UNITED STATES OF AMERICA
By the Commission
Commissioner Carey, and
|Jonathan G. Katz|
I dissent from the Commission's decision to reverse the ALJ's grant of partial summary disposition on the Rule 102(e) charges in respondent's favor. Because I have stated my general views on the Commission's uses of Rule 102(e) at length elsewhere, I will be succinct.14
As a threshold matter, I believe that the Commission lacks the authority even to promulgate Rule 102(e).15
Even if I thought otherwise, I would still affirm the ALJ's decision to dismiss the Rule 102(e) charges. As the ALJ correctly ruled, at the time the proceedings were instituted against respondent, April 17, 1998, the Commission had failed to establish a consistent definition of the mental state necessary to establish a violation of Rule 102(e)[, and that] at the earliest adequate notice was not given to the public until October 19, 1998[, the date the Commission issued its release adopting the amendment to Rule 102(e)] * * * .16
The ALJ was likewise correct in determining that reinstatement of the Rule 102(e) charges would violate due process and result in unfair prejudice to respondent.17
In my view, the majority's disposition is simply irreconcilable with the D.C. Circuit's decision in Checkosky II.18 In the Commission opinion subject to review in Checkosky II, the Commission had found that respondents' conduct was reckless, as the staff alleges that respondent's conduct was here.19 Because of the Commission's "persistent failure to explain itself," among other things, and notwithstanding the finding of recklessness, the D.C. Circuit invoked the exceedingly rare remedy of remanding the case with instructions to dismiss.20 Even assuming the Commission's recent amendment to Rule 102(e) cured the pervasive flaws the D.C. Circuit identified in our Rule 102(e) jurisprudence, which I doubt,21 that fix came well after every relevant date in this case: (a) the date of respondent's alleged misconduct; (b) the date the staff instituted this case; and (c) the close of evidence in the proceedings before the ALJ.
The majority treats the relevant version of Rule 102(e) the one that existed prior to the recent amendment as if it had a severable "recklessness" element that survived Checkosky II. But the superseded version of Rule 102(e) had no separate recklessness element as relevant to respondent, all that was forbidden was "improper professional conduct." And, of course, the D.C. Circuit determined in Checkosky I and Checkosky II that the Commission had previously failed to offer a coherent interpretation of "improper professional conduct."22 The separate "recklessness" element, codified in current Rule 102(e)(1)(iv), was only added by an amendment having an effective date of November 25, 1998.23 The theory adopted by the majority would only be valid if the new Rule 102(e) could have permissible application to conduct occurring before its effective date (or, perhaps, the date of the adopting release). For the reasons set forth in my dissenting statement to the Commission's October 1998 Rule 102(e) release and by the ALJ in this case, I do not believe that the new version of Rule 102(e) even assuming that it is otherwise valid may lawfully have such retroactive application.24
I note that distinguished commentators share my view that the Commission may not retroactively bring Rule 102(e) charges, even charges sounding in recklessness, based on conduct occurring before the effective date of the Rule 102(e) amendment. For instance, former Commissioner Richard Roberts (whose dissent from the Commission's first opinion in Checkosky was vindicated by the D.C. Circuit in Checkosky I25) recently observed:
The stated rationale for a retroactive application was that the amendment was a `clarification' of existing Commission standards and not the issuance of a new standard. The potential unfairness of retroactivity is that auditors may face discipline for their conduct that occurred at a time when the D.C. Circuit found in Checkosky that the Commission had no meaningful standards under Rule 102(e).26
Another commentator likewise analyzed the recent amendment to Rule 102(e) and remarked:
Despite criticism from the appellate court that prior practice had not given practitioners adequate notice of culpability standards under Rule 102(e), the Commission has indicated that it will apply the rule amendments in the Adopting Release on a retroactive basis in all cases considered after the effective date irrespective of the date when the conduct occurred.27
In sum, the ALJ concluded that retroactive application of the new standard for "improper professional conduct" under Rule 102(e) to respondent would violate his right to due process.28 I agree. I continue to believe that the Commission is heading down the wrong path in trying to expand its authority under Rule 102(e), and that it would be best for accountants and other professionals who practice before the Commission (as well as for the Commission itself, investors and issuers), if these matters received definitive clarification sooner rather than later.
1 17 C.F.R. § 201.102(e)(1)(ii). Rule 102(e)(1)(ii) authorizes a censor or denial of the privilege of appearing or practicing before the Commission to any accountant found:(ii) To be lacking in character or integrity or to have engaged in unethical or improper professional conduct.
2 139 F.3d 221 (D.C. Cir. 1998)
3 Among other things, the amended rule states that accountants can be disciplined for "intentional or knowing conduct, including reckless conduct." Amendment to Rule 102(e) of the Commission's Rules of Practice, Securities Act Rel. No. 7593 (Oct. 19, 1998), 68 SEC Docket 705. The release also sets forth the types of less than reckless conduct that might warrant accountant discipline.
4 See Rule 400(c) of the Commission's Rules of Practice. 17 C.F.R. § 201.400(c).
5 Amendment to Rule 102(e) at n.9.
6 Id. at n.34. See also Russell G. Davy, 48 S.E.C. 138 (1985), aff'd, 792 F.2d 1418, 1422 (9th Cir. 1986).
7 See, e.g., Davy v. SEC, 792 F.2d 1418, 1422 (9th Cir. 1986) (although "there may be cases where the [Commission] should not be empowered to determine the standards by which accountants . . . are to be judged," breach of conduct at issue "so clear and so uncontroverted that any vagueness in the Rule is not at issue here."). Cf. Sheldon v. SEC, 45 F.3d 1515, 1518 (11th Cir. 1995) (rejecting contention that Rule is improper or otherwise taints the fairness of proceedings before the Commission); Touche Ross & Co. v. SEC, 609 F.2d 570, 578 (2d Cir. 1979) (current Rule and its predecessors have been in effect for over forty years, and no court has ever held that it is invalid).
