Now you see it: SEC dismisses enforcement actions against audit partners after Jarkesy
The SEC walks away from the fight over sanctioning auditors for bad audits. Defendants are deliriously happy but the decision leaves many broken hearts and shattered dreams.
Success is stumbling from failure to failure with no loss of enthusiasm. Winston Churchill
On June 27, 2024 the U.S. Supreme Court affirmed the Fifth Circuit’s decision in Jarkesy v. SEC in a 6-3 ruling, holding that the Seventh Amendment right to a jury trial precluded the U.S. Securities and Exchange Commission, the SEC, from pursuing monetary penalties for securities fraud violations through its in-house administrative courts.
Several law firms that defend white-collar individual clients in SEC cases had great write-ups of the decision. I was particularly interested in firms and key attorneys that routinely defend CPAs, specifically audit partners caught up in cases where there firms are also defendants, or where the firms are also sanctioned/fined for violations of securities laws and PCAOB rules, which are also securities laws.
That's because the decision left open the question of what would happen to accountants who were alleged to have violated Rule 102(e) of the SEC’s Rules of Practice that allow the SEC to censure a person or deny the privilege of appearing or practicing before the SEC to any person if it finds that such person has engaged in “improper professional conduct”.
While the Jarkesy decision was pending at the Supreme Court, defense attorneys started asking the SEC to put a hold on pending actions against their clients. The SEC had no choice, it seems, but to capitulate.
For example, in the matter of Joshua Abrahams, CPA, Admin. Proc. File No. 3-21214, the parties filed a joint stipulation on August 14, 2023, to stay his proceeding pending the Supreme Court's decision.
ORDER POSTPONING PROCEEDING
On October 21, 2022, the Securities and Exchange Commission issued an order instituting administrative proceedings (“OIP”) against Joshua Abrahams, CPA, pursuant to Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice.1 On April 3, 2023, the Commission issued a scheduling order, reflecting the parties’ joint stipulation, that provided fact discovery would close on July 31, 2023.
On July 28, 2023, the parties filed a joint stipulation to stay the proceeding upon the conclusion of the fact discovery period. The parties “agree that a stay of all deadlines . . . is warranted” pending the Supreme Court’s resolution of SEC v. Jarkesy in light of the issues that are before the Supreme Court in that case.
In general, everyone who asked for a postponement got the same deadline:
Accordingly, it is ORDERED that the proceeding is postponed until the earlier of 30 days after the Supreme Court issues its mandate in Jarkesy or July 31, 2024...
Law firm Debevoise and Plimpton, the home of former SEC Director of Enforcement Andrew Ceresney, and former SEC Chair Mary Jo White, spelled out the issues for defendants in 102 (e) cases like Joshua Abrahams:
Unresolved Issues
The Supreme Court’s opinion did not reach two of the constitutional questions considered and decided in the Fifth Circuit. First, the Court did not address the Fifth Circuit’s holding that Congress violated the non-delegation doctrine by authorizing the SEC to choose whether to pursue a civil penalty action before an administrative law judge or to litigate in an Article III court.
Second, the Court did not opine on whether the SEC’s structure violates Article II because of the tenure protections afforded to ALJs. A finding that these agency adjudicators are unconstitutionally protected from removal would have required the agency to fundamentally restructure itself and would have disrupted the core of its enforcement capabilities.
Since the Fifth Circuit’s decision, the SEC has been limiting or avoiding assigning new cases to ALJs and instead has assigned itself, i.e., the five-member SEC, as the hearing officer in some cases. This strategy presents its own constitutional due process issues as there is no established procedure for the Commissioners to act as hearing officer in the first instance. And indeed, we understand that the SEC has itself never presided over an administrative hearing. It remains to be seen whether the SEC will change its practices now that a ruling from the Court is not imminent (though there is other litigation pending challenging administrative proceedings).
Jarkesy is an extremely important milestone in SEC jurisprudence as it confirms that SEC fraud claims seeking legal remedies, such as civil penalties, must be tried by a jury. As a practical matter, however, its impact may be limited in the near term, as the SEC has already been bringing nearly all of its new enforcement actions—whether sounding in fraud, negligence, or strict liability—in district court since the Supreme Court’s Lucia decision, which addressed but declined to resolve the constitutional questions regarding the agency’s use of ALJs. Although the majority’s holding was limited to securities fraud cases, we expect the SEC to continue its existing practice of going to district court whenever possible, regardless of the claim.
We would expect there to be further litigation over whether other types of remedies, such as Rule 102(e) bars which prevent attorneys or accountants from appearing or practicing before the SEC, are punitive in nature and therefore require a jury trial.
The SEC currently may only seek 102(e) relief in administrative proceedings and does not have the option of seeking such relief in district court. Due process and other challenges to such proceedings are also likely.
Those who watch these cases, like me, have been watching and waiting to see what would happen after the Supreme Court's ruling.
After the jump, for paid subscribers only, I discuss some specific cases highlighted by attorney Nick Morgan on LinkedIn and the Abrahams case, which was not on Morgan’s list.
I discuss why, again as in the SolarWinds case, it matters a lot what law the SEC uses to bring a case.
