Free Enterprise Fund v. PCAOB

Supreme Court Dooms Chicago Gun Ban; Obama Judicial Nominees Oppose Gun Rights; Religious Clubs Lose First Amendment Case; Removal of High-Ranking Bureaucrats Made Easier

by Hans Bader on June 30, 2010

in Intellectual Property, International, Labor, Legal, Nanny State, Personal Liberty, Politics as Usual, Regulation, Sanctimony, Zeitgeist

The Supreme Court doomed Chicago’s handgun ban Monday by ruling 5-to-4 that the Second Amendment applies to state and local governments like Chicago, not merely the federal government.  (Most guarantees in the Bill of Rights are deemed so fundamental that they apply to both state and federal governments, but a few rights deemed trivial, like the right to a jury trial in lawsuits seeking over $20, only are applied by the Courts to the federal government, not the states.)  In 2008, the Supreme Court ruled that the Second Amendment protects the individual right to possess a handgun in a federal enclave, in striking down a handgun ban in Washington, D.C., in District of Columbia v. Heller.  Chicago’s ban is quite similar to the one found unconstitutional in Washington, D.C., so the Supreme Court’s ruling Monday in McDonald v. City of Chicago dooms Chicago’s gun ban.

In 2009, President Obama’s first Supreme Court nominee, Sonia Sotomayor, claimed before her confirmation to accept the Supreme Court’s ruling in Heller as binding precedent.  But on Monday, she joined a dissent by the Supreme Court’s four liberal justices calling for the Heller decision to be overruled.  Second Amendment scholar David Kopel says that Sotomayor was not candid, noting that her opinion “contradicted” what she told the Senate before the Senate confirmed her to the Supreme Court.  It is likely that future liberal Supreme Court nominees will pretend to support gun rights until they are confirmed, then vote against such rights once on the Court.

Obama’s current Supreme Court nominee, Elena Kagan, lumped the NRA together with the KKK as “bad guy orgs” while serving in the Clinton administration, suggesting that she will consistently rule against gun owners if her nomination is approved by the Senate.  Kagan failed to defend federal laws protecting crime victims while serving as Solicitor General.

As a Harvard dean, Kagan blocked the military from recruiting, in defiance of a federal law requiring access for military recruiters.  Kagan claimed her opposition was based on the military’s exclusion of openly-gay soldiers, not hostility to the military in general, but this is hard to square with the fact that she had no problem letting the Saudis sponsor an Islamic studies program at Harvard Law School, even though the Saudis flog and execute gay people, and she had no problem serving in the Clinton administration, even though Clinton signed into law both the restrictions on gays in the military she claimed to object to (the Don’t Ask, Don’t Tell policy), and the ban on federal recognition of gay marriages contained in DOMA.

The Supreme Court Monday also ruled that religious clubs can be forced by colleges to admit atheists and others who disagree with the club’s religious perspective as members, as long as the college requires this as part of a general policy of banning clubs from discriminating based on any characteristic.  The Supreme Court’s four “conservative” justices dissented against this ruling limiting the First Amendment’s freedom of association, while moderate Anthony Kennedy joined the Supreme Court’s liberal bloc in ruling against the religious clubs in Christian Legal Society v. Martinez.

In Free Enterprise Fund v. PCAOB, the Supreme Court, in a 5-to-4 ruling, cut back on restrictions on the ability to remove high-ranking bureaucrats, ruling that provisions of the Sarbanes-Oxley law that kept anyone from removing members of the Public Company Accounting Oversight Board except for willful misconduct unconstitutionally infringed on the constitutional separation of powers, which requires that important government employees be subject to some degree of accountability to higher-ups in the executive branch.  However, the Supreme Court left intact the bulk of the Sarbanes-Oxley law.  The red tape adopted by bureaucrats under Sarbanes-Oxley has driven many IPOs and American jobs overseas.  The red tape costs the economy $35 billion a year, according to the American Electronics Association, and it did nothing to prevent the mortgage meltdown, Bernard Madoff’s $50 billion fraud, or the faulty valuation of sub-prime mortgage-backed securities that helped spawn the financial crisis.

The Supreme Court overturned a ruling that allowed business methods to be treated as exclusive property under the patent laws, but did not definitively rule out the patenting of business methods, in Bilski v. Kappos.

CEI’s Supreme Court Oscar Speech

by John Berlau on June 29, 2010

in Odds & Ends, Zeitgeist

CEI won a significant victory yesterday in Free Enterprise Fund v. Public Company Accounting Oversight Board, the first Supreme Court case to which we served as co-counsel. The Court held the lack of removal power for PCAOB members to be unconstitutional and opened up an avenue of litigation for entrepreneurs to challenge its current rules and disciplinary actions under the Sarbanes-Oxley Act that created it.

