Petition for Writ of Certiorari — Kabani & Company, Inc., et al., Petitioners v. Securities and Exchange Commission
Supreme Court briefFeb 22, 2019
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APPENDIX
TABLE OF APPENDICES
Appendix A
Memorandum Disposition, United States
Court of Appeals for the Ninth Circuit,
Kabani & Co., Inc. v. SEC, No. 17-70786
(Aug. 9, 2018) ............................................... App-1
Appendix B
Order, United States Court of Appeals for
the Ninth Circuit, Kabani & Co., Inc. v.
SEC, No. 17-70786 (Sept. 25, 2018) ............ App-5
Appendix C
Opinion, Securities and Exchange
Commission, In the Matter of the
Application of Kabani & Company, Inc. et
al. for Review of Disciplinary Action,
Release No. 80201 (Mar. 10, 2017) ............. App-6
App-1
Appendix A
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
________________
No. 17-70786
________________
KABANI & COMPANY, INC.; MICHAEL
DEUTCHMAN, CPA; KARIM KHAN MUHAMMAD, CPA;
HAMID KABANI, CPA,
v.
Petitioners,
U.S. SECURITIES & EXCHANGE COMMISSION,
Respondent.
________________
On Petition for Review of an Order of the
Securities & Exchange Commission
________________
MEMORANDUM *
________________
Submitted: August 9, 2018 **
Filed: August 13, 2018
________________
* This disposition is not appropriate for publication and is not
precedent except as provided by Ninth Circuit Rule 36-3.
** The panel unanimously concludes this case is suitable for
decision without oral argument. See Fed. R. App. P. 34(a)(2).
App-2
Before: CALLAHAN and NGUYEN, Circuit Judges,
and EZRA, *** District Judge
________________
Kabani & Company, Michael Deutchman, Karim
Khan Muhammad, and Hamid Kabani petition for
review of the SEC’s order sustaining sanctions
imposed by the Public Company Accounting Oversight
Board (“PCAOB”). We have jurisdiction under 15
U.S.C. § 78y(a)(1). Reviewing the SEC’s scienter
determination and other factual findings for
substantial evidence and its legal conclusions de novo,
see Gebhart v. SEC, 595 F.3d 1034, 1040, 1043 (9th
Cir. 2010), we deny the petition for review.
1. Substantial evidence supports the SEC’s
finding that petitioners violated PCAOB Accounting
Standard No. 3 (“AS3”) with the requisite scienter.
The indications of an attempted cover-up—the
backdated sign-off dates, the altered metadata, and
petitioners’ failure during the inspection to disclose
the changes made after the documentation completion
deadlines—all strongly support an inference of
knowledge and intent.
2. The PCAOB proceedings comported with
procedural due process. The PCAOB timely
commenced disciplinary proceedings, and substantial
evidence supports the hearing officer’s finding that
petitioners lacked good cause to designate a substitute
expert after the deadline had passed. Petitioners’
concealment of auditing violations and multiple
requests for time extensions caused most of the delays
*** The Honorable David A. Ezra, United States District Judge
for the District of Hawaii, sitting by designation.
App-3
in the proceedings, and petitioners fail to show
prejudice from the other delays. Petitioners also fail to
show prejudice from the publication of the SEC’s
settlement with Rehan Saeed, which concerns audits
of issuers not at issue here and does not raise an
inference of wrongdoing by petitioners. A showing of
prejudice is essential to their due process claims. See
5 U.S.C. § 706; NLRB v. Heath TEC Div./S.F., 566
F.2d 1367, 1371 (9th Cir. 1978); cf. United States v.
Talbot, 51 F.3d 183, 185 (9th Cir. 1995) (explaining
that to establish due process claim based on delay in
filing criminal charges, defendant “must prove actual,
non-speculative prejudice from the delay”).
Petitioners’ other procedural complaints are
meritless. The PCAOB did not “suppress” evidence in
the audit files that petitioners themselves provided.
Petitioners were not entitled to a jury because the
Seventh Amendment does not apply to administrative
proceedings. See Tull v. United States, 481 U.S. 412,
418 n.4 (1987). And the SEC considered all relevant
circumstances, including the appropriateness of less
severe remedies, when upholding the PCAOB’s
sanctions.
The hearing officer did not improperly place the
burden on petitioners to prove that they did not violate
AS3. The burden of establishing a fact-based defense
to liability falls on the party asserting it, see Olin
Corp. v. FTC, 986 F.2d 1295, 1307 (9th Cir. 1993), and
defendants failed to meet their burden of proving that
Saeed was reviewing non-final versions of the audit
work papers. Petitioners cite neither record evidence
nor legal authority for their argument that the
hearing officer was inexperienced, unfamiliar with
App-4
their case, and improperly deferential to the agency.
This argument is therefore deemed waived. See
United States v. Graf, 610 F.3d 1148, 1166 (9th Cir.
2010).
Likewise,
petitioners
forfeited
their
Appointments Clause claim by failing to raise it in
their briefs or before the agency. Cf. Lucia v. SEC, 138
S. Ct. 2044, 2055 (2018) (“‘[O]ne who makes a timely
challenge to the constitutional validity of the
appointment of an officer who adjudicates his case’ is
entitled to relief.”).
PETITION FOR REVIEW DENIED.
App-5
Appendix B
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
________________
No. 17-70786
________________
KABANI & COMPANY, INC.; MICHAEL DEUTCHMAN,
CPA; KARIM KHAN MUHAMMAD, CPA; HAMID KABANI,
CPA,
v.
Petitioners,
U.S. SECURITIES & EXCHANGE COMMISSION,
Respondent.
________________
ORDER
________________
Filed: September 25, 2018
________________
Before: CALLAHAN and NGUYEN, Circuit Judges,
and EZRA, * District Judge.
Petitioners’ motion for reconsideration (docket
entry no. 67) is denied. We also construe the motion as
a petition for panel rehearing and deny the petition.
No further petitions for rehearing will be accepted in
this case.
* The Honorable David A. Ezra, United States District Judge
for the District of Hawaii, sitting by designation.
App-6
Appendix C
SECURITIES AND EXCHANGE COMMISSION
________________
Release No. 80201
Admin. Proc. File No. 3-16518
________________
In the Matter of the Application of
KABANI & COMPANY, INC., HAMID KABANI, CPA,
MICHAEL DEUTCHMAN, CPA, and
KARIM KHAN MUHAMMAD, CPA
For Review of Disciplinary Action Taken by the
PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
________________
OPINION OF THE COMMISSION
________________
March 10, 2017
________________
Public Company Accounting Oversight Board—
Review of Disciplinary Proceedings
Violation of PCAOB Rules
Improper Professional Conduct
Failure to Cooperate with Inspection
Registered public accounting firm and three
persons associated with the firm violated PCAOB
rules by altering audit files in anticipation of a PCAOB
inspection and then producing those audit files to the
PCAOB without informing PCAOB staff of the
alterations. Held, findings of violations and sanction
imposed are sustained.
App-7
I.
Introduction
Applicants Kabani & Company, Inc. (“K&C”), a
firm registered with the Public Company Accounting
Oversight Board (“PCAOB” or “Board”), and Hamid
Kabani, CPA, Michael Deutchman, CPA, and Karim
Khan Muhammad, CPA, all persons associated with
K&C, appeal from PCAOB disciplinary action. The
PCAOB found that Applicants violated PCAOB rules
by engaging in a “wide-spread and resource-intensive
effort” to conceal documentation deficiencies in three
issuer audit files from PCAOB inspectors. For these
violations,
the
Board
censured
Applicants;
permanently revoked K&C’s registration; barred
Kabani, Deutchman, and Khan from associating with
a registered public accounting firm (with leave for
Deutchman and Khan to petition the PCAOB to
terminate their bars in two years and 18 months,
respectively); and ordered Kabani, Deutchman, and
Khan to pay civil penalties. 1
We base our findings on our independent review
of the record. That record shows that Applicants added
or falsified hundreds of audit documents; intentionally
reset internal computer clocks to conceal that the
alterations were made before applicable deadlines;
and backdated their signatures on relevant work
papers. We agree with the PCAOB that this evidence
demonstrates a course of misconduct that is troubling
on its face and that Applicants’ changing, conflicting,
and patently unbelievable testimony “accentuates the
1 Final Decision, Kabani & Co., No. 105-2012-002, slip op. at 19
(PCAOB Jan. 22, 2015).
App-8
gravity of the misconduct.” As the PCAOB held, this
“[m]isconduct is especially troubling and deserving of
serious sanctions,” because Applicants “went to
considerable lengths to conceal their actions.”
Substantial evidence thus establishes that Applicants
intentionally and knowingly violated the PCAOB’s
rules and that the PCAOB’s imposition of sanctions for
those violations was an appropriate remedy. 2
II. Facts
At issue here are K&C’s files for the 2007 audit of
Issuers “A,” “B,” and “C”—three Delaware
corporations headquartered in China, Hong Kong, and
California, respectively. Kabani, who is K&C’s
founder, president, and sole shareholder and was
responsible for K&C’s overall management, was the
engagement partner on these three audits.
