In the Courts

DC Circuit Upholds Constitutionality of SOX's Public Company Accounting Oversight Board

A divided panel of the DC Circuit Court of Appeals upheld the constitutionality of the Public Company Accounting Oversight Board against claims that legislation governing appointment and removal of the Board's members violated the Constitution's Appointments Clause and separation of powers. Free Enter. Fund v. Public Co. Accounting Oversight Bd., No. 07-5127 (D.C. Cir. Aug. 22, 2008). The facial challenge to the law was brought by the Free Enterprise Fund, a non-profit public interest group, and a Nevada-based accounting firm that is under investigation by the Board. The Board was created by the Sarbanes-Oxley Act of 2002 (SOX) to oversee auditors of public companies. The Board is comprised of five members who are appointed by the SEC after consultation with the Chairman of the Board of Governors of the Federal Reserve and the Secretary of the Treasury.

The Appointments Clause states that [the President] shall “nominate, by and with with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

The Appointments Clause allows Congress to confer the appointment power of inferior officers in entities other than the President. The Free Enterprise Fund and the accounting firm argued that the members of the Board were not inferior officers, and thus had to be appointed by the President, rather than the SEC, and that even if they were inferior officers, that the Commission was not a “Department” and that the Board was not appointed by the “Head” of a “Department.” Writing for the majority, Judge Judith Rogers explained that members of the Board are inferior officers who can be appointed by an entity other than the President, even though the Commission did not exercise day-to-day supervision over the Board and members of the Board could only be removed for cause. The majority also found that members of the Board could be appointed by the Commission because the Commission and its Commissioners are equivalent to “Heads of Departments.”

In a lengthy dissent, Judge Brett Kavanaugh wrote that the case presented the “most important separation-of-powers case regarding the President's appointment and removal powers” in 20 years. The dissent argued that under the Appointments Clause, only the President could appoint tFhe Board's members and that separation of powers did not allow the Commission, rather than the President, to have control over the Board.

In the Courts and Business Crimes Hotline were written by Associate Editor Jason Hernandez, Kirkland & Ellis LLP, Washngton, DC.

Four Remaining KPMG Defendants' Motion to Dismiss Indictment Is Denied

The four remaining defendants in the KPMG tax shelter prosecution moved unsuccessfully to have the indictment against them dismissed because of alleged IRS violations of 26 U.S.C. ' 6103, which requires the IRS to keep tax return information confidential. (See analysis on page 1.) United States v. Stein, No. 05-CR-00888 (S.D.N.Y. Sept. 10, 2008) (Memorandum & Order). Section 6103 provides that returns and “return information shall be confidential” and shall not be disclosed except as authorized by federal law. Disclosures may be made only “if the Secretary [of the Treasury, or his designees] has referred the case to the Department of Justice.” The defendants claimed that KPMG's return information was disclosed in 2003 to government authorities, who at the time were conducting a civil investigation, without the necessary referral under the law from the Secretary of the Treasury.

Judge Lewis Kaplan denied the motion for three reasons. First, the court found that even if the defendants were able to state a claim under ' 6103 ' which the court assumed arguendo ' dismissal of the indictment was not the proper remedy. “Congress has provided civil and criminal remedies for violations of Section 6103.” Second, ' 6103 does not protect the defendants in this case, because the information that was disclosed was KPMG information, not the defendants' information. Finally, Judge Kaplan found that the government's actions did not constitute “outrageous conduct” in violation of the Fifth Amendment's Due Process Clause.

DC Circuit Upholds Constitutionality of SOX's Public Company Accounting Oversight Board

A divided panel of the DC Circuit Court of Appeals upheld the constitutionality of the Public Company Accounting Oversight Board against claims that legislation governing appointment and removal of the Board's members violated the Constitution's Appointments Clause and separation of powers. Free Enter. Fund v. Public Co. Accounting Oversight Bd., No. 07-5127 (D.C. Cir. Aug. 22, 2008). The facial challenge to the law was brought by the Free Enterprise Fund, a non-profit public interest group, and a Nevada-based accounting firm that is under investigation by the Board. The Board was created by the Sarbanes-Oxley Act of 2002 (SOX) to oversee auditors of public companies. The Board is comprised of five members who are appointed by the SEC after consultation with the Chairman of the Board of Governors of the Federal Reserve and the Secretary of the Treasury.

The Appointments Clause states that [the President] shall “nominate, by and with with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

The Appointments Clause allows Congress to confer the appointment power of inferior officers in entities other than the President. The Free Enterprise Fund and the accounting firm argued that the members of the Board were not inferior officers, and thus had to be appointed by the President, rather than the SEC, and that even if they were inferior officers, that the Commission was not a “Department” and that the Board was not appointed by the “Head” of a “Department.” Writing for the majority, Judge Judith Rogers explained that members of the Board are inferior officers who can be appointed by an entity other than the President, even though the Commission did not exercise day-to-day supervision over the Board and members of the Board could only be removed for cause. The majority also found that members of the Board could be appointed by the Commission because the Commission and its Commissioners are equivalent to “Heads of Departments.”

In a lengthy dissent, Judge Brett Kavanaugh wrote that the case presented the “most important separation-of-powers case regarding the President's appointment and removal powers” in 20 years. The dissent argued that under the Appointments Clause, only the President could appoint tFhe Board's members and that separation of powers did not allow the Commission, rather than the President, to have control over the Board.

In the Courts and Business Crimes Hotline were written by Associate Editor Jason Hernandez, Kirkland & Ellis LLP, Washngton, DC.