Many people made this victory possible. So here is our “Oscar speech” that tries to thank each of them. (Note to Academy Awards buffs: There is one major difference. There is nothing to be read in those whom we left out. It’s just that there are so many countless people to thank, even for encouraging words that kept us going).

We were very fortunate to have a principled membership organization like the Free Enterprise Fund as a client. Founded by Steve Moore (now of course a prominent editorial writer for the Wall Street Journal), FEF helped bring  the focus of fiscal conservatism to new areas such as SOX and securities law. Moore’s successor as FEF chairman, Mallory Fact0r, provided valuable guidance from his vast business acumen as well as the initial funding to bring the case forward. Factor was ably assisted by the fund’s then executive director E. O’Brien Murray. Current FEF chairman Steve Goodrich is continuing the FEF’s good work.

We were also very fortunate to be working with a top legal team, beginning with lead counsel Michael Carvin and his associates at the Jones Day law firm Noel Francisco and Christian Vergonis. And we also had the expertise of the brilliant legal minds of former Solicitor General Ken Starr and former Assistant Attorney General Viet Dinh.

Before the court case, nine separtate amici briefs were also filed on our behalf. Indiana University Law Profess Donna Nagy, who wrote one of the first law review articles exposing the constitutional defects of the PCAOB, organized a brief signed by 15 law professor, including UCLA’s Stephen Bainbridge and Brooklyn College’s Roberta Karmel, the SEC’s first female commissioner who was appointed by President Carter.

Former Attorneys General Edwin Meese, Richard Thornburgh, and William Barr weighed in on a brief from the Washington Legal Foundation. The Cato Institute and its senior fellow Ilya Shapiro filed a brief that highlighted both the costs of Sarbanes-Oxley rules enforced by the PCAOB and incorporated public choice economic theory to show how  agency’s incentives are skewed. And Factor again weighed in on our behalf, joining in an amicus brief filed American Civil Rights Union Counsel Peter Ferrara.

Finally, we can never thank enough for his courage and perseverance our client Brad Beckstead, partner in the two-person Henderson, Nev., accounting firm Beckstead & Watts. Nearly five years ago, Beckstead shared with us his concerns that the PCAOB was showering on him and the firms he audited mounds of red tape that increased costs and was of little value to shareholders. We began to discuss filing a lawsuit. Beckstead joined FEF, and they both became the plaintiffs, represented by CEI and the Jones Day legal team. This case is a victory for Brad Beckstead and all the entrepreneurial “Davids”  he represents who just beat the “Goliath” of the PCAOB.

CEI in the News for June 10, 2010

by Ryan Lynch on June 10, 2010

in Video, Zeitgeist

[youtube:http://www.youtube.com/watch?v=vYBTdSDPPm4 285 234]

False Claims by Government in Supreme Court Case: PCAOB Agency Is More Powerful and Independent Than Government Claims

by Hans Bader on December 6, 2009 · 3 comments

in Legal, Politics as Usual, Regulation

The members of the Public Company Accounting Oversight Board (PCAOB), an agency being challenged in the Supreme Court on December 7, aren’t appointed by the president, nor can he remove them. The General Accounting Office describes the PCAOB as “an independent board with sweeping powers and authority;” its rules and red tape cost the economy billions of dollars every year (with an long-term cost of perhaps $1 trillion).

Yet the government suggests in its brief that the president has “fully effective control” over the PCAOB (see pg. 46 of that brief). That’s not the only peculiar claim made in the PCAOB’s defense.

The case raises the issue of whether members of an agency — the PCAOB — picked by the members of yet another independent agency — the five Commissioners of the Securities and Exchange Commission (SEC) acting as a group — are, in light of their broad policy making role, actually “principal officers” who thus should have been picked instead by the president under the Constitution’s Appointments Clause. Alternatively, assuming that PCAOB members are mere “inferior” officers, the case raises the issue of whether they should have been picked, as the Appointments Clause requires for inferior officers, by the “Head” of a “Department,” rather than the SEC Commissioners acting collectively (the SEC has a Chairman who manages it and supervises its staff).

Government lawyers argue that the PCAOB is so controlled by the SEC that its members are mere inferior officers, and claim that the SEC is headed by all its Commissioners, not its Chairman. But as Jonathan Moore has noted, a long-time SEC commissioner debunked these claims on December 3. Former SEC Commissioner Paul Atkins took the exact opposite view, in a panel discussion at the American Enterprise Institute, which one can view and listen to here (Atkins was the fifth speaker; I also spoke at the event, and Jonathan Moore, who was in the audience, questioned the panel).

