SEC Dismisses Misconduct Proceedings Against Accountants

By Douglas Gillison

(Reuters) – The U.S. Securities and Exchange Commission (SEC) last month requested the dismissal of all active misconduct proceedings against accountants before its in-house judges, indicating a significant shift in the agency’s enforcement powers following a recent Supreme Court ruling.

Between August 2 and August 19, the SEC’s enforcement division filed motions to dismiss eight enforcement actions involving malpractice allegations against accountants, some dating back to 2021. The agency did not provide any explanation for this decision, and a spokesperson declined to comment.

Federal law permits the SEC to pursue certain enforcement actions in its in-house courts, a more efficient alternative to federal court, especially in malpractice cases. Rarely has the SEC dismissed an entire category of enforcement actions, and the timing is particularly notable since the agency seemed likely to prevail in some cases.

Legal experts attribute this shift to a June Supreme Court ruling that prohibited the SEC from using in-house judges for matters involving fines for fraud, citing violations of the Seventh Amendment’s right to a jury trial. One dismissed case involved Edward Hackert, a New York accountant, who counter-sued the SEC, arguing the proceeding was unconstitutional in light of the Supreme Court ruling.

While the ruling did not specifically address the constitutionality of in-house courts for malpractice cases, Hackert’s case escalated the potential for the SEC to face unfavorable outcomes in court again. Hackert updated his counter-suit on July 25, indicating that the SEC’s dismissals were closely linked to his litigation.

Robert Glicksman, a law professor at George Washington University, noted, “This seems like an example of an agency that has decided to voluntarily limit its enforcement activity due to concern that pursuing enforcement under long-standing practices will result in significant judicial incursions on that authority.”

Other Developments

The SEC accused Hackert of insufficiently supervising over 200 audits from 2012 to 2022, which allegedly led to deficient results. Hackert denies these allegations.

Nicolas Morgan, a former SEC trial counsel, remarked that the agency’s simultaneous dismissal of all contested malpractice proceedings was likely unprecedented. Although the SEC previously dropped over 40 administrative cases due to technical issues, this current batch of dismissals indicates a more measured approach.

In another dismissal, the SEC accused New Jersey accountant Ira Viener of performing deficient audits. Viener expressed surprise at the sudden withdrawal of the case, emphasizing the challenges he faced during the process. He stated, “They were winning because they had deep pockets and I couldn’t afford to defend myself. I did nothing wrong.”