Sarbanes-Oxley

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.

Dodd-Frank is not “financial reform,” it’s more Big Government lunacy

by John Berlau on July 15, 2010 · 4 comments

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

The 2,315 page Dodd-Frank financial regulation bill should not be called “financial reform.” Instead, it should be called what for what it is: pages and  pages of massively costly, counterproductive and possibly unconstitutional mandates on nearly every type of business except for those government-sponsored enterprises at the root of the crisis. And while the bill claims to crack down on excesses on Wall Street, its harshest impact will likely be on Main Street businesses that had nothing to do with the crisis.

A front-page Wall Street Journal article this week noted that “far from Wall Street, President Barack Obama’s financial regulatory overhaul … will leave tracks across the wide-open landscape of American industry.” The Journal notes that “the bill will touch storefront check cashiers, city governments, small manufacturers.”

But one  thing it will leave totally untouched are the government-sponsored enterprises Fannie Mae and Freddie Mac, which new research by Congress’ Financial Crisis Inquiry Commission and other bodies shows was even more of a prime factor in the subprime boom than originally assumed.  The Federal Housing Finance Agency now reports that Fannie and Freddie purchase 40 percent of  of all private-label subprime securities in 2003 and 2004. Indeed, according to Edward Pinto, housing scholar and Fannie’s former chief credit officer, millions of mortgages to borrowers with credit scores of less than 660, considered by prominent researchers to be the dividing line for subprime loans, had been labeled by Fannie and Freddie as prime going back as early as 1993.

Rather than wait for Congress’s own Financial Crisis Inquiry Commission to issue its report in December to examine the role of Fannie and other causes, Congress has instead passed a bill that will not prevent future bubbles and imposes untold costs that will put the country in danger of slipping back into a recession.

New collateral requirements on derivatives could cost U.S. companies as much as $1 trillion in lost capital and liquidity, according to the International Swaps and Deriviatives Association. And as the WSJ piece notes, these costs would not just hit big banks, but farmers who use derivatives to hedge the price of their crops and fuel for their tractor. The new Consumer Financial Protection Bureau could also hit retailers that issue credit tangentially related to their business, such as small stores that offer  layaway plans.

On the other side of the retail ledger, some of the biggest retailers also got an unjustified mandated benefit with the Durbin amendment that puts price controls on the interchange fees they pay to process credit cards. This corporate welfare for fat cat merchants will mean higher costs to consumers, community banks and credit unions.

In addition, the bill contains provisions that will empower special interests at the expense of ordinary shareholders and that may exceed the limits of the U.S. Constitution. The bill’s “orderly liquidation” authority will allow the Federal Reserve and the Treasury Department not just to bail out firms whose failure is deemed to be a threat to “financial stability,” but to actually seize firms that are not even asking for a bailout. The “proxy access” provisionswould override longstanding state rules in corporate director elections and force companies and their shareholders to subsidize director elections by special interest-shareholder — such as unions, enviromentalists and others. This would give these groups leverage to cut deals with management to push through agenda items, such as the “card check” abolition of secret ballots in labor in labor election and carbon cap-and-tax reductions, that they can’t get through the halls of Congress.

The silver lining is that the more people found out about the potential unintended consequences of this bill, the less popular it became. The bill cleared cloture with the bare minimum 60 votes that it needed. In the House, almost all Republicans , as well as 19 Democrats voted no, on the final bill. As a result of the growing skepticism of the bill, publicized by the Competitive Enterprise Institute and other free-market groups,  a few of the most horrific provisions — such as those that would have hurt angel investors  and ensnared manufacturers in the definition of “financial companies” — were dropped. And one genuinely pro-growth reform was adopted.

That measure, which was added over Chairman Dodd and Chairman Frank’s objections, helps fix costly and counterproductive provisions of the last “financial reform.”: the Sarbanes-Oxley Act of 2002. This provision will permanently exempt smaller public companies — those with market valuations of $75 million or less — from the law’s section 404(b), the mandate of an audit of a company’s “internal controls.”  This requirement and the rest of Sarbox did nothing to stop the accounting schemes at companies like Lehman Brothers and Countrywide, but instead frustrated honest entrepreneurs with audits of trivial items like possession of office keys and number of letters in an employee passwords, and cost the U.S. econ0my $35 billion a year. See my study, “SOXing it to the Little Guy.”

Thanks to this relief, many more smaller companies will be able to afford the cost of going public and get the financing they need to grow into the next Microsoft, Facebook or Google. That is, if they don’t get strangled by the other mounds of red tape in this bill.