Atkins spoke at length about the PCAOB and how difficult it was for the SEC to influence the PCAOB. He noted that the PCAOB had enough autonomy to frustrate the SEC’s attempts at oversight. When the SEC sought a business plan from the PCAOB, the PCAOB Chairman said that “the statute was his business plan” and more or less failed to comply. It took five years to get something akin to a business plan from the PCAOB. Atkins said that PCAOB’s “Audit Standard 2” “has a very checkered history” and illustrated the “limits” of SEC oversight. The 400 pages of requirements from Auditing Standard No. 2 made compliance with Sarbanes-Oxley “very difficult” and “very costly.”

Atkins noted that “All five commissioners” were in favor of “radical” changes to it, yet it took years for them to obtain merely “some” changes to that audit standard, owing to the need for consensus and PCAOB foot dragging. He recounted how the PCAOB adopts “staff-driven” rules through “informal rulemaking” that apply without being approved by the SEC, regardless of Sarbanes-Oxley’s formal approval process for rules. Atkins says, for example, that its guidance regarding “stock options” was “not subject to any rule at all,” despite functioning in practice as a rule. While the SEC has to approve formal rules, the PCAOB functions heavily through informal rules never approved by the SEC. He said that “Peekaboo does have real power,” “investigative power,” and “prosecutorial power.” Although the SEC theoretically reviews the PCAOB’s budget, Atkins noted that “staff at Peekaboo were not telling the truth” about the PCAOB’s budget system to the SEC, making evaluation of its budget and spending difficult. He noted that on the SEC’s website, there is video footage of his concerns over this at the last budget meeting. He noted that because of the PCAOB’s separate status and the SEC’s lack of control over PCAOB staff, the “SEC found it didn’t really have the authority” to control the PCAOB’s budget that it supposedly did.

Atkins noted that the SEC’s “power is not plenary” over the PCAOB, that it was difficult to get a group consensus focused on oversight over the PCAOB, and that oversight of the PCAOB was “like pushing on a string.” He said that the current set-up under Sarbanes-Oxley is a “very difficult way for the SEC to oversee a separate board.” He cited “flawed implementation of [SOX Section] 404” from 2002 to 2006 as an example, and noted the “incredible amount of attention diverted” to accounting issues that were not important as a result of the PCAOB’s internal-controls rules.

He addressed the question of whether the SEC’s chairman is its head for appointments clause purposes. He said that the Founders realized the “committee structure” or the “committee system was not a very effective decision making type of body” for things like appointments, and cited the 1950 Reorganization Plan 10 that vested “authority over the budget” and “HR decisions” in the SEC’s chairman. Although he noted that “consensus” is desired for key posts like the General Counsel, when push comes to shove, “in reality, he [the Chairman] can still appoint who he wants.” He said that the idea that PCAOB members – or even SEC members – were really accountable to the president was silly, and that the SEC’s own history “illustrates how difficult it is for the President to assert authority” over the SEC, much less the PCAOB.

Atkins’ observations debunk the government’s suggestion that the president has “fully effective control” over the SEC – and the lower court ruling upholding the PCAOB, which claimed that the SEC was not headed by its Chairman, but by SEC Commissioners as a group – a claim based on that court’s inconsistent reasoning. Law professor Donna Nagy similarly debunks claims that the PCAOB is “heavily controlled” by the SEC in a forthcoming article in the Pittsburgh Law Review, noting that PCAOB members are “principal officers” “acting with significant discretion and autonomy outside the SEC’s control” who constitutionally must be appointed by the president — not, as is currently the case, by the SEC Commissioners as a group.

Also available online is the text of SEC Commissioner Paul Atkins’s earlier 2006 speech noting the SEC’s limited ability to control the PCAOB (such as the PCAOB’s unapproved guidance on subjects like “options grants” and the PCAOB chair’s view that the PCAOB is more like the SEC’s “cousin” than its subordinate).

Courts sometimes take judicial notice of such statements. See Nebraska v. EPA, 331 F.3d 995, 998 n.3 (D.C. Cir. 2003) (taking judicial notice of statements on web site); Cf. Parents Involved in Community Schools v. Seattle School District No. 1, 551 U.S. 701, 780 n. 30 (2006) (Thomas, J., concurring) (quoting from web site); id. at 730, n.14 (plurality) (citing news articles about website’s earlier content).

