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Your Papers, Please
After lawyers for the Securities and Exchange Commission tangled for three hours in March with Latham & Watkins and Sidley Austin, representing Deloitte Touche Tohmatsu CPA, one thing seemed clear: U.S. Magistrate Judge Deborah Robinson would be no rubber stamp for the government in a case that tests the scope of the subpoena power of the SEC.
In Washington federal district court, Robinson pressed SEC lawyer David Mendel, assistant chief litigation counsel, for the authority the commission believes gives it the power to acquire documents located in a foreign countrythrough a subpoena served in the United States. Mendel didn't always have immediate answers for the judge, forcing the SEC's team, which included Matthew Solomon and Lisa Weinstein Deitch, to scramble during the hearing.
The SEC administrative subpoena, served on Gibson, Dunn & Crutcher partner Douglas Cox, was validly issued and validly served, Mendel argued, giving the SEC access to audit papers anywhere in the worldin this case, in China. "It matters not at all that the documents are abroad in a foreign country," Mendel said.
Robinson wanted to know which federal criminal rule of civil procedure supports the SEC in the case. Mendel didn't have an answer. The judge, rather than forge ahead, gave the SEC team time to confer and to dig through legal books.
After Mendel had done so, he told the judge that the authority is governed by regulation, not the federal rules of procedure. When Robinson asked for any statutory power in U.S. code, the SEC lawyers again huddled up. When the hearing resumed, Mendel pointed to a section of the Securities Exchange Act that gives certain powers to the commission to make rules and regulations.
At that point, Mendel argued the substance of the SEC's position: that the government needs audit papers from Deloitte's unit in China to determine facts amid a "potentially massive" fraud investigation involving the securities of a company called Longtop Financial Technologies, a onetime client of Deloitte.
In November 2011 the SEC initiated an administrative proceeding that charged Longtop with failing to file current and accurate financial reports with the commission. An SEC official said in a statement at the time: "We are taking this action to protect investors because it appears there is no current and reliable information available to the investing public about Longtop."
More recently, the SEC tried for months to convince its counterparts in China to turn over Deloitte's audit papers, but to no avail, Mendel said in court. The U.S. interest in the enforcement of securities laws, Mendel argued, outweighs China's interest in government secrecy.
Deloitte's lawyers, including Latham partner Miles Ruthberg, chair of the firm's litigation practice, and Sidley accounting partner Michael Warden, said in court papers that disclosure of the information the SEC is demanding will violate Chinese law and expose Deloitte to potential criminal sanctions in that country. Ruthberg stressed that argument in court, telling the judge that "this is not speculation." The publication of state secrets in China, he noted, is punishable by jail time.
Ruthberg portrayed Deloitte as a witness in the casethe corporate entity that exposed potential wrongdoing at Longtop. He also attacked the SEC's claim that the subpoena was validly issued and served, saying that U.S. counsel believed that it was issued under a provision of the Sarbanes-Oxley Act that addresses foreign public accounting firms. The acceptance of the subpoena, Ruthberg said, was based on a misunderstanding.
There's no case, he argued, that allows the SEC to use the service of a subpoena on a U.S. lawyer to grab documents in a foreign country. The SEC, he said, wants Robinson "to rush into a ruling" as if the dispute were a routine subpoena enforcement matter. A ruling in favor of the SEC, Ruthberg argued, "would turn our adversarial process on its head."
Robinson did not immediately rule on whether she will force Deloitte to comply with the subpoena. But the potential significance of the case grew late last year, when the SEC brought an administrative proceeding against all the major China audit firms, including Deloitte's unit in that country. The administrative case, Deloitte's lawyers said, presents the same core issues that are in dispute in the fight over the subpoena.
"Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud," Robert Khuzami, then the director of the SEC's enforcement division, said in a statement last year.
A version of this story appeared in The National Law Journal, a sibling of Corporate Counsel.