Deutchman, who was K&C’s director of audit and
accounting and participated in monitoring K&C’s
quality control and staff training, was the concurring
partner on the three audits. Khan, who was a K&C
auditor with responsibilities for overseeing general
audit work and supervising audit staff, worked as an
“In-Charge” on the Issuer A audit acting as an audit
supervisor or manager. Kabani, Deutchman, and
Khan all worked in K&C’s Los Angeles office.
Under Section 105(e)(1) of the Sarbanes-Oxley Act,
Applicants’ application for review triggered an automatic stay of
the sanctions. On September 3, 2015, the PCAOB filed a motion
with the Commission to terminate the stay. Applicants opposed
the motion and moved to strike it as an improper sur-reply.
Because we sustain the sanctions, we lift the automatic stay
without relying on the PCAOB’s motion. We dismiss the
PCAOB’s and Applicants’ motions as moot.
2
App-9
This case stems from Applicants’ failure to
comply, for the three audits at issue, with two
requirements under the PCAOB’s Auditing Standard
No. 3 (“AS No. 3”): (1) that complete and final audit
documentation be assembled for retention within 45
days of the auditor’s report release date (the
“documentation completion date”); and (2) that any
documentation added after the documentation
completion date must indicate the date the
information was added, the name of the person who
prepared the additional documentation, and the
reason for adding it. 3 AS No. 3 required Applicants to
assemble a complete and final audit file for the Issuer
A audit by July 27, 2008; the Issuer B audit by May
12, 2008; and the Issuer C audit by May 30, 2008. 4
A. Applicants engaged in a “cleanup” of
K&C’s audit files in anticipation of a
PCAOB inspection.
On June 2, 2008, the PCAOB’s Division of
Registration
and
Inspections
(“Division
of
Inspections”) told Kabani that it intended to inspect
K&C’s audit records. After receiving this notice,
Kabani held a meeting with Firm personnel. Rehan
Saeed, a concurring reviewer for K&C, testified that
at the meeting Kabani stated that a PCAOB
3 See AS No. 3 ¶ 15, ¶ 16.
4 Applicants argue that, because Issuer A filed an
amended
annual report on July 3, 2008, the documentation deadline for
Issuer A should be August 17, 2008. But AS No. 3 ties the 45-day
documentation deadline to the audit report release date, not to
the date of the company’s filings. See, e.g., AS No. 3, App’x A.
Regardless, most (if not all) of the alterations and additions to
the Issuer A files occurred after August 17, 2008.
App-10
inspection was coming; that the PCAOB had noted
deficiencies at the Firm during a previous inspection;
that PCAOB rules permitted firms to correct certain
deficiencies in work paper files; that Kabani wanted
audit files reviewed to determine whether certain
documents were missing; and that a new, junior
staffer would be “driving the project.” After the initial
meeting, Kabani gave Saeed a list of audit files to
review and explained that he should “report back what
documents are missing” from the files. Although he
disputed this at the hearing, Kabani admitted in
investigative testimony that he “want[ed] [Saeed] to
look at the final version of the files.”
Contemporaneous emails, on which Kabani,
Deutchman, and Khan were copied, described K&C’s
efforts as “PCAOB Cleanup” or “Rehan’s PCAOB
Cleaning-up.” Indeed, there were at least 11
references to a “PCAOB Cleanup” or “PCAOB
Cleaning-up” during the relevant period. Applicants
identify no evidence, and we can find none, that they
ever questioned or expressed concern about the use of
these terms.
K&C’s “PCAOB Cleanup” consumed so much of
the staff’s time in the two months before the PCAOB’s
inspection that, according to Saeed, K&C “could not do
much billing” on any paying projects. Saeed testified
that “it looked like a huge project where everyone was
working on it, they were working overtime, they were
working against the deadlines.” Deutchman similarly
testified that “[e]verybody was afraid of the inspection.
Everybody was terrified of the PCAOB, almost
paranoid of the PCAOB.” And Kabani testified that,
when he instituted the internal inspection, the Firm
App-11
was “going through [an] extremely busy period”
because it “had 60 filings within [the] next three
months and [that he and Firm personnel] were
overwhelm[ed].” K&C’s time records show that staff
spent hundreds of hours on the Issuer A, B, and C
audits after the documentation deadlines but before
the PCAOB’s inspection.
On or around September 14, 2008, for example, a
senior auditor emailed Saeed that, “[f]ollowing a
discussion with Karim [Kahn],” she was attaching for
Saeed’s review a file containing the work papers for
the Issuer A audit and listing the work that she had
already done on the file. Approximately a week after
receiving the Issuer A work papers, Saeed emailed the
senior auditor and Khan a list of deficient and missing
audit documents. Khan emailed back, “Rehan, Thanks
for your comments. We will update the files and get
back to you.” The following week, Saeed was provided
with files containing work papers relating to the
Issuer B and C audits. During Saeed’s review of those
files, the junior staffer in charge kept Kabani,
Deutchman, and Khan apprised of Saeed’s progress by
emailing them an “updated list” of “Rehan’s PCAOB
Cleaning-up as of today.” The email also indicated that
Deutchman was reviewing or had reviewed 18
different audit files, including those for Issuers B and
C.
On Sunday, October 12, 2008, the Division of
Inspections confirmed that PCAOB staff would arrive
at K&C’s office, on Monday, October 20 and emailed
Kabani a list of the audits that it would be inspecting
(which included audits for Issuers A, B, and C). Within
minutes, Kabani forwarded the email to K&C staff
App-12
with the following message: “Please note below the
clients selected by the PCAOB. We will be working 12
hrs per day, next week, including Saturday and
possibly Sunday. Everybody is expected to make
arrangement[s] and resolve the[ir] personal matters.
No exceptions.” The following day, Kabani emailed
Saeed directly, writing that “[s]ince we have been
informed by the PCAOB about which clients they will
inspect, let’s review those clients now.” Deutchman
also emailed Saeed about his review of the audit files,
writing: “Thanks, Rehan[.] We look forward to your
thoughtful comments. They are always good and as
you know we really need them now.”
Later that week, Saeed emailed his comments on
the Issuer B file to, among others, Kabani,
Deutchman, and Khan. The junior staffer in charge
replied (copying Kabani and Khan): “Thanks for your
hard work on [Issuer B]. We are updating it based on
your comments now.” A few days later, Saeed
completed his review of the Issuer C file and emailed
comments to Kabani, Deutchman, and Khan. Saeed
labeled his comments as “Internal Inspection PCAOB
Cleanup” and concluded that, among numerous other
deficiencies, neither the Issuer B nor C audit files had
been assembled within 45 days of the release of the
audit report as required by AS No.3.
Three days later, on Monday, October 20, 2008,
PCAOB inspectors visited K&C’s office and reviewed,
among other things, the Issuer A, B, and C audit files.
At Kabani’s direction, staff provided the inspectors
with the work papers. No one informed the inspectors
that work papers had been supplemented or altered
after the respective documentation completion dates.
App-13
B. The PCAOB learned of K&C’s “cleanup”
after Saeed left the firm and contacted
its staff.
Saeed left K&C approximately a year after the
PCAOB’s inspection. Around that time, he contacted
PCAOB staff about “concerns that [he] developed over
time relating to seeing deficiencies and relating to
work paper reviews in advance of a PCAOB
inspection” of K&C. Saeed also provided the PCAOB
with a thumb drive containing copies of the audit files
he reviewed for the Issuer A and B audits and emails
related to all three audits at issue.
In April 2010, the PCAOB’s Division of
Enforcement and Investigations (“Division of
Enforcement”) opened an investigation and requested
that K&C produce a copy of “all working papers and
other documents concerning the audit, review or other
services” performed by K&C for certain audit clients
from April 2007 through April 2010, including Issuers
A, B, and C. K&C provided the PCAOB with the
requested materials in June 2010. Kabani testified at
the disciplinary hearing that the documents he
provided were “the final set of work papers” and that
he “d[id] not believe [he] sent any non-final” versions
of the work papers to the PCAOB.
On February 8, 2011, the Division of Enforcement
informed K&C that the Issuer A audit file was corrupt
and unreadable. Later the same day, Kabani sent the
PCAOB a disk containing a substitute file with the
Issuer A work papers and represented that “[t]he files
were copied in the same format as they were stored on
the firm’s computer server.” Kabani did not suggest
that the substitute file was different from the audit file
App-14
made available to PCAOB inspectors during their
onsite visit or from the audit file initially produced to
the Division of Enforcement; indeed, Applicants
stipulated that the Issuer B and C audit files that they
provided to the Division of Enforcement were the same
ones made available to PCAOB staff during their
inspection.
C. PCAOB staff identified numerous
examples of documents that K&C added
or altered to address deficiencies Saeed
recognized during K&C’s “cleanup.”
