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KPMG, LLP v. Securities and Exchange Commission

Petition for review of SEC's cease-and-desist order denied; SEC was correct in determining that accounting firm's negligence in failing to maintain its independence from its client was an appropriate basis for violations underlying a cease-and-desist order; order was not overbroad or vague.

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Argued February 15, 2002

Dissenting opinion filed by Circuit Judge Randolph.

KPMG, LLP (formerly KPMG Peat Markwick, LLP) challenges a cease-and-desist order entered by the Securities and Exchange Commission, pursuant to Section 21C(a) of the Securities and Exchange Act (“Exchange Act”), 15 U.S.C. s 78u-3(a), on the basis of several violations of the securities laws and regulations. KPMG principally contends that the Commission lacks authority to turn the ancillary authority provided by Section 21C into an independent basis to sanction accountants, failed to give fair notice of its novel interpretation of Rule 302 of the Code of Professional Conduct of the Association of Independent Certified Public Accountants (“AICPA”), and adopted an improper presumption in concluding there was a sufficient risk of future violations warranting a cease-and-desist remedy. KPMG also contends that the cease-and-desist order is overbroad and vague. We hold that although KPMG did not have fair notice of the Commission’s interpretation of AICPA Rule 302, the Commission properly could use a negligence standard to enforce violations of the Exchange Act and Commission rules under Section 21C. We also hold that several contentions are waived, not having been raised before the Commission. We further hold that, although the Commission’s explanation on reconsideration of the basis for its conclusion that there was a risk of future harm might leave ambiguous whether simply one or more than one of the violations would be sufficient to meet its standard for entry of a cease-and-desist order, there is no ambiguity here that the Commission on remand would reach the same result. Accordingly, we deny the petition for review.

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