In this bill, much arbitrary power is delegated to an army of new regulators. CEI will weigh on the new regulations and educate policy makers to ensure that the true interests of American investors, entrepreneurs and consumers are represented. In addition, fresh from our recent Supreme Court victory in getting part of Sarbox declared unconstitutional, we will review the law’s many constitutional defects.

CEI Research Associate Andrew Kwiatkowski contributed to this post.

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.

PCAOB case in the WSJ — Kazman quoted

by Fran Smith on December 7, 2009

in Economy, Legal

CEI’s Sam Kazman has a great quote on the PCAOB case in James Freeman’s article today in the Wall Street Journal. Although the case, being heard by the Supreme Court this morning,  may seem to deal with an esoteric Constitutional issue of appointments to the Public Company Accounting Oversight Board, Freeman points out the broad effects and costs of this board’s oversight, especially of Section 404 of the Sarbanes-Oxley Act.

The board is charged with making sure that Sarbox’s Section 404 rules on “internal controls” over bookkeeping are implemented. These rules are so onerous that companies have had to undertake exhaustive investigations of such minor issues as how many people should be required to authorize small customer refunds at a retail location.

Freeman concludes with Kazman’s quote and a succinct summary of the problem:

Is all this fuss about board appointments just legal hairsplitting? Sam Kazman, general counsel of the Competitive Enterprise Institute, one of the plaintiffs suing the PCAOB, doesn’t think so. He notes that “responsibility for bureaucrats was a fundamental issue for the Framers,” and that the appointments clause was created “as an essential check on overweening bureaucracy. As colonists of England, they had seen offices created by both the king and Parliament spawn more offices with no accountability, creating what the Declaration of Independence refers to as a ‘multitude of new offices’ and ‘swarms of officers to harass our people and eat out their substance.’”

Today, people who work at public companies-and their investors-understand this problem perfectly.

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).

Reps. Maloney and Adler push true bipartisan stimulus — Sarbanes-Oxley relief

by John Berlau on October 28, 2009 · 2 comments

in Deregulate to Stimulate, Economy, Nanny State, Personal Liberty

After months of talk about solutions that would rev up job growth and the economy, today the House Financial Service Committee may finally adopt a true bipartisan stimulus. Led by Democratic Reps. Carolyn Maloney of New York and John Adler of New Jersey, two amendments will likely be introduced to the Investor Protection Act that would truly stimulate the economy by partially liberating investors, entrepreneurs and innovators from the shackles of a seven-year-old “investor protection” law that has added billions in costs while providing little if any benefits to investors and doing nothing to prevent the recent financial crisis: the Sarbanes-Oxley Act of 2002.

Maloney, whose most recent legislative accomplishment was the Credit Card Holders Bill of Rights that was signed by President Obama in May and hailed by liberal groups, has teamed with conservative Rep. Scott Garrett, R-N.J., to introduce an amendment to extend the exemption for smaller public companies – those with less than a $75 million market cap – from the costly audit of internal controls from the law’s Section 404 to at least June 2011 and until the Securities and Exchange Commission and Government Accountability Office each perform a study. This is important because the current exemption expires next June, and SEC Chairman Mary Schapiro recently said that there will absolutely, positively be no further extension, despite the limited research on the effects of Sarbox on the very smallest companies and the extensive research showing often devastating burdens on midsize and even large ones.

Rep. Adler goes one further. His amendment would exempt small and midsize companies – those with market caps of less than $700 million, the mark above which the SEC classifies companies as “large accelerated filers” – from Sarbox Section 404 until the SEC promulgates “regulations that take into consideration the different characteristics and limitations of various sized companies,” according to a “Dear Colleague” from Adler. In the letter, obtained by OpenMarket but not yet posted on the web, Adler states: “My amendment will increase America’s competitiveness within the global economy and create jobs here at home. When a company goes public, investors invest capital, the company expands and jobs are created.”

Indeed, new research from the University of Pittsburgh’s Kenneth Lehn and others demonstrates in detail the damage Sarbox is doing to job growth by showing how its costs reduce business spending on research and development and other precursors to job growth. Rammed through Congress in 2002 in the rush to “do something” after the Enron and WorldCom accounting scandals, Sarbox has had many perverse effects recognized by Republicans and Democrats. In 2006, now-Speaker Nancy Pelosi decried the law’s “unintended consequences” for entrepreneurs.