The Division of Enforcement compared the audit
files Saeed provided with those Applicants provided
and discovered numerous examples of documents that
K&C added or altered before the PCAOB inspectors
arrived. The metadata in the audit files that
Applicants provided also showed numerous other
changes after the applicable documentation deadlines.
None of these changes was accompanied by an
indication of when, why, or by whom they were made.
1.
The files that Saeed provided and
the files that Applicants provided
differed substantially.
The Issuer A audit file that Saeed provided to the
PCAOB (which he reviewed in mid-September 2008,
well after the documentation completion date)
contained 158 documents, four work paper folders,
and no supporting work papers for 13 of 38
subsidiaries. The file that Applicants produced to the
Division of Enforcement, however, contained 1,104
work papers, two additional work paper folders (titled
“Checklists” and “Wrap up”), and 446 supporting work
papers for the 13 subsidiaries that did not have
App-15
supporting work papers in Saeed’s file. There were
also more than 100 differences in 13 trial balances and
28 supporting work papers that corresponded to the
“disparities” identified by the senior auditor, including
removing and revising supporting work papers and
adding and altering work paper references.
There were also discrepancies between the Issuer
B audit file that Saeed reviewed and the file
Applicants provided to the PCAOB. Saeed’s review of
the Issuer B audit file noted that it lacked a Risk
Assessment Summary Form, and minutes of two K&C
staff meetings held in October 2008 similarly noted
the need to “create memo for Risk Assessment.” The
audit file that Applicants provided to the PCAOB,
however, contained the Risk Assessment form. Saeed
also noted that a Supervision, Review, and Approval
Form lacked handwritten signatures; the final audit
file contained a signed form. Saeed commented further
that the management representation letter dated
January 25, 2008 in the file he reviewed did not match
the March 10, 2008 report release date. The file
Applicants provided to the PCAOB contained a letter
with the correct March 10, 2008 date. Saeed also noted
that the dollar amounts in a liability lead schedule
should have been the same as corresponding figures in
the supporting schedule and working trial balance.
The work papers provided to the PCAOB contained
corrected figures.
With respect to the Issuer C audit file, Saeed’s
review identified two missing documents: (1) a
“Certificate of Approval by FIE (Foreign Investment)”
and (2) a “Risk Assessment Summary Form” work
paper. K&C, Kabani, and Deutchman stipulated
App-16
below that K&C personnel scanned and added both
documents to the final work papers on October 16,
2008—after the documentation completion date—and
both documents were included in the file that
Applicants produced to the PCAOB. Saeed also noted
that the management representation letter in the
Issuer C audit file was dated March 31, 2008 (a month
after the February 28, 2008 audit report date). The
audit file that Applicants provided to the PCAOB
contained a management representation letter dated
February 28, 2008. Saeed noted further that the
Supervision, Review, and Approval Form was not
signed. The Supervision, Review, and Approval Form
in the audit file that Applicants provided to the
PCAOB had handwritten signatures.
2.
The files’ metadata showed that
work papers were added late or
were backdated.
The Division of Enforcement examined the audit
work papers’ “metadata,” which is stored information
about a document’s properties, including when and by
whom it was created and last modified. The metadata
showed that 156 documents were added after the
applicable documentation completion deadlines for
the three issuers. Specifically, the Issuer A file
contained 54 documents created and/or modified after
July 27, 2008; the Issuer B file contained 39
documents created and/or modified after May 12,
2008; and the Issuer C file contained 63 documents
created and/or modified after May 30, 2008.
Of those documents, the Issuer A work papers
contained 18 documents in which the modification
timestamps predated the creation timestamps
App-17
(despite the impossibility of modifying documents
before they were created) and the Issuer B and Issuer
C work papers each contained 37 similarly anomalous
documents. A cursory review of these documents
would suggest that they were last modified just before
applicable deadlines, but the PCAOB’s expert testified
that the anomalies in the metadata actually showed
that the documents had been opened on a computer
where the internal clock had been intentionally set
backward. In other words, the pattern with which
these anomalous documents were backdated indicated
that they were not the result of innocent or accidental
file operations but rather of an intentional scheme to
deceive and mislead.
Specifically, the Division’s expert explained, users
logging in as “Hamid,” “Kabani,” “Hamid Kabani,”
“Karim,” or “Mohammed” opened documents, made
minor, non-substantive changes (like adding a
carriage return after the last line of text), and then
saved the file to give it a modified date that matched
the computer’s clock at the time the file was saved. In
each case, the new modified dates predated the
applicable documentation deadlines—suggesting that
the changes were done to make it appear that the
audit files complied with AS No. 3. Indeed, the
PCAOB’s expert observed that the “consistency of
[the] intervening period” between the created and
modified dates, combined with the pattern of “contentneutral changes” to the anomalous documents, makes
it “probable that the Anomalous Documents were
modified on intentionally backdated machines (rather
than modified on inadvertently or randomly
backdated machines).”
App-18
3.
K&C’s work papers showed that the
Issuer A and B audit files contained
inaccurate and misleading auditor
sign-offs.
K&C’s work papers also showed that Applicants
backdated or otherwise altered its auditors’ “sign-off”
date—the date that the auditors manually entered in
the files of the individual work papers when
conducting their final review of an audit file. These
new sign-off dates were attempts to conceal the fact
that some audit work had not been done before K&C
released its audit reports.
The sign-offs in the Issuer A audit file that Kabani
provided to the PCAOB indicated that, for every work
paper in that file, Khan completed his audit work (and
Kabani and Deutchman completed their review of that
work) on June 10, 2008—two days before K&C
released its audit report. But that same audit file
contained 13 spreadsheets showing that K&C did not
actually receive the underlying documents (e.g.,
letters from financial institutions confirming account
balances) until sometime between June 16 and June
20, 2008—after the audit work for these documents
was supposedly completed and reviewed. In fact, for
10 of those confirmations, the underlying documents
themselves (that had supposedly been reviewed on
June 10) bear facsimile marks showing that K&C did
not receive them until after June 13.
Similarly, the Issuer B work papers showed that
auditor sign-offs were added after the documentation
completion date. The work papers that Saeed
reviewed in October 2008 (well after the May 12, 2008
documentation completion date) contained electronic
App-19
sign-offs indicating that most—but not all—of the
work papers had been “Completed” by October 2008,
and that none of the work papers contained a sign-off
showing that it had been “Reviewed.” However, in the
audit file that K&C provided to the PCAOB, the files
contained sign-offs indicating that all 372 work papers
had been both “Completed” (by a K&C staff member)
and “Reviewed” (by Kabani and Deutchman) on the
same day, March 26, 2008. The audit file provided to
the PCAOB bears no notation explaining that the
sign-offs had been added after May 12, 2008 (the
documentation completion date), the person who
added them, or the reason for doing so.
III. Procedural History
On June 15, 2012, the Board issued an Order
Instituting Disciplinary Proceedings (“OIP”) alleging
that Applicants had violated PCAOB rules and
auditing standards by adding, deleting, altering,
and/or backdating numerous work papers across
several audit engagements and that Applicants
provided work papers for at least three of those
engagements to the PCAOB in connection with its
inspection without informing the PCAOB of the
alterations. 5
5 The OIP also named Saeed as a respondent, but the Board
settled the proceedings against him on May 21, 2013. See Rehan
Saeed, CPA, Release No. 105-2013-004 (PCAOB May 21, 2013)
(finding that Saeed violated PCAOB rules and auditing
standards in connection with his failure to perform timely
concurring reviews and his backdating of concurring review
documentation; censuring him; and barring him from being an
associated person of a registered public accounting firm, with
leave to petition to terminate the bar in 18 months), available at
App-20
After a hearing, a PCAOB hearing officer issued
an initial decision on April 22, 2014, finding that
Applicants violated PCAOB rules by participating in a
“wide-spread and resource-intensive effort” to alter
documents in three issuer audit files in an attempt “to
deceive PCAOB inspectors in an upcoming inspection
about the deficiencies in the Firm’s audit work
papers.” 6 The initial decision found that Kabani’s and
Deutchman’s misconduct was “intentional and
knowing,” and that Khan’s misconduct was “knowing,
intentional, or at least reckless.” The initial decision
censured all four Applicants; revoked K&C’s
registration;
permanently
barred
Kabani,
Deutchman, and Khan from associating with a
registered public accounting firm (with leave for
Deutchman and Khan to reapply in two years and 18
months, respectively); and imposed civil penalties of
$100,000 on Kabani, $35,000 on Deutchman, and
$20,000 on Khan.
Applicants petitioned the Board for review of the
initial decision. After conducting a de novo review of
https://pcaobus.org/Enforcement/Decisions/Documents/05212013
_Saeed.pdf.