8 Rather, the court observed, "a recklessness standard [brings] its own risks: there might not be substantial evidence to support a finding of reckless conduct." Checkosky, 139 F.3d at 225.
See also Checkosky v. SEC, 23 F.3d 452, 455-56 (Silberman, J.), 467 (Randolph, J.), 493 (Reynolds, J.) (agreeing that the Commission could discipline persons who appeared before it).
9 Id. at 226.
10 Robert D. Potts, Securities Exchange Act Rel. No. 39126 (Sept. 24, 1997), 65 SEC Docket 1376.
11 151 F.3d 810, 812 (8th Cir. 1998), cert. denied, 119 S. Ct. 1574 (1999).
12 The order instituting proceedings also alleges that Yesner willfully violated and aided and abetted violations of the securities laws and regulations and thus is subject to discipline under Rule 102(e)(1)(iii).
13 Appellate courts routinely reinstate claims that have been dismissed either on summary or final judgment. See Chicksaw Nation v. Oklahoma, 64 F.3d 577 (10th Cir. 1995); Pinnacle Nursing Home v. David Axelrod, 928 F.2d 1306 (2d Cir. 1991).
14 See Amendment to Rule 102(e) of the Commission's Rules of Practice, 63 Fed. Reg. 57164, 57172 (October 26, 1998) ["Adopting Release"] (Johnson, Comm'r, dissenting); Proposed Amendment to Rule 102(e) of the Commission's Rules of Practice, 63 Fed. Reg. 33305, 33309 (June 18, 1998) (Johnson, Comm'r, dissenting); Norman S. Johnson & Ross A. Albert, Deja Vu All Over Again: The SEC Once More Attempts to Regulate the Accounting Profession Through Rule 102(e) of Its Rules of Practice, 1999 Utah L. Rev. 553 (forthcoming); see also Norman S. Johnson, The Dynamics of SEC Rule 2(e): A Crisis for the Bar, 1975 Utah L. Rev. 629; Norman S. Johnson, The Expanding Responsibilities of Attorneys in Practice Before the SEC: Disciplinary Proceedings Under Rule 2(e) of the Commission's Rules of Practice, 25 Mercer L. Rev. 637 (1974).
15 Adopting Release, 63 Fed. Reg. at 57178-80 (Johnson, Comm'r, dissenting).
16 Albert Glenn Yesner, 1998 SEC LEXIS 2692, at *6 (Dec. 3, 1998) (citing Checkosky v. SEC, 139 F.3d 221 (D.C. Cir. 1998) ("Checkosky II"); see also Checkosky v. SEC, 23 F.3d 452 (D.C. Cir. 1994) ("Checkosky I").
17 Yesner, 1998 SEC LEXIS 2692, at *7 to *8.
18 The majority opinion places heavy reliance on Potts v. SEC, 151 F.3d 810 (8th Cir.), cert. denied, 119 S. Ct. 1574 (1999), for the proposition that nothing in Checkosky II affected the Commission's ability to bring recklessness-based charges of "improper professional conduct." But Potts is inapposite. In Potts, the Eighth Circuit affirmed a Commission finding that an accountant had committed "improper professional conduct" under Rule 102(e), but did not revisit (or even mention) Checkosky II apparently because of a concession made by the accountant. Potts, 151 F.3d at 812 ("Potts acknowledges the SEC's authority to discipline him for reckless professional misconduct * * * ."). No such concession appears on this record, and the Commission may not hold Potts' concession against the present respondent.
19 139 F.3d at 223-24.
20 139 F.3d at 222-24 & 227.
21 Adopting Release, 63 Fed. Reg. at 57180-83 (Johnson, Comm'r, dissenting).
22 See, e.g., Checkosky II, 139 F.3d at 223 (agreeing with claim that "the Commission had failed to articulate an intelligible standard for `improper professional conduct'"); Checkosky I, 23 F.3d at 454 (remanding case to the Commission "for a more adequate explanation of its interpretation of Rule 2(e)(1)(ii)," currently codified as Rule 102(e)(1)(ii)).
23 Adopting Release, 63 Fed. Reg. at 57164.
24 See Adopting Release, 63 Fed. Reg. at 57187 (Johnson, Comm'r, dissenting); Yesner, 1998 SEC LEXIS 2692, at *5 to *8.
25 David J. Checkosky, 50 S.E.C. 1180, 1198 (1992) (Roberts, Comm'r, concurring in part and dissenting in part), remanded, 23 F.3d 452 (D.C. Cir. 1994).
26 Richard Y. Roberts et al., SEC Disciplinary Actions Against Accountants Under Rule 102(e): Current Developments, SD60 ALI-ABA 393, 400 (Jan. 28, 1999).
27 Michael J. Connell, SEC Sanctions of Security Counsel, 1093 P.L.I./Corp. 471, 486 (1999); see also Roberta S. Karmel, Accountants' Culpability Under Rule 102(e), N.Y.L.J., Oct. 29, 1998, at 3 (criticizing retroactivity provision of Rule 102(e) amendment).
28 Yesner, 1998 SEC LEXIS 2692, at *7 to *8.
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