University of Rochester researcher Ivy Zhang has found that Sarbox has racked up $1.4 trillion in direct and indirect costs to the U.S. economy, with no quantifiable economic benefits. By far, the biggest cost is from Section 404’s internal control mandates, which the American Electronics Association calculated as costing U.S. public companies $35 billion a year, and as much as quadrupled an individual company’s auditing and compliance costs, according to the Foley & Lardner law and consulting firm.  This section’s price tag is largely because the Public Company Accounting Oversight Board, the powerful yet unaccountable regulator created by Sarbox (and whose constitutionality is being challenged in a case before Supreme Court this term in which CEI attorneys are serving as co-counsel), required full-blown audits for internal controls as well as a company’s number. That is what turned Sarbox into what has been called “The Accountants Full Employment Act,” in which accountants are reviewing “internal controls” such as possession of office key, the number of letters in an employee password and other items of little relevance to the average shareholder.

Tech journalist John Battelle reported that Sarbox was even frustrating for a company as big as Google, because of the extensive red tape that went along with documenting innovative technology. According to Battelle, becoming Sarbox compliant when Google went public in 2004 was “no small feat,” because “the law requires an audit trail of every third party transaction, and Google has millions of them a week in its [search] engine.” And keep in mind that Google already had a market cap of more than $1 billion when it went public in 2004. So the smaller innovative companies with the potential to be the Googles and Microsofts of tomorrow might not be able to get over this Sarbox hurdle and raise the capital they need by going public.

And new, groundbreaking research shows that Sarbanes-Oxley hits cutting edge software and biotechnology firms especially hard, reducing the amounts they spend on research and development that could lead to new fields that create new job.  A 2008 paper from University of Pittsburgh economist Kenneth Lehn that was selected for a conference of the Federal Reserve Bank of Atlanta finds that “greater evaluation and testing of

internal controls [is] required for firms with activities involving specialized knowledge.” And Lehn’s study includes data from 2007, after the SEC and PCAOB supposed “tailored” Sarbox to make compliance easier for smaller companies.

A letter from The Biotechnology Industry Organization that Lehn cites states that biotech firms “are directing precious resources from core research and development of new therapies for patients” to costly Sarbox compliance.

And ironically, the bells and whistles of Sarbanes-Oxley’s “internal controls” may ironically be taking the core focus off of rooting out fraud. In 2007 Countrywide Financial Corp. was praised for its Sarbox controls by the Institute of Internal Auditors. Two years and many scandals later, its former executives have been charged with securities fraud. And certainly, overall transparency doesn’t increase when companies go private or delay going public, as many have chosen to do because of Sarbox’s costs.

In addition to the valuable Adler and Maloney-Garrett measures, Rep. Michelle Bachmann, R-Minn., will likely introduce a worthy amendment to keep the underlying Investor Protection Act from expanding Sarbox and the PCAOB’s reach to include non-public broker dealers (an incredible power grab that jettisons the whole justification for Sarbox protection of average investors – they might have to change the name to the NCAOB – Nonpublic Company Accounting Oversight Board) until the Supreme Court rules on the entity’s constitutionality.

Her amendment will  also likely propose transferring the responsibility of appointing powerful members of the PCAOB from the SEC to the President, with Senate confirmation. This is what CEI and other attorneys argue in the court case is constitutionally required, since PCAOB members are important “principal officers” with authority to make rules that have such a large impact on the U.S. economy. The Bachmann amendment is also bipartisan in spirit, as it gives more power to President Obama, but also institutes the constitutional accountability needed for this powerful agency.

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.”

Will talent flee to the City?

by Fran Smith on March 20, 2009

in Bailout Watch, Economy, International, Personal Liberty, Politics as Usual, Sanctimony

A different take on possible effects of lawmakers’ rabble-rousing on TARP bonuses. Jeffrey Goldfarb at breakingviews.com says that driving out talented financial executives in the U.S. may be a boon for foreign-owned banks in the U.S. in getting new talent, but most especially for London and its global financial powerhouse, the City. Sarbanes-Oxley already caused financial institutions to flee New York for London. The 90 percent tax rate on TARP bonuses might provide a new impetus for savvy executives to relocate.

Still, with London house prices down, and no “Keep Out” signs for foreigners – think TARP-related Visa restrictions in the U.S. – many of those who can choose their continents may soon be thinking the City is something of a safe haven with better job opportunities, as long as the UK doesn’t wind up succumbing to mob rule too.

Maybe London could adapt the Statue of Liberty’s quotation to: “Give me your tired, your rich, your huddled masses yearning to breathe free.”