Free Enterprise Fund v. Public Company Accounting Overs

In defending Kagan, Media Matters embraces Bush Justice Department

by John Berlau on July 31, 2010

in Culture, Deregulate to Stimulate, Economy, Legal, Mobility, Nanny State, Odds & Ends, Personal Liberty, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

Well, who woulda thunk it?! George W. Bush’s Justice Department is now considered a citadel of wisdom by the legal eagles at the liberal Media Matters for America.

On Thursday, I outlined in National Review how Elena Kagan’s position as solicitor general that “regulated firms” must “exhaust” the administrative review process at a regulatory agency before judicial review – if adopted by a future Supreme Court — would likely mean that small businesses challenging Obamacare and other laws would never see their day in court. Hours later, Media Matters blasted my piece as “the latest bogus attack on Kagan.” My criticism was “bogus,” according to the site, because “the Bush administration Justice Department made the same argument in lower court proceedings.”
Putting aside the issue of whether these arguments were in fact “the same” – and they differed in many respects – it is striking that authors of the Media Matters response did not seem to be bothered by the rejection of these arguments by two federal judges appointed by Bill Clinton, a fact that one would think would hold interest for the site’s readers. Both James Robertson at the D.C. district court and Judith Rogers, who wrote the majority opinion for the appeals court, ruled that plaintiffs had standing to challenge the constitutionality of Sarbanes-Oxley in Free Enterprise Fund v. Public Company Accounting Board, although they would rule against the merits of this challenge. Rogers wrote that the doctrine of regulatory “exhaustion doctrine does not apply” because the “constitutional challenges to the Act are collateral to the Act’s administrative review scheme.”
It is true that when the case was filed in 2006, officials of the Bush DOJ did submit an opposition brief arguing, among other things, that plaintiffs lacked standing. The Competitive Enterprise Institute protested the administration’s position vigorously through the participation of our attorneys in the case and in public statements as well articles, op-eds and postings on Open Market. Should any of the DOJ employees whose names are on these briefs ever become the judicial nominees of a future GOP president, they too should face serious scrutiny for their advocacy of this position.
That being said, Kagan’s briefs in the case ventured beyond those of the Bush DOJ and phrased the arguments in terms of general principles that seem to bar virtually all legal challenges to laws and rules by “regulated firms” unless a regulatory agency’s review process is “exhausted.” Further, she brought back the arguments on standing after both the district and appeals courts had rejected them. And Kagan’s briefs in which she abandoned arguments in favor of the Defense of Marriage Act because they were contrary to the views of the Obama administration shows that she is not hesitant to discard a legal argument in a case if it goes against her principles.
First, it should be pointed out that the Bush DOJ did not have the opportunity to file briefs once the case was taken by the Supreme Court in May 2009, a few months after the Obama administration took office. Comparing DOJ briefs offered in cases before the lower courts to those filed before the Supreme Court – even in the same case-is to some extent an apples-and-oranges exercise. Except for politically-charged cases such as the challenge to Arizona’s immigration law, higher-level DOJ officials often have minimal involvement in lower court cases. Bush’s solicitor general’s name is not on any of the DOJ lower briefs in the case, while Kagan is listed as “counsel of record” on the Supreme Court briefs.
This distinction is important in discerning her constitutional views because at the Supreme Court level, an administration is much more conscious about the arguments it makes, knowing that it can influence the Court not just with regard to the case at hand, but other important cases as well.
This makes it all the more striking that in comparing the briefs, the Bush DOJ argued against standing mostly based on the facts and circumstances of this specific case, while Kagan’s brief phrased the arguments in terms of general principles about judicial review and the regulatory state. The Bush briefs, for instance, never praised the exhaustion doctrine in such effusive terms as the Kagan brief, which called it one of the “bedrock principles of judicial review of administrative action.”
The Bush DOJ briefs made a more limited argument –still wrong and still rejected by the lower courts –that the plaintiffs in this case lacked standing because of specific provisions of Sarbanes-Oxley and the Exchange Act and because the injuries the small accounting firm Beckstead & Watts suffered due to the law weren’t severe enough to bypass review at the agency. But those DOJ officials also conceded that the agency exhaustion doctrine should not apply to some cases. A DOJ brief in 2006 conceded that legal challenges in which the plaintiff would suffer “immediate and irreparable harm” without prompt access to the courts “could justify extra-statutory review.” It argued, however (and again wrongly), that this plaintiff was in no such danger.
But Kagan never made allowance for “irreparable harm” or other extenuating circumstances to her argument of the need for “regulated firms” to exhaust all procedures at the regulatory agency. In the brief‘s words, “even when an agency cannot itself rule on the merits of a constitutional challenge, a regulated firm cannot bypass exclusive administrative review procedures established by Congress if the constitutional claims can be meaningfully addressed in the Court of Appeals after the administrative review.” Note the phrase “after the administrative review.” What good would judicial review, however “meaningful”, if a plaintiff such as a small business had its livelihood harmed for years before a regulatory agency before it even got access to the courts?
Also, the Bush DOJ never suggested, as Kagan’s brief does, that Beckstead & Watts seek judicial review by refusing to comply with a Sarbanes-Oxley inspection or investigation. That argument drew a serious rebuke from Chief Justice John Roberts in the Supreme Court decision last month. Noting that the firm would face “severe punishment should its challenge fail,” Roberts wrote dryly in the opinion, “We normally do not require plaintiffs to bet the farm by taking the violative action before testing the validity of the law, . . . and we do not consider this a meaningful avenue of relief.” The dissent did not express disagreement with Roberts on this point.
Media Matters also fell back on the argument that “Kagan’s personal legal views can’t be inferred from her actions as solicitor general,” and that “Kagan’s duty as SG is to make every reasonable argument to defend federal laws and actions.” But in previously defending Kagan’s dropping of what many would deem “reasonable” arguments from a brief supporting the Defense of Marriage Act (a law and an issue that the Competitive Enterprise Institute takes no position on), Media Matters argued, “It’s not unprecedented for DOJ to abandon arguments.” The site quoted approvingly former Attorney General John Ashcroft’s statement that “justice is best achieved, not by making any available argument that might win a case, but by vigorously enforcing federal law in a manner that heeds the commands of the Constitution.”
Kagan did not have to argue that this small business lacked legal standing in order to make her case. In fact, since it was rejected by both the district and appeals court and by Clinton-appointed judges, pragmatism would seem to suggest dropping the argument. But Kagan instead expanded the argument to further close the courthouse door on virtually all “regulated firms” challenging government agencies. The facts suggest that her arguments in this brief represent her deeply help legal views, and small businesses have reason to fear a Solicitor General-turned-Justice Kagan.

I add the same disclaimer to this blog post that I did for the article in National Review: The opinions expressed in this article do not necessarily reflect those of counsel for the plaintiff in Free Enterprise Fund v. Public Company Accounting Oversight Board.

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).

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.”