Peekaboo! PCAOB More Powerful and Less Accountable than Government Claims

by Jonathan Moore on December 4, 2009 · 7 comments

in Legal

On December 7, the U.S. Supreme Court will hear Free Enterprise Fund v. Public Company Accounting Oversight Board. The case, brought by CEI and Jones Day attorneys on behalf of the Free Enterprise Fund, challenges the constitutionality of the way Public Company Accounting Oversight Board (also known as PCAOB, or not so affectionately as Peekaboo) members are appointed. The PCAOB, which was established by the Sarbanes-Oxley Act of 2002, is an independent governmental agency (according to Sarbanes-Oxley it is a private institution, but even supporters of the Board’s structure admit that it is a governmental body) whose members are selected by the SEC commissioners collectively. The lawyers arguing the case argue that this selection process violates the appointments clause of the Constitution.

The Constitution, in Article 2 sec. 2, establishes that the President “Shall have Power, by and with the Advice and Consent of the Senate to… nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

According to the Constitution, the President is responsible for appointing what has later been defined as “principal officers.” Further, if the officers are deemed to be “inferior officers,” Congress may give appointment power to the President, a judge, or the head of a department. Lawyers for the Free Enterprise Fund charge that regardless of whether the PCAOB members are principal or inferior, the Constitution has been violated. The President does not appoint the board members, and as such, if they are principal officers, the Constitution has been violated. If the board members, however, are inferior officers, they have not been appointed by a head of a department, rather, they have been appointed by the SEC commissioners.

Lawyers defending the constitutionality of the PCAOB have charged that the board members are inferior officers, and that the SEC commissioners collectively are the head of the SEC. Further, they claim that the SEC has complete control over the PCAOB through several powers, including the power to review all PCAOB rules, and approving the PCAOB’s budget. As such, they argue, this direct supervisory authority makes the PCAOB clear inferior officers, and since the President has control over the SEC commissioners, who have control over the PCAOB, the President has “fully effective control” over the PCAOB.

Yesterday, however, at an American Enterprise Institute event titled “Public Company Accounting Oversight Board: A Preview”, former SEC Commissioner (2002-2008) Paul Atkins provided an alternative story of the SEC’s control over the PCAOB, as well as refuting the claim that the SEC commissioners are collectively the head of the SEC.

Atkins noted several areas in which the PCAOB managed to evade SEC controls and operate very independently of the SEC. First, he stated that the PCAOB’s budget was not nearly as under control by the SEC as has been claimed. Atkins stated that the “staff at Peekaboo were not telling the truth” to the SEC about the PCAOB’s budget. His experience at the SEC led him to the conclusion that the SEC “didn’t really have the authority it supposedly did” over the PCAOB’s budget.

At one point, the SEC asked the PCAOB for a business plan regarding their operations. The PCAOB chairman informed the SEC that Sarbanes-Oxley “was his business plan” and for five years the PCAOB evaded the SEC’s demand for a business plan.

After the PCAOB produced their “Audit Standard 2”, “all five” SEC commissioners were in favor of “radical” changes to it, and yet it took the SEC years to even make “some” changes to the auditing standards due in part to PCAOB recalcitrance.

He stated that the PCAOB used “informal rulemaking” to adopt “staff-driven” rules which evaded the need to obtain SEC approval for all rules. As an example, he says that the PCAOB’s rule making regarding stock options was “not subject to any rule at all” despite functioning as a rule.

Atkins directly refuted the claim that the SEC has plenary power over the PCAOB, stating bluntly that the SEC’s “power is not plenary” regarding the PCAOB. He even said that a good analogy for SEC oversight of the PCAOB was that of “pushing on a string”.

Atkins also implied that considering the SEC commissioners as a collective head for the SEC was ignoring the realities of the day-to-day operation of the SEC. He stated that the chairman has considerably more power than the other commissioners. He noted that the 1950 Reorganization Plan 10 gave “authority over the budget” and “HR decisions” to the SEC’s chairman. He did say that consensus among the commissioners is generally important, but said that “in reality, he can still appoint whoever he wants” to critical appointment posts. And yet, this does not apply to the PCAOB, who are appointed collectively by the SEC. Further, Atkins even questioned whether or not the President had direct power over the SEC, a lynchpin of the defenders of the SEC’s argument. He stated that the SEC’s history “illustrates how difficult it is for the President to assert authority” over the SEC, much less the PCAOB.

Atkins’ telling of the SEC and PCAOB’s relationship calls much of the PCAOB’s legal defense into question. If the SEC lacks reliable control over the PCAOB, how can the President have “fully effective control” over the PCAOB? If, one wonders, the SEC chairman is treated as the appointer for other positions within the SEC, which implies that he is the head of the department, why is it that he does not have the power to appoint the PCAOB members? And why is the SEC chairman sufficiently powerful to act as the head in all other appointment cases, but when it comes to the PCAOB he must act as an equal to his fellow commissioners? And further, if the President lacks even control over the SEC, how can he truly have control over the PCAOB members, who are an additional step further down the chain of command?