The hearing officer also found that K&C violated PCAOB
rules by failing to establish sufficient policies and procedures
concerning audit documentation and the performance of timely
concurring reviews. He found further that Kabani and
Deutchman took and/or omitted to take action knowing, or
recklessly not knowing, that their acts and/or omissions would
contribute directly and substantially to the Firm’s quality control
violations, in violation of PCAOB Rule 5302(b). In its subsequent
review, the Board found it “unnecessary” to consider these
findings and set them aside in light of the sanctions imposed for
the other violations.
6
App-21
the record, the Board summarily affirmed the initial
decision’s findings and imposition of sanctions on
January 22, 2015. 7 The Board explained that
Applicants had “not identified any potentially
meritorious challenges to the hearing officer’s findings
of violation[s].” Specifically, the Board found the
“initial decision’s presentation of the facts to be fairly
based on a preponderance of the record evidence.” The
Board further found that “the changing, conflicting,
and patently incredible explanations for the[]
document alterations offered by [Applicants]
throughout this proceeding accentuate the gravity of
the misconduct and underscore how meritless
[Applicants’] arguments to the contrary now are.”
IV. Violations
Under Section 107(c)(2) of the Sarbanes-Oxley
Act, we will sustain the Board’s decision if we find that
the record shows that Applicants engaged in the
conduct that the Board found Applicants to have
7 PCAOB Rule 5460(e) states that “[t]he Board may summarily
affirm an initial decision based upon the petition for review,
without further briefing, if it finds that no issue raised in the
petition for review warrants further consideration by the Board.”
We review only the Board’s decision on appeal. Cf. Fajardo v.
INS, 300 F.3d 1018, 1019 n.1 (9th Cir. 2002) (“The BIA
summarily affirmed the IJ’s order, which therefore constitutes
the final agency decision under review.”); Philippe N. Keyes,
Exchange Act Release No. 54723, 2006 WL 3313843, at *6 n.17
(Nov. 8, 2006) (“[I]t is the decision of the NAC, not the decision of
the Hearing Panel, that is the final action of NASD which is
subject to Commission review.”); 15 U.S.C. § 7217 (c)(2)
(outlining Commission review of “final disciplinary sanctions
imposed by the Board”).
App-22
engaged in, that Applicants’ conduct violated PCAOB
rules, and that those rules are, and were applied in a
manner, consistent with the purposes of SarbanesOxley. 8 We conduct a de novo review of the record to
determine whether a preponderance of the evidence
supports the PCAOB’s findings. 9 We find that it does.
Although Applicants broadly contend, without citation
or further explanation, that the “weight of the
evidence” against them “does not make up for the
procedural shortcomings clearly stated in the Hearing
Officer’s decision,” we find no reversible error in either
that decision or the decision of the Board. To the
contrary, based on our de novo review, we agree with
the PCAOB that the Hearing Officer’s findings are
well supported by the evidence in the record and the
law. 10
8 See 15 U.S.C. § 7217(c)(2).
9 See, e.g., S.W. Hatfield, Exchange Act Release No. 69930, 2013
WL 3339647, at *1 (July 3, 2013) (applying preponderance of
evidence standard in PCAOB disciplinary proceeding).
10 Because we find the Hearing Officer’s findings to be well
supported, we reject Applicants’ assertion that the PCAOB’s
decision should be set aside because the hearing officer “had no
experience in the practice of auditing and accounting” and “was
unfamiliar with the case, the previous pleadings and motion
documents, and discovery issues before the hearing.”
App-23
A. The
record
demonstrates
that
Applicants altered or added work
papers to the files of three audits after
their
documentation
completion
deadlines and produced the files to
PCAOB staff without informing the
PCAOB of the changes.
A preponderance of the evidence shows that
Kabani devised and (with Deutchman and Khan)
executed a plan to improperly alter and add work
papers in the Issuer A, B, and C audit files. Kabani
and Deutchman authorized, supervised, and
implemented the effort to conceal deficiencies for the
Issuer A, B, and C audits, and Khan authorized,
supervised, and implemented this effort for the Issuer
A audit. As described above, these efforts yielded the
audit files that Applicants produced to the Division of
Enforcement. A comparison to the files Saeed provided
and a review of the files’ metadata reveal numerous
examples of changes made after the respective
documentation completion dates and evidence of
attempts to conceal the changes. Instead of identifying
any of this to the PCAOB, Applicants remained silent,
leaving the false impression that they had properly
assembled complete and final audit files and done so
by the deadlines under the auditing rules.
Applicants contend that they did not improperly
alter the audit files before the PCAOB’s inspection
because Saeed reviewed “non-final” audit files for
internal review purposes only, the Issuer A audit file
was not altered, and they reviewed files that the
PCAOB did not inspect. None of these arguments has
merit.
App-24
1.
The record does not establish that
Saeed reviewed only “non-final”
files.
Applicants assert that Saeed reviewed only “nonfinal” audit files as part of an internal quality-control
exercise (thus implying that the deficiencies Saeed
identified in his review are irrelevant because K&C
had an already-assembled set of complete and final
audit files somewhere else that it provided to the
PCAOB). But the only evidence of this is Applicants’
own testimony, which is either not supported by or is
inconsistent with the other record evidence. Kabani
testified at the PCAOB disciplinary hearing that while
he told Saeed to review K&C’s audit files the review
was for internal quality control purposes and that he
could not “care less” whether Saeed reviewed final
versions of the audit files.
This testimony contradicts Kabani’s testimony
during the PCAOB’s investigation that he engaged
Saeed to inspect the “final version” of the work papers.
The checklist that Saeed used when reviewing K&C’s
audit files also asked him to confirm whether the audit
files had been completed within 45 days of the report—
a requirement applicable to final audit files. And
Applicants themselves admitted to adding work
papers to the audit files after the documentation
deadlines. Nor do any of the contemporaneous emails
describing the “PCAOB Cleanup” that were sent after
the PCAOB announced its inspection mention or
reasonably suggest that the “cleanup” was of non-final
files, for internal quality-control purposes only. We
agree with the PCAOB hearing officer that “[i]t only
makes sense that Saeed would be given final versions
App-25
[of the work papers to review], for what quality control
benefits could the Firm reasonably have expected to
derive from expending substantial resources
reviewing non-final work papers, after the
documentation completion deadline, in the weeks
before an impending PCAOB inspection?”
Applicants challenge the PCAOB’s findings by
arguing that the hearing officer wrongly credited
Saeed’s testimony about reviewing final audit files
given Saeed’s “ethical and professional violations” and
his admission “that he had no direct knowledge that
he was in fact reviewing the final versions.” Although
the PCAOB hearing officer expressed concerns
regarding Saeed’s conduct and motives, he found
Saeed nonetheless “credible on the major aspects of his
testimony.” We generally accord considerable weight
and deference to the factfinder’s credibility
determination, and find no reason not to do so here. 11
Saeed testified that his “understanding” was that
Applicants sent him “the complete final files of the
engagement to look for deficiencies, [and] to prepare
for the PCAOB inspection.” He also admitted that he
had “no information” about whether “in fact [he]
received the complete final file as opposed to just
having an expectation that a complete final file would
be sent to him.” We find this to be a credible
explanation of what occurred, and K&C’s
contemporaneous emails and the audit files
11 See S.W. Hatfield, 2013 WL 3339647, at *12 (stating that the
Commission defers to a PCAOB hearing officer’s credibility
determinations “unless the record contains substantial evidence
to support overturning them”).
App-26
themselves corroborate that Applicants asked Saeed
to review the final audit files.
Conversely, Applicants’ own testimony lacked
credibility. At the hearing, Applicants denied
understanding what the terms “PCAOB Cleanup” or
“PCAOB Cleaning-up” meant. Kabani claimed that he
“did not notice any E-mail showing ‘PCAOB clean up’
in October” and that he had “no idea any PCAOB
cleanup was going on at the time.” Khan suggested
that perhaps the junior staffer in charge of the project
“was asking PCAOB to clean something” or that “it
looks like PCAOB is cleaning something.” The PCAOB
hearing officer found that “[n]ot only was this
testimony not credible, but it was so incredible that it
undermined [Applicants’] overall credibility.” Because
we find it implausible that Applicants would not notice
or understand a phrase like “PCAOB Cleanup” in the
numerous emails they either sent or received that
described an urgent and intensive effort to identify
and correct deficiencies in audit files in the weeks
after the PCAOB announced its inspection, we agree
with that assessment.
Applicants attempt to bolster their credibility on
appeal by referencing a polygraph test that Kabani
took (and attempted to introduce into the record
below) after the PCAOB hearing officer issued his
initial decision. We find no impropriety in the Board’s
decision not to admit this test into the record. As the
Board explained, Applicants did not establish that the
polygraph results were material or that good cause
excused Applicants’ failure to present the results at
App-27
the hearing. 12 Kabani’s explanation for taking the
polygraph test was that he was “shocked” by the
PCAOB hearing officer’s findings against him. As the
Board explained, however, “[w]itness credibility is an
issue to be considered in nearly every adjudicated
proceeding, as is the possibility of an unfavorable
decision.” Applicants should not “be permitted to
gamble on one course of action and, upon an
unfavorable decision, to try another course of
action.” 13 The Board also correctly observed that
“courts are especially reluctant to admit polygraph
evidence where, as here, the parties did not stipulate
to the admissibility of the test results and no notice of
the administration of the test was given to the
opposing party. 14
See PCAOB Rule 5464 (permitting motions to adduce
additional evidence before the Board but requiring that such
motions “show with particularity that such additional evidence is
material and that there were reasonable grounds for failure to
adduce such evidence previously”). Applicants’ assertion that the
polygraph result was cumulative does not address why it is
material or why it could not have been adduced earlier.
