Supreme Court sides with accountant over SEC

The Supreme Court ruled Friday in favor of a Texas accountant who challenged the constitutionality of a Securities and Exchange Commission administrative law judge holding enforcement proceedings against her.

The Supreme Court held that Texas accountant Michelle Cochran has the right to challenge the constitutionality of her administrative law judge in federal court before undergoing an administrative adjudication. 

The ruling came in conjunction with a decision in a related case involving the use of administrative law judges by the Federal Trade Commission during a proceeding against a body camera manufacturer, Axon Enterprise (see story). Both cases involved the “removal protections” for administrative law judges at agencies like the SEC and the FTC, which restrict the president’s ability to remove them at will, and whether those protections are unconstitutional. Attorneys had argued that such cases should have gone before a traditional federal court under Article III of the Constitution.

“The statutory review schemes set out in the Securities Exchange Act and Federal Trade Commission Act do not displace a district court’s federal-question jurisdiction over claims challenging as uncon­stitutional the structure or existence of the SEC or FTC,” wrote Justice Elena Kagan in a unanimous opinion for the court. “The ordinary statutory review scheme does not preclude a district court from entertaining these extraordinary claims.”

The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, represented Cochran in her case, Securities and Exchange Commission, et al. v. Michelle Cochran, and praised the court for a decision that will allow their client to plead her case before a traditional federal court, rather than be subjected to a series of hearings at the agency. 

Cochran originally filed suit in federal district court to enjoin the SEC’s second round of administrative enforcement proceedings against her. Her attorneys contended the administrative law judge remained unconstitutional despite the SEC’s efforts to remedy the situation after an earlier case, because SEC ALJs still enjoy multiple layers of “for cause” removal protection, a problem an earlier court declined to resolve and that the SEC could not fix on its own because the insulations from removal are statutory.

The NCLA also asserted that the SEC violated Cochran’s due process rights by failing to adhere to its own rules and procedures.

“Today is a victory for all Americans — especially targets of SEC or FTC administrative enforcement,” said NCLA senior litigation counsel Peggy Little in a statement. “For decades, Americans have been hauled before agencies which act as investigator, prosecutor, judge and their first court of appeal. Whether that is constitutional is, as Justice Kagan notes at the outset, ‘fundamental, even existential.’ Michelle Cochran had the courage to insist that any hearing that put her CPA license at stake must be constitutional. And today the Supreme Court unanimously agreed that she is entitled to her day in court before the constitutional injury takes place.”

Cochran was elated at the ruling. “From the first hearing forward, it was clear that the odds were stacked against me,” she said in a statement. “I am thrilled that every one of the Supreme Court justices agree that whether this costly, bruising and biased system is constitutional must be heard by a real judge before I have to undergo a second one. I have been stuck in this system for seven years, with everything, including my CPA license, at risk. I’m forever thankful for my incredible representation by NCLA and Latham & Watkins and everyone who has supported us along the way.”

The Supreme Court held that Cochran’s removal power claim is outside the SEC’s “sphere of expertise.”

Justice Kagan noted that Cochran’s claims “cannot receive meaningful judi­cial review through the … Exchange Act.” Relying on the Supreme Court’s earlier precedent in the case of Thunder Basin Coal Co. v. Reich, the court held, “All three Thunder Basin factors thus point in the same direction — toward allowing district court review of Axon’s and Cochran’s claims that the structure, or even existence, of an agency violates the Constitution.”

In a concurring opinion, Justice Clarence Thomas wrote to express his “grave doubts about the constitutional propriety of Congress vesting administrative agencies with primary authority to adjudicate core private rights with only deferential judicial review on the back end.” He stated that if private rights are at stake — as they are in Cochran’s case — “the Con­stitution likely requires plenary Article III adjudication.” 

Justice Neil Gorsuch wrote separately to say the case should have been decided solely on statutory grounds. He criticized the court’s superimposing of a judicially created and difficult-to-administer balancing test on top of Congress’ text, and he pointed out how such a test had caused Cochran to suffer.

The case has been remanded to a federal district court in Texas. NCLA president and general counsel Mark Chenowith noted during a press conference that appeals court judges in that district had already reached a favorable ruling in a separate case involving administrative law judges.

“The Fifth Circuit Court of Appeals decided that, in fact, it is unconstitutional to have these multiple layers of removal from protection,” he said.

PCAOB case

Friday’s ruling cites an earlier Supreme Court case from 2010 brought by the Free Enterprise Fund challenging the structure of the Public Company Accounting Oversight Board, which led to some changes in the governance of the board, although it mostly preserved the constitutionality of the PCAOB and the Sarbanes-Oxley Act that created it.

Separately, on Friday, the PCAOB challenged another case in which the NCLA is representing an accountant who is suing the board over what the NCLA calls “secret disciplinary proceedings” (see story).

The case involves an auditor in the South American country of Colombia. The plaintiff is referred to only as “John Doe” and is described as an accountant who previously worked as an auditor at an accounting firm there that is a member of a larger international network of accounting firms. In 2015, the accountant worked on a team that performed “component audit procedures” relating to a publicly traded audit client to help a different member firm within the network, which was the principal auditor of the client’s financial statements. The case seemed to match a case involving a group of KPMG auditors.

The PCAOB filed a motion to dismiss the case, which the NCLA had filed in Texas, arguing that the board has virtually no presence in Texas.

“The complaint does not come close to alleging that the board has contacts with the State of Texas sufficient to meet the due process requirements for asserting personal jurisdiction,” said the PCAOB. “This case has no meaningful connection to Texas. As the complaint alleges, the board is incorporated and has its principal place of business in the District of Columbia, and its proceedings occur there. Although the board allegedly maintains two offices in Texas, the complaint does not suggest that those offices have anything to do with this suit, and Supreme Court precedent makes clear that such offices cannot give rise to personal jurisdiction. And nothing in the complaint suggests that the conduct at issue in the underlying enforcement proceeding — plaintiff’s alleged failure to cooperate in a board investigation — has any connection to Texas. There is thus no possible basis for this Court’s exercise of personal jurisdiction over the board in this case.”

For similar reasons, the PCAOB argued that even if the venue were technically proper in the case, discretionary factors point overwhelmingly to the U.S. District Court for the District of Columbia as the proper court to adjudicate this suit.

“The PCAOB is laser-focused on protecting investors,” the board said in a statement.

The PCAOB retained a number of prominent attorneys in the case, including former Solicitor General Don Verilli, who has argued more than 50 cases before the Supreme Court. Jeff Lamken, a former law clerk to Justice Sandra Day O’Connor, spearheaded the board’s representation in the Free Enterprise Fund challenge, which was decided by the Supreme Court in 2010, preserving the board and declaring that the Sarbanes-Oxley Act “remains fully operative as a law.”

The NCLA pointed to its victory in the Supreme Court ruling Friday as a more significant development.  “We believe today’s motion lacks merit and we intend to respond accordingly,” said Russell Ryan, senior litigation counsel at the NCLA. “By unhappy coincidence for the PCAOB, much of the motion was undercut by this morning’s Supreme Court decision in the Cochran case.”

Chenoweth noted, “They must take the threat to the PCAOB seriously. The filing had 13 different attorneys listed on it in response to our complaint. These are all private attorneys too.” 

“Your tax dollars are going to pay outside lawyers to mount a massive defense of an agency,” said Little during a press conference. “Typically when you walk into an SEC proceeding, they have a whole cadre of lawyers. For some reason, on this PCAOB case, in addition to their very largely staffed teams that prosecute these cases, they’ve had to reach for outside counsel. I do think that suggests grave concern about the constitutionality of these proceedings.”