These are some questions the justices should be asking on December 7.

Law Professors Urge Supreme Court to Review Challenge to Powerful Agency, in Free Enterprise Fund v. Public Company Accounting Oversight Board

by Hans Bader on May 13, 2009

in Deregulate to Stimulate, Economy, Legal, Personal Liberty, Precaution & Risk

Tomorrow, the Supreme Court will weigh whether to decide what a federal judge called the “the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years.” Law professors Kenneth Starr and Viet Dinh, who worked on the case, have an editorial in today’s Wall Street Journal urging the Supreme Court to hear the case, which challenges a powerful, and largely unaccountable, federal agency called the Public Company Accounting Oversight Board (PCAOB). As they point out, in creating the PCAOB, “Congress created a striking Constitutional anomaly – a powerful executive branch agency with a structure that gives the President almost no say over its policies.”

Last year, a divided D.C. Circuit Court of Appeals voted 2-to-1 to uphold a provision of the Sarbanes-Oxley Act, over a strong dissent by Judge Kavanaugh, in the case of Free Enterprise Fund v. Public Company Accounting Oversight Board. That ruling deserves Supreme Court review both because the case is exceedingly important, and because the ruling rests on reasoning that is disturbingly inconsistent.

The case challenges the PCAOB, the regulatory board set up by the 2002 Sarbanes-Oxley Act, as a violation of the Constitution’s Appointments Clause and separation of powers. The PCAOB is enormously important: As Starr and Dinh note, “A Brookings-American Enterprise Institute study found that all of Sarbanes-Oxley’s provisions – mostly enforced by the PCAOB – have cost the U.S. economy more than $1 trillion in direct and indirect costs.” Moreover, the PCAOB’s red tape imposes annual compliance costs of over $35 billion, while providing only illusory benefits for investors, and driving businesses overseas. The PCAOB enjoys “massive power,” “unchecked power by design,” according to a Senator who voted to create it.

But rather than being picked by the President with Senate approval, the way important government officials are supposed to be, PCAOB members are picked by SEC Commissioners as a group (which led to a disorganized selection process for the first PCAOB members). As Starr and Dinh note, “The PCAOB’s lack of an accountable structure has likely contributed to what members of both parties see as its policy failures, such as its failure to stem inadequate disclosures by “firms reporting subprime securities.”

The lawsuit says that violates the Appointments Clause of the Constitution, which requires that government officials be picked by the President or (for minor officials) by the “Head of a Department.” The lawsuit also argued that the PCAOB members are so unaccountable to the president, who can’t remove them (the SEC Commissioners collectively can, but only for “willful” misconduct), that it violates separation of powers.

In order to reject the constitutional challenges, the court’s majority had to rely on inconsistent reasoning. First, it claimed that the SEC’s Chairman is NOT the SEC’s head, but rather “simply one” of “several commissioners,” making the SEC Commissioners collectively the head of the SEC. See Opinion, at pg. 20 (“The [SEC's] Chairman . . . is simply one Commissioner”); Opinion, pg. 21 (“The commission is a body whose ‘Head’ consists of the several commissioners”). Only by doing that could it rule that the SEC Commissioners collectively are the “Head” of a department and thus are permitted by the Appointments Clause to make appointments. (Never mind that the Chairman has been described by the SEC itself as its “chief executive” and “head”).

Then, just a few pages later, it suddenly suggested just the opposite: that the SEC’s chairman was, after all, the SEC’s head. Confronted with the argument that the PCAOB is not accountable to the President through his appointees, such as the SEC’s chairman (who, unlike other SEC commissioners, serves at the president’s pleasure), the court stated that the President does have indirect influence over the PCAOB through the SEC, because the president picks the SEC Chairman, who “dominates commission policymaking.” See Opinion, Pg. 24. (It said that “by appointment of the Commission chairman, who serves at the pleasure of the President and often ‘dominate[s] commission policymaking,’ the President can influence Commission policy and control who directs ‘the administrative side of commission business, select[s] most staff, set[s] budgetary policy, and as a consequence command[s] staff loyalties.’” See Opinion, pg. 24). But if the Chairman so “dominates commission policymaking,” that is because he is the SEC’s actual “head” (its “top executive,” as the SEC concedes), not a mere figurehead.

Is it too much to ask that courts not rely on inconsistent reasoning? Especially in a case like this, which Judge Kavanaugh noted is “the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years.”