12
13 David T. Fleischman, Exchange Act Release No. 8187, 1967
WL 87757, at *3 (Nov. 1. 1967) (finding that a respondent’s
failure “to testify and adduce available evidence to meet the
charges against him and show mitigating factors does not entitle
him to have the proceedings reopened after the issuance of an
adverse decision”); see also, e.g., Gross v. SEC, 418 F.2d 103, 108
(2d Cir. 1969) (upholding the Commission’s decision to reject
respondent’s request to reopen hearing to take new testimony by
observing that “[p]ublic policy considerations favor the
expeditious disposition of litigation”) (quoting Fleischman, 1967
WL 87757, at *3).
14 See, e.g., Conti v. Comm’r, 39 F.3d 658, 663 (6th Cir. 1994)
(“[U]nilaterally obtained polygraph evidence is almost never
admissible under Evidence Rule 403.”); 1 KENNETH S. BROUN,
App-28
Finally, Applicants contend that the PCAOB
hearing officer misapplied the burden of proof by
requiring them to prove that Saeed reviewed non-final
work papers. Although the hearing officer held that
Applicants “never proved . . . that [Saeed] was
reviewing documents solely for quality control
purposes or that he was reviewing non-final versions
of the audit work papers,” this conclusion was entirely
proper. The hearing officer considered Applicants’
claim that Saeed reviewed non-final work papers after
the Division of Enforcement submitted evidence that
Applicants reviewed and altered final audit files after
the applicable documentation completion deadlines.
With the Division of Enforcement having done so,
Applicants bore the burden of producing evidence to
support their factual claims. 15 Applicants, however,
did not do so; rather, they offered only implausible
explanations “which without adequate supporting
evidence amount[] to little more than assertions.” 16
MCCORMICK ON EVIDENCE § 206 (7th ed. 2013) (“[A]dmission of
unstipulated [polygraph] results is so rare as to be aberrational”).
15 See, e.g., Atlanta-One, Inc. v. SEC, 100 F.3d 105, 109-10 (9th
Cir. 1996) (finding that NASD had not impermissibly shifted the
burden of proof when it asked respondent during the hearing
process to explain certain commissions that were alleged to have
been excessive); The Dratel Grp., Inc., Exchange Act Release No.
77396, 2016 WL 1071560, at *9 (Mar. 17, 2016) (holding that
FINRA had the burden of proving that Applicants engaged in
violative conduct but “Applicants bore the burden of producing
evidence to support their claimed factual defenses”).
16 The Dratel Grp., 2016 WL 1071560, at *9.
App-29
2.
The record does not establish
Applicants’ claim that the Issuer A
audit file was not altered.
With respect to the Issuer A audit file, Applicants
claim that it would have been impossible for them to
add the approximately 900 work papers that were in
the file they produced to the PCOAB but not in the file
Saeed provided. But the Board did not find that
Applicants created all approximately 900 new
documents. Applicants could have simply moved
previously existing documents into the Issuer A audit
file. Because Applicants did not note these additions
(or the reasons for them) in the file, such conduct
would still violate AS No.3.
Applicants argue further that the anomalies in
the metadata are consistent with their having to
assemble a replacement Issuer A audit file “to ensure
that the PCAOB could review something regarding the
subject audit” after learning that the initial file was
corrupted. In their brief before us, Applicants contend
that “even the developer of the [software], Thomson
Reuters, indicated that they believe the two files, the
one which could be opened by the PCAOB staff and the
one that could not be opened, were different files,”
with “different sizes and different names.” Applicants,
however, neither cite to nor seek to introduce evidence
that Thompson Reuters ever made this statement (nor
do Applicants repeat this claim in their reply brief
after the PCAOB challenged Applicants’ lack of
support). And, in fact, the two files had the same file
name—a fact to which the K&C, Kabani, and
Deutchman stipulated during the PCAOB proceeding.
The PCAOB’s expert also explained in his report that
App-30
any size difference between a corrupt and non-corrupt
file “is not a reliable indication that the contents of the
pre-corrupt version were more or less extensive than
those of the second file” because, for example, data
may become incorrectly associated or unassociated
with the corrupted file. In any event, because only one
file was ever unreadable (the Issuer A file), Applicants
argument, even if true, does not explain why there
would be anomalous metadata in the Issuer B or C
audit files. 17
3.
The record does not establish that
K&C’s review of files not part of the
PCAOB’s inspection showed that
Applicants lacked the intent to alter
files improperly.
Applicants also argue that they would not have
reviewed audit files that were not part of the PCAOB’s
inspection “if [their] intent was to modify and alter
work papers before the inspection.” This argument
elides the relevant context. K&C initiated a broad
17 Applicants attached to their opening brief what they purport
to be “a copy of bank confirms that were originally stored in JPEG
format and changed to .PDF (solely for the PCAOB).” According
to Applicants, these documents show that, when copying a JPEG
into Adobe format, the metadata had “a recent modification date,
but the metadata for the JPEG file, which was still part of the
file, had the original metadata dates.” Applicants claim this is
“direct evidence that the correct and complete work papers were
already in the file and were not changed in anticipation of a
PCAOB investigation.” We find no significance in these
attachments. The metadata for the .jpg versions of these work
papers show the files’ creation and modification dates as April 28,
2008. The metadata for the associated PDF versions of these
work papers also show the files’ creation and modification dates
as April 28, 2008.
App-31
review before Applicants learned about the scope of
the PCAOB inquiry; Kabani narrowed K&C’s review
after learning which files the PCAOB intended to
inspect. This sequence of events suggests an intent to
modify the work papers that the PCAOB was going to
inspect, not the opposite. As Kabani emailed Saeed on
October 13: “Since we have been informed by the
PCAOB about which clients they will inspect, let’s
review those clients now.”
B. Applicants’ conduct violated PCAOB
Rules 3100 and 4006.
The PCAOB found that Applicants’ efforts to
conceal documentation deficiencies in the three issuer
audit files from PCAOB inspectors violated PCAOB
Rules 3100 and 4006. PCAOB Rule 3100 requires
registered public accounting firms and their
associated persons to comply with “all applicable
auditing and related professional practice standards.”
Here, the standard at issue—AS No. 3—requires
auditors to assemble for retention a “complete and
final set of audit documentation . . . as of a date not
more than 45 days after the report release date
(documentation completion date).” 18 Although AS No.
3 recognizes that “[c]ircumstances may require
additions to audit documentation after the report
release date,” it specifies that “[a]ny documentation
added must indicate the date the information was
added, the name of the person who prepared the
additional documentation, and the reason for adding
it.” 19
18 AS No. 3 ¶ 15.
19 AS No. 3 ¶ 16.
App-32
PCAOB Rule 4006, in turn, requires registered
public accounting firms and associated persons of such
firms to “cooperate with . . . any Board inspection.”
That “[c]ooperation shall include, but is not limited to,
cooperating and complying with any request, made in
furtherance
of the
Board’s authority
and
responsibilities under [Sarbanes-Oxley]” to “provide
access to, and the ability to copy, any record in the
possession, custody, or control of such firm or person”
and to “provide information by oral interviews,
written responses, or otherwise.” Implicit in this
cooperation requirement is that auditors provide
accurate and truthful information. 20
The record demonstrates that Applicants’ conduct
violated Rules 3100 and 4006. Kabani, Deutchman,
Khan, and K&C (acting through the individual
Applicants) 21 added and altered work papers (or
directed others to do so) to the Issuer A, B, and C audit
files after the relevant documentation completion
Cf. Sinclair v. SEC, 444 F.2d 399, 401 (2d Cir. 1971)
(“The . . . falsification . . . on [the] order tickets is so clearly a
violation of the record-keeping requirements of [Section] 17(a) of
the 1934 Act . . . that it hardly deserves comment . . . . [T]hat
information was obviously material and important, and, even
assuming no legal obligation to furnish the names, there was an
obligation, upon voluntarily supplying that information, to be
truthful.”); Eric J. Brown, Exchange Act Release No. 66469, 2012
WL 625874, at *11 (Feb. 27, 2012) (stating that the requirement
that broker-dealers “make and keep current . . . certain books
and records . . . includes the requirement that the records be
accurate, which applies regardless of whether the information
itself is mandated”) (quotation marks omitted).
