filed for bankruptcy protection two years later, rendering Kennedy’s investment worthless. Kennedy then filed a civil complaint against Peat Marwick as a result of its alleged reliance on the auditors’ report. Kennedy claimed the report materially misrepresented the financial condition of Gulf. Did Peat Marwick owe a legal duty to Kennedy? Explain.