By Douglas Gillison
(Reuters) – The U.S. Securities and Exchange Commission last month asked to dismiss all pending misconduct lawsuits against accountants before its internal judges, a new sign that a recent Supreme Court ruling is curbing the agency’s enforcement powers, legal experts said.
Between Aug. 2 and Aug. 19, the SEC’s enforcement division filed motions to dismiss eight enforcement actions pending before its administrative law judges, public records show. In each case, some dating back to 2021, the agency sought to discipline accountants for alleged wrongdoing.
The SEC did not provide an explanation for the decision, and a spokesperson declined to comment.
According to attorneys who practice in this area, federal law allows the SEC to pursue certain enforcement actions through its own courts. This is a more streamlined process than a lawsuit in federal court and is the SEC’s only option when it comes to professional misconduct cases.
Legal experts said it was rare, if not unprecedented, for the agency to dismiss an entire category of administrative enforcement actions. The move was particularly notable because the SEC was on the verge of winning in some cases.
They said the SEC’s capitulation appeared to be related to a June Supreme Court ruling that barred the agency from using in-house judges in cases seeking fraud fines, a decision the court ruled violated the right to a jury trial under the Seventh Amendment to the U.S. Constitution.
One of the eight dismissed cases involved Edward Hackert, a New York accountant who filed a countersuit against the SEC in February, arguing that its proceedings were unconstitutional. He updated that lawsuit on July 25 to cite the Supreme Court ruling.
While that ruling did not address whether involving internal courts in medical malpractice cases was unconstitutional, Hackert’s lawsuits in July raised the risk that the SEC could lose again, further limiting its powers, the legal experts said.
On August 2, the SEC filed its first motion to dismiss one of the eight cases, and six days later it sought to dismiss Hackert’s case.
That timeline shows that the SEC’s denials were a direct result of Hackert’s petition. Legal experts say that shows how much the Supreme Court’s June ruling weighs on the SEC’s enforcement powers.
“This appears to be an example of an agency that has decided to voluntarily limit its enforcement activities out of concern that pursuing enforcement based on long-standing practices will result in significant legal intrusions on that authority,” said Robert Glicksman, a law professor at George Washington University.
OTHER WAYS
SEC officials accused Hackert of failing to properly oversee more than 200 audits of publicly traded companies and special purpose acquisition vehicles between 2012 and 2022, resulting in flawed audits. Hackert denies the SEC allegations.
His attorney, former SEC Enforcement Director Andrew Ceresney, declined to comment through a spokesman.
Nicolas Morgan, a former senior litigator at the SEC and president of Investors Choice Advocates Network, a pro bono litigation firm, told Reuters that the decision by SEC officials to dismiss all contested lawsuits for professional misconduct at the same time was likely unprecedented.
Last year, the SEC voluntarily dropped more than 40 administrative cases, but that was due to a technical incident that officials said threatened the integrity of the process.
While the general perception is that federal law requires the SEC to bring misconduct cases only in internal courts, Morgan said there are avenues for the SEC to pursue litigation through federal courts, though they have not yet been tested.
In another case that was considered for dismissal, the SEC accused Ira Viener, a New Jersey accountant, of conducting flawed audits and lacking independence from the companies he audited. He told Reuters he was surprised when the agency suddenly dropped the case, which he said had been a painful ordeal.
“They won because they had deep pockets and I couldn’t afford to defend myself,” he said. “I didn’t do anything wrong.”
(Reporting by Douglas Gillison and Alison Frankel; Editing by Michelle Price and Paul Simao)