20
21 See, e.g., A.J. White & Co. v. SEC, 556 F.2d 619, 624 (1st Cir.
1977) (noting that a firm “can act only through its agents, and is
accountable for the actions of its responsible officers”).
App-33
dates without indicating that the documents were
changed, the persons who did so, or the reasons for
doing so. In each case, Applicants’ failure to identify
any changes interfered with the PCAOB’s ability to
fulfill its regulatory function of ensuring that auditors
comply with their professional responsibilities.
C. PCAOB Rules 3100 and 4006 are, and
were applied in a manner, consistent
with the purposes of Sarbanes-Oxley.
Rules 3100 and 4006 are, and were applied in a
manner, consistent with the purposes of SarbanesOxley. Sarbanes-Oxley requires that the PCAOB
establish auditing and other professional practice
standards for registered public accounting firms “as
may be necessary or appropriate in the public interest
or for the protection of investors.” 22 Rule 3100’s
requirement that persons associated with registered
public accounting firms comply with all applicable
auditing standards is thus consistent with SarbanesOxley. 23
Sarbanes-Oxley also provides that the rules of the
Board may require, in connection with a Board
22 15 U.S.C. § 7213(a)(1).
23 See Order Approving Proposed Rules Relating to Compliance
with Auditing and Related Practice Standards and Advisory
Groups, Exchange Act Release No. 48730, 2003 WL 22478774, at
*2 (Oct. 31, 2003) (finding that Rule 3100 was “consistent with
the requirements of the [Sarbanes-Oxley] Act and the securities
laws and are necessary and appropriate in the public interest and
for the protection of investors”); id. at 2 (finding that “adoption of
Rule 3100 would mean that any registered public accounting
firms or person associated with such a firm that fails to adhere
to applicable Standards could be the subject of a Board
disciplinary proceeding”).
App-34
investigation, the testimony of a firm or any person
associated with a registered public accounting firm
and the production of audit work papers or other
documents. 24 It provides further that the Board may
impose sanctions on any firm or associated person that
“refuses to testify, produce documents, or otherwise
cooperate with the Board in connection with an
investigation.” 25 Rule 4006’s requirement that public
accounting firms and associated persons cooperate
with any Board inspection is thus consistent with the
purposes of Sarbanes-Oxley.
For the same reasons, it was consistent with the
purposes of Sarbanes-Oxley to apply these rules to
Applicants’ failure to adhere to applicable auditing
standards and failure to cooperate with the Board’s
inspection and find that Applicants violated Rules
3100 and 4006.
V. Sanctions
We review the PCAOB’s imposition of sanctions to
determine if, “having due regard for the public interest
and the protection of investors,” the sanction imposed
“(A) is not necessary or appropriate in furtherance of
[the Sarbanes-Oxley] Act or the securities laws; or (B)
is excessive, oppressive, inadequate, or otherwise not
appropriate to the finding or the basis on which the
sanction was imposed.” 26 Based on that review, we
“may enhance, modify, cancel, reduce, or require the
remission of a sanction imposed by the Board upon a
registered public accounting firm or associated person
24 15 U.S.C. § 7215(b)(2).
25 Id. § 7215(b)(3).
26 Id. § 7217(c)(3).
App-35
thereof.” 27 We consider both “the nature of the
violation and the mitigating factors presented in the
record.” 28 In doing so, we are mindful of the
responsibility to be “particularly careful to address
potentially mitigating factors” and the “remedial and
protective efficacy” of sanctions involving expulsion of
a firm or individual from the auditing industry. 29
Under these standards, we sustain the Board’s
imposition of sanctions, because we agree that
Applicants engaged in an egregious attempt to deceive
the PCAOB and “might have been successful in [doing
so] if Saeed had not reported his concerns.”
A. We sustain the revocation of K&C’s
registration
and
the
bars
from
associating with a registered public
accounting firm imposed on Kabani,
Deutchman, and Khan.
1.
Applicants’
violations
were
intentional, knowing, and reckless.
Sarbanes-Oxley requires that to revoke a firm’s
registration or bar associated persons from future
association the Board must find “intentional or
knowing conduct, including reckless conduct, that
results in a violation of the applicable statutory,
regulatory, or professional standard.” 30 Recklessness
is an “extreme departure from the standards of
27 Id.
28 Gately & Assocs., LLC, Exchange Act Release No. 62656,
2010 WL 3071900, at *13 (Aug. 5, 2010) (quoting McCarthy v.
SEC, 406 F.3d 179, 190 (2d Cir. 2005)).
29 Id.
30 15 U.S.C. § 7215(c)(5).
App-36
ordinary care, . . . which presents a danger” to
investors or the markets “that is either known to the
(actor) or is so obvious that the actor must have been
aware of it.” 31 We find that the record supports the
Board’s finding that Applicants’ conduct was knowing,
intentional, or at a minimum reckless.
Kabani admitted that he directed staff to review
K&C’s audit files for errors after the PCAOB notified
him about its plan to inspect K&C’s records. Although
Kabani claims this review was for internal qualitycontrol purposes, we do not find that contention
credible. To the contrary, the record shows that
Kabani devised and directed K&C’s “PCAOB
Cleanup,” during which K&C staff undertook an
urgent and intensive effort to identify and fix
deficiencies in the Issuer A, B, and C audit files after
the documentation completion dates. Kabani then
personally produced the Issuer A, B, and C audit files
to PCAOB inspectors without disclosing what he knew
to be alterations and additions to those files. Kabani’s
conduct resulted in intentional and knowing
violations of PCAOB rules. 32 Kabani’s mental state is
also attributable to K&C because Kabani was the sole
shareholder and head of the firm and he engaged in
31 Gately & Assocs., LLC, 2010 WL 3071900, at *11.
32 We also agree with the Hearing Officer’s finding that, to the
extent Kabani believed (as he told his staff) that PCAOB rules
allowed K&C to modify its audit files, he was reckless in believing
so because that interpretation was “contrary to the plain wording
of AS [No.] 3.”
App-37
the violative conduct within the scope of his
authority. 33
The evidence shows that Deutchman also
intentionally and knowingly, or at least recklessly,
participated in Kabani’s “PCAOB Cleanup” scheme by
identifying and fixing deficiencies in the audit files
and encouraging Saeed to do the same. Although
Deutchman did not personally produce the audit files
to the PCAOB, he knew (or was reckless in not
knowing) that the altered files would be provided to
PCAOB inspectors without proper disclosures. As an
experienced accountant and the firm’s director of
audit and accounting, Deutchman knew (or was
reckless in not knowing) that these actions violated
applicable audit documentation standards and would
interfere with the PCAOB’s inspection.
Khan also acted with the mental state required to
impose a bar. He admitted that the Issuer A audit file
had not been completely assembled by that audit’s
documentation completion date, and emails show that
Khan was directly involved in furthering the “PCAOB
Cleanup” scheme by coordinating Saeed’s and the
senior auditor’s efforts to fix deficiencies in the Issuer
33 See, e.g., Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1106-
07 (10th Cir. 2003) (holding that the “scienter of the senior
controlling officers of a corporation may be attributed to the
corporation itself . . . when those senior officials were acting
within the scope of their apparent authority”); Suez Equity Inv’rs,
L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 100-01 (2d Cir.
2001) (holding that the scienter of a corporate defendant’s agent
is attributable to the corporation); SEC v. Manor Nursing Ctrs.,
Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972) (holding that scienter
of one who “controlled” two corporations could be imputed to
those entities).
App-38
A audit file. As a certified public accountant who
oversaw the general audit work at the firm, Khan
knew or was reckless in not knowing that the Issuer A
audit files did not comply with AS No. 3 and that the
attempts to fix the file’s deficiencies without
identifying those alterations to the PCAOB would
interfere with the PCAOB’s ability to carry out its
inspection.
Applicants argue that the PCAOB’s findings are
“based on an impermissible pyramiding of inference
upon inference upon inference to reach a result.” Yet
Applicants admit to much of their conduct, and the
Board may “draw inferences of subjective intent from
evidence of . . . objective acts, and from circumstantial
evidence.” 34 For the reasons stated above, we find that
a preponderance of the evidence establishes that
Applicants acted with the requisite mental state.
34 United States v. Piekarsky, 687 F.3d 134, 1448 (3d Cir. 2012);
see also, e.g., Am. Calcar, Inc. v. Am. Honda Motor Co., 768 F.3d
1185, 1189-91 (Fed. Cir. 2014) (stating that, even under a higher
“clear and convincing” standard of proof, “[b]ecause direct
evidence of deceptive intent is rare, a district court may infer
intent from indirect and circumstantial evidence”); Blair
Alexander West, Exchange Act Release No. 74030, 2015 WL
137266, at *8 n.20 (Jan. 9, 2015) (“It is well established that
‘[i]ntent may be proved through circumstantial evidence and
inferences drawn from surrounding circumstances.’”) (quoting
Thomas C. Kocherans, Exchange Act Release No. 36556, 1995
WL 723989, at *2 (Dec. 6, 1995)), aff’d, 641 F. App’x 27 (2016).
