John Doe v. Public Company Accounting Oversight Board

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Washington, DC (January 19, 2023) – The New Civil Liberties Alliance filed a complaint today in the U.S. District Court for the Northern District of Texas seeking declaratory and injunctive relief from the Public Company Accounting Oversight Board’s secret, unaccountable, and inherently biased prosecutorial processes. With no meaningful supervision by any government official appointed or directly removable by the President, and using funds raised by private taxes with no Congressional appropriation or oversight, PCAOB has investigated and brought a secret prosecution seeking to strip NCLA’s client of his livelihood and impose quasi-criminal monetary penalties—without a jury trial, due process of law, an impartial adjudicator, or any constitutional accountability.

Plaintiff John Doe (a pseudonym used to protect his anonymity) seeks to stop PCAOB from continuing its unlawful and unconstitutional disciplinary proceedings. The Board’s massive investigative, prosecutorial, and pseudo-judicial powers are largely unchecked. After years of intrusive investigation, PCAOB can impose severe punitive sanctions against individual accountants and accounting firms in its regulatory ambit, up to the permanent ban on an individual’s associating with any registered firm, revocation of a firm’s registration, and civil monetary penalties of up to $1.1 million for individuals and $22 million for firms—per violation. These potential penalty amounts are 20 times higher for firms than penalties the Securities and Exchange Commission (SEC) may impose.

Worse yet, PCAOB’s core executive and pseudo-judicial activity is performed and superintended by private citizens, none of whom is constitutionally appointed as an officer of the United States. PCAOB hearing officers are inferior constitutional officers who have not been lawfully appointed under the Appointments Clause of the Constitution and are unconstitutionally protected by multiple layers of protection from removal by the President. 

NCLA argues that (1) PCAOB’s prosecution is being funded by money raised and spent in violation of the Appropriations, Taxing, and Spending Clauses of the Constitution and the separation of powers principles enshrined in those clauses; (2) PCAOB’s disciplinary proceedings deprive Plaintiff of his right to a jury trial in violation of the Seventh Amendment; and (3) PCAOB’s disciplinary process is systemically biased, secretive, and unfair in violation of the Due Process Clause of the Fifth Amendment and the Sarbanes-Oxley Act of 2002. 

Increasingly, Congress outsources vast governmental powers to private actors who are not elected by the citizenry nor appointed by the President. This pernicious trend has elicited understandable scorn from several Supreme Court justices, who describe PCAOB as “highly unusual” and as an “unprecedented extra-constitutional stew.”

Plaintiff John Doe is represented by a team of experienced securities law attorneys, including NCLA’s Russ Ryan, who served as Assistant Director of Enforcement at SEC and as Deputy Chief of Enforcement at the Financial Industry Regulatory Authority (FINRA), Ian Roffman of Nutter McClennen & Fish, who served as senior trial counsel at SEC, and Kit Addleman of Haynes Boone, a former Director of SEC’s Atlanta Regional Office. 

NCLA released the following statement: 

“We’re asking the Court to stop this outrageous example of ‘peekaboo prosecution’—private, unaccountable actors using secret proceedings to prosecute and punish people without meaningful government oversight, no jury trial, inherently biased adjudicators, and woefully deficient due process protections. The Sarbanes-Oxley Act created this uniquely extra-constitutional machinery 20 years ago, and it’s past time for the courts to shut it down.”
— Russ Ryan, Senior Litigation Counsel, NCLA

For more information visit the case page here. 

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

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Imagine a dystopian world where Congress empowers a private corporation to secretly investigate and punish members of a particular profession — say, auditors. Think of a private version of the Securities and Exchange Commission (SEC), but with evergreen funding that never requires an appropriation from Congress and with lavishly compensated personnel who are exempt from laws designed to keep governmental regulators in check.

Imagine further that this private regulator’s investigative, prosecutorial and adjudicative activity is secretly performed by staff employees with no meaningful supervision by any government official appointed by the president.

Finally, imagine being secretly prosecuted by these nongovernmental enforcers. Your case is then secretly decided by a “hearing officer” who is a fellow company employee of the prosecutors. There is no jury and not even – as self-regulators like the Financial Industry Regulatory Authority (FINRA) routinely provide – a multi-member hearing panel that includes one or two of your industry peers.

Although your accusers likely spent several years amassing their case against you, you get only six months to prepare your defense, and you can’t take depositions or obtain other kinds of pre-hearing discovery that are routinely available in court proceedings and even SEC administrative proceedings.

You’re also denied access to prior decisions where others successfully defended themselves (one of the most critical defense tools since time immemorial), although your prosecutors and the hearing officer have unrestricted access to those same secret precedents.

If you lose, your appeal is decided by the executive officers of the corporation — the same ones who hand-picked the prosecutors and hearing officer and who launched the charges against you in the first place based on secret communications with the prosecutors. And as best you can tell from public sources, no previous appeal has ever succeeded, although many provoked the officers to impose harsher penalties than the hearing officer did.

Believe it or not, this modern version of the Star Chamber already exists in the form of the Public Company Accounting Oversight Board (PCAOB) — often derided as “peekaboo” due to its acronym and infamous secrecy. Congress created the PCAOB 20 years ago this month as part of the Sarbanes-Oxley Act of 2002, and it has been controversial ever since.

The board’s first chairman resigned within a month of his appointment after reports that the SEC was investigating a public company for which he had served as audit committee chairman. The Supreme Court ruled the entire board unconstitutional for unrelated reasons in 2010, but regrettably spared it from early demise by redlining Sarbanes-Oxley to allow the SEC to remove the board’s executive officers. The result? Nearly wholesale turnover of board leadership after each of the last two changes in political administrations.

Scandal erupted again in 2018 when rogue PCAOB staffers leaked confidential board inspection plans to a former colleague then working for a prominent audit firm. More recently, liberal lawmakers have criticized the board as weak and ineffective, while conservative lawmakers have introduced legislation to fold it into the SEC to ensure tighter supervision and accountability.

Originally intended to prevent market-rocking accounting scandals like Enron and WorldCom, the PCAOB has instead targeted most of its enforcement firepower at small audit firms with limited resources to fight back — often firms owned by foreigners or ethnic minorities. Many targeted firms audit only a few tiny public companies that typical retail investors have never even heard of, much less invested in. Few board investigations expose material accounting misstatements or fraud, and fewer still involve investor losses.

Yet these investigations can drag on for years in secrecy. Targeted auditors are compelled to search for and turn over reams of private documents under threat of debarment, monetary penalties and potential criminal prosecution for “noncooperation.” They are also routinely interrogated under oath for multiple days on end. The process is so burdensome and expensive for small auditors that most eventually settle or default rather than resist, and many simply close up shop altogether.

If all this weren’t bad enough, the PCAOB’s home-court adjudication system makes a mockery of due process for the few who have the resources and fortitude to defend themselves. Auditors who endure the board’s years-long gauntlet can eventually appeal to the SEC and later to a federal court, but very few can afford the odyssey. In the board’s first 20 years, fewer than 10 have made it to the SEC and only two all the way to federal court. Nearly all of the hundreds of other board enforcement targets have capitulated or defaulted at some point, never having their cases decided by even a hearing officer, much less the SEC or a court.

It’s no wonder that then-Judge Brett Kavanaugh, while serving on the U.S. Court of Appeals for the District of Columbia Circuit, described the PCAOB as an “unprecedented extra-constitutional stew.” Congress should rewrite this unsavory recipe before the courts inevitably dump the entire crock.