App-39
2.
Revoking K&C’s registration and
barring Kabani, Deutchman, and
Khan is not excessive, oppressive, or
otherwise inappropriate.
We further find that revoking K&C’s registration
and barring Kabani, Deutchman, and Khan from
association with any registered public company
accounting firm (with leave for Deutchman and Khan
to petition the PCAOB to terminate their bar in two
years and 18 months, respectively) is not excessive,
oppressive, or otherwise inappropriate and is in the
public interest.
Applicants acted egregiously. In adopting AS No.
3, the PCAOB emphasized that this standard was “one
of the fundamental building blocks on which both the
integrity of audits and the Board’s oversight will
rest.” 35 The PCAOB also highlighted that “[c]lear and
comprehensive audit documentation is essential to
enhance the quality of the audit and, at the same time,
to allow the Board to fulfill its mandate to inspect
registered public accounting firms to assess the degree
of compliance of those firms with applicable standards
and laws.” 36
Applicants agreed to abide by these requirements
when they choose to register with the PCAOB and to
be associated with a registered firm. Applicants not
35 AS No. 3, Appendix A, ¶ A4.
36 Id.; cf. Rani T. Jarkas, Exchange Act Release No. 77503, 2016
WL 1272876, at *13 (Apr. 1, 2016) (observing that it is “critically
important to the self-regulatory system that members and
associated persons cooperate with [FINRA] investigations”)
(quoting Erenstein v. SEC, 316 F. App’x 865, 871 (11th Cir.
2008)).
App-40
only failed to do so but also embarked on a determined
effort to undermine the PCAOB’s regulatory
responsibilities by deceiving PCAOB inspection staff
about whether K&C’s documentation complied with
applicable auditing standards. Their scheme involved
several weeks of sustained effort to identify and
correct hundreds of deficiencies in multiple issuer
files.
As senior management, Kabani and Deutchman
had a heightened responsibility to ensure that they
and the firm complied with PCAOB’s inspections and
document requirements. Instead, Kabani concocted a
scheme—which he and Deutchman directed—to hide
K&C’s documentation failures from the PCAOB. Their
actions were particularly troubling because, as the
PCAOB hearing officer observed, they “implicitly
represented to the Firm’s staff that the alteration
efforts had [their] stamp of imprimatur upon them.”
Although Khan was less senior, he still possessed
significant responsibility over the Issuer A audit and
had a professional obligation to ensure the file
complied with PCAOB’s auditing standards. Yet he
also actively participated in the alteration or addition
of work papers and directed other staff to do so.
Applicants’ misconduct also involved a high
degree of scienter. They were experienced auditors
who knowingly, intentionally, and recklessly
subverted
basic
regulatory
standards,
thus
demonstrating an extreme disregard for regulatory
authority over a prolonged period. 37 Allowing K&C to
37 Cf. Perpetual Sec., Inc., Exchange Act Release No. 56613,
2007 WL 2892696, at *11 (Oct. 4, 2007) (sustaining NASD’s
App-41
remain registered and Kabani, Deutchman, and Khan
to remain associated persons would give them future
opportunities to undermine the PCAOB’s regulatory
processes. It is well established that “[t]he existence of
a violation raises an inference that it will be
repeated,” 38 and Applicants have represented that
they continue to practice as public auditors. These
considerations demonstrate that Applicants each pose
a continuing danger to the investing public, and that
the revocation and bars are in the public interest.
Applicants argue that lesser sanctions are
appropriate because the PCAOB did not “admonish
Kabani” for any failures relating to the audits
themselves. But an auditor’s noncooperation with a
PCAOB inspection is serious precisely because it
frustrates the Board’s ability to detect violations. 39
Nor does the lack of a disciplinary history mitigate
Applicants’ misconduct. Applicants are required to
adhere to their regulatory obligations. 40 In any case,
decision to expel firm and bar supervisory principals where they
showed an “extreme disregard for NASD regulatory authority).
38 S.W. Hatfield, 2013 WL 3339647, at *25 (citation omitted).
See, e.g., R.E. Bassie & Co., Accounting and Auditing
Enforcement Release No. 3354, 2012 WL 90269, at *11 (Jan. 10,
2012) (affirming bar and explaining that a “failure to cooperate
impairs the Division [of Enforcement]’s ability to investigate,
which in turn impairs the Board’s ability to identify violations
and sanction violators”); see generally Brogan v. United States,
522 U.S. 398, 402 (1998) (stating that, “since it is the very
purpose of an investigation to uncover the truth, any falsehood
relating to the subject of the investigation perverts that
function”).
39
40 See PCAOB Rule 3100 (“A registered public accounting firm
and its associated persons shall comply with all applicable
App-42
Deutchman has a disciplinary history that we find to
be an aggravating factor. 41
We nevertheless agree with the Board’s
determination that, under the circumstances,
Deutchman and Khan should be allowed to petition
the PCAOB to terminate their bars. Although
Deutchman directed the scheme to alter the audit files
and did not meet his obligation to inform the PCAOB
inspectors about those alterations, we find it to be
mitigating that (unlike with Kabani) there is no
evidence he devised the scheme or directed the final
auditing and related professional practice standards.”); cf. Siegel
v. SEC, 592 F.3d 147, 156-57 (D.C. Cir. 2010) (affirming
Commission’s finding that lack of disciplinary history was not
mitigating because “associated person should not be rewarded for
acting in compliance with the securities laws and with his duties
as a securities professional”); Kornman v SEC, 592 F.3d 173, 18788 (D.C. Cir. 2010) (affirming imposition of a permanent bar
where registered investment adviser did not have a prior
disciplinary history); Rooms v. SEC, 444 F.3d 1208, 1214 (10th
Cir. 2006) (affirming imposition of a permanent bar by explaining
that “[l]ack of a disciplinary history is not a mitigating factor;
[respondent] was required to comply with the NASD’s high
standards of conduct at all times”).
See Michael Deutchman, CPA, Exchange Act Release No.
58240, 2008 WL 2902011 (July 29, 2008) (accepting offer of
settlement and finding that Deutchman violated the Securities
Exchange Act by preparing and issuing a public audit report
without having registered with the Board); cf. The Dratel Grp.,
2016 WL 1071560, at *15 (Mar. 17, 2016) (finding that, even if
Applicants had settled proceedings “for reasons of efficiency, they
are part of Applicants’ disciplinary history, which provides
evidence of whether an applicant’s misconduct is isolated, the
sincerity of the applicant’s assurance that he will not commit
future violations and/or the egregiousness of the applicant’s
misconduct”) (quotations omitted).
41
App-43
production of documents to PCAOB’s inspectors. And
while Khan had a significant role at K&C and with the
Issuer A audit, we find Khan’s misconduct to be
mitigated by his involvement in only one of the three
audits at issue, by the lack of evidence that he devised
the scheme, by his relatively less senior position of
responsibility, and by his more limited public
accounting experience. None of these mitigating
considerations apply to Kabani, and we do not find it
appropriate for him to be allowed to petition the
PCAOB to terminate his bar. As K&C’s head, Kabani
personally devised and directed the scheme to alter
the firm’s audit files. He then personally instructed
that those altered files be produced to both the
PCAOB’s inspectors and its Division of Enforcement.
Accordingly, we find that the PCAOB’s decision to
revoke K&C’s registration and bar Kabani,
Deutchman, and Khan from association with any
registered public company accounting firm (with leave
for Deutchman and Khan to petition the PCAOB to
terminate their bars in two years and 18 months,
respectively) is not excessive, oppressive, or otherwise
inappropriate.
B. We sustain the imposition of civil money
penalties and censures.
We also agree with the Board’s imposition of civil
monetary penalties and censures. Although SarbanesOxley does not specify the factors to be considered in
determining whether a penalty is in the public
interest, the Board considered the factors set forth in
Section 21B(c) of the Exchange Act for determining
whether a penalty is in the public interest in a
Commission administrative proceeding. We have
App-44
found the Board’s consideration of such factors to be
appropriate previously. 42 But we have also held that
the Board may impose a civil penalty when not all of
the factors are present. 43 The relevant factors are: (1)
whether there was fraudulent misconduct or
deliberate or reckless disregard of a regulatory
requirement; (2) harm to others; (3) unjust
enrichment; (4) whether the applicant had committed
prior violations; (5) the need for deterrence; and (6)
such other matters as justice may require. 44
Here, these factors weigh in favor of imposing a
civil penalty. Applicants demonstrated a deliberate
disregard for their obligation to maintain adequate
audit documentation and to cooperate with a PCAOB
inspection by producing altered documents to PCAOB
inspectors. Although there is no evidence of direct
harm to investors, Applicants’ conduct indirectly
harmed the market by preventing the PCAOB from
carrying out an effective inspection. 45 Moreover, given
42 See R.E. Bassie & Co., 2012 WL 90269, at *13.
43 Id.
44 15 U.S.C. § 78u-2(c).
45 See, e.g., R.E. Bassie & Co., 2012 WL 90269, at *12 (holding
that “[t]he fact that the Board could not identify whether there
was specific harm to a particular investor” in connection with a
failure to cooperate with an inspection “does not detract from the
seriousness of the misconduct”); PAZ Sec., Inc., Exchange Act
Release No. 57656, 2008 WL 1697153, at *5 (Apr. 11, 2008)
(observing that a failure to provide information in connection
with an inspection “will rarely, in itself, result in direct harm to
a customer” but rather will undermine an SRO’s “ability to detect
misconduct that may have occurred and that may have resulted
in harm to investors” and therefore “is serious because it impedes
App-45
the importance of inspections and the natural
incentive for individuals to conceal document
deficiencies that could lead to disciplinary action, we
find that a civil penalty acts as a necessary additional
deterrent. 46 These considerations also outweigh
Applicants’ lack of unjust enrichment or Kabani’s and
Khan’s lack of prior disciplinary history.
Accordingly, we find that in light of their different
levels of involvement and scienter Kabani’s $100,000
civil penalty, Deutchman’s $35,000 civil penalty, and
Khan’s $20,000 civil penalty are not excessive,
oppressive, inadequate, or otherwise inappropriate. 47
VI. Constitutional Arguments
Applicants claim that the PCAOB decision should
be set aside because the PCAOB violated their due
process rights and other constitutional requirements.
We do not address whether the Constitution’s due
process requirements apply to PCAOB disciplinary
proceedings because we find that Applicants’
arguments fail on the merits. 48
detection of such violative conduct”) (footnote omitted), petition
denied, 566 F.3d 1172 (D.C. Cir. 2009).
R.E. Bassie, 2012 WL 90269, at *13 (recognizing that if
“individuals are concerned that cooperation with an investigation
may provide information that could lead to sanctions, those
individuals—absent the threat of a civil penalty—could have an
incentive to avoid cooperation in order to maximize their income
from issuer audit work for as long as possible”).
46
47 For the same reasons discussed herein, we also sustain the
censures the PCAOB imposed.
48 Cf. Eric J. Weiss, Exchange Act Release No. 69177, 2013 WL
1122496, at *6 n.40 (Mar. 19, 2013) (holding that self-regulatory
App-46
A. The PCAOB did not violate Applicants’
due process rights by publishing Saeed’s
settlement.
Applicants argue that, by publishing its
settlement with Saeed on its website, the PCAOB
“effectively tainted the neutrality of the forum” and
“ensured that [Applicants] would not receive a fair and
impartial hearing insofar as [Applicants] were already
adjudged by the PCAOB.” Here, both the PCAOB
hearing officer and the Board specified that their
findings of liability in this matter “were grounded on
record evidence, not on any finding in Saeed’s
settlement order.” 49 We can find no evidence to the
contrary and, regardless, our de novo review of the
evidence “cures whatever bias, if any, that may have
existed.” 50
Applicants also argue that, by publishing Saeed’s
settlement, the Board violated PCAOB Rule 5203’s
requirement that no disciplinary hearing shall be
public “except for good cause shown and with consent
of the parties.” We disagree. Although the settlement
organizations “such as FINRA are not state actors and thus not
subject to the Constitution’s due process requirements”).
49 Kabani, slip op. at 17; see, e.g., mPhase Techs, Inc., Exchange
Act Release No. 74187, 2015 WL 412910, at *8 (Feb. 2, 2015)
(holding that, although a dismissed complaint had been
considered by an examiner during the investigation of applicant,
there was no basis for reversal because it had not been a basis for
FINRA’s ultimate decision); see also Schweiker v. McClure, 456
U.S. 188, 195 (1982) (stating that the court “must start . . . from
the presumption that the hearing officers . . . are unbiased”);
Withrow v. Larkin, 421 U.S. 35, 47 (1975) (same).
50 Richard G. Cody, Exchange Act Release No. 64565, 2011 WL
2098202 at *19 (May 27, 2011), aff’d, 693 F.3d 251 (1st Cir. 2012).
App-47
found that Saeed violated PCAOB rules and auditing
standards during two of the audits at issue here, the
settlement does not mention that Applicants were
subject to a pending disciplinary action or allege that
they had ever engaged in improper conduct. It is also
well established that an administrative body may
settle with one respondent while proceeding against
other respondents in the same case. 51 This has been
found to be particularly true where, as here, the
settlement “state[s] that it was not binding on the
other [non-settling] respondents.” 52
B. The PCAOB did not violate Applicants’
due process rights by denying their
request to designate a substitute expert
witness, and any error was harmless.
Applicants argue that the PCAOB hearing officer
improperly rejected their request to designate a
substitute expert six weeks before the scheduled start
of the hearing. We disagree. The evidence shows that
the hearing officer acted well within his discretion to
manage the course of a hearing by repeatedly
attempting to accommodate Applicants’ pre-hearing
requests. 53
During a September 2012 pre-hearing conference,
the Division of Enforcement informed Applicants that
51 See, e.g., The Stuart-James Co., Inc., Exchange Act Release
No. 28810, 1991 WL 291802, at *1 (Jan. 23, 1991).
52 Sinclair, 444 F.2d at 401.
53 See, e.g., Underhill Sec. Corp., Exchange Act Release No.
7668, 1965 WL 87065, at *8 (Aug. 3, 1965) (stating that “[t]he
determination whether to grant a continuance was a matter
resting in the sound discretion of the [hearing] examiner”).
App-48
it intended to call a data forensics expert as a witness.
After Applicants obtained two extensions of the prehearing scheduling deadlines, 54 the parties exchanged
expert reports on December 14, 2012. The PCAOB
hearing officer extended the scheduling deadlines
twice more to consider (and ultimately reject)
Applicants’ motion to strike the Division of
Enforcement’s expert report, and the parties
exchanged revised expert reports on January 28, 2013.
In March 2013, the hearing officer granted
Applicants’ requests for yet additional extensions of
time (including extending the deadline for filing final
exhibits) after they replaced their counsel. In doing so,
the hearing officer emphasized that, “[a]bsent a
showing of exigent, unforeseen circumstances, [he
was] unlikely to grant any further requests for
extensions of those deadlines.” But almost a month
after the deadline for filing exhibits passed,
Applicants requested just such an extension of the
deadline. Applicants explained that they had retained
a new expert, who they anticipated would be more
effective than their prior counsel’s expert in rebutting
the Division of Enforcement’s case, and requested
leave from the scheduling order to file a report and
present the new expert’s testimony. The hearing
officer denied the motion on the ground that
“[r]egretting the selection of an expert . . . does not
constitute good cause to amend the schedule . . . less
than two months before the hearing.”
54 Khan represented himself at this time and did not join in the
motions discussed in this section.
App-49
At a final pre-hearing conference, Applicants
agreed that their initial expert would testify; however,
they did not call him during the hearing due to
communication difficulties and a dispute over an
unpaid invoice. The PCAOB hearing officer extended
the hearing schedule to permit the expert to appear by
video, but Applicants were ultimately unable to secure
his testimony. Their replacement expert was allowed
to attend the hearing during the testimony of the
Division of Enforcement’s expert and to consult with
Applicants’ counsel during breaks. 55
Applicants argue that the PCAOB erred in
excluding their replacement expert because the
Division of Enforcement did not identify any prejudice
or injury it would have suffered had their alternate
expert testified. But “the absence of prejudice to the
opposing party is not equivalent to a showing of good
cause.” 56 Courts have repeatedly found that a party’s
untimely decision to change witnesses is not a valid
Although Applicants imply that they sought to provide a
substitute rebuttal expert only after learning that their initial
expert could not appear at the hearing, witness unavailability
was not the reason they gave the hearing officer for wanting to
replace their expert.
55
56 Wagner v. Circle W Mastiffs, Nos. 2:08-cv-431, 2:09-cv-0172,
2011 WL 124226, at *4 (S.D. Ohio Jan. 14, 2011); see also
Geiserman v. MacDonald, 893 F.2d 787, 791 (5th Cir. 1990)
(rejecting argument that an expert witness who had not been
designated within the scheduling deadline should be allowed to
testify since there would be no prejudice because “[s]uch
delay . . . would have disrupted the court’s discovery schedule
and the opponent’s preparation”).
App-50
basis for disrupting a fair and reasonable scheduling
order. 57
Nor have Applicants identified any harm from the
hearing officer’s decision. Applicants claim that the
decision allowed the Division of Enforcement to
provide uncontroverted expert testimony, but they
have not explained how their expert would have
controverted the findings of the Division of
Enforcement’s expert. 58 We thus find no reversible
See, e.g., Crandall v. Hartford Cas. Ins. Co., No. CV 1000127-REB, 2012 WL 6086598, at *3 (D. Idaho Dec. 6, 2012) (“A
party’s dissatisfaction with their expert’s opinions and/or an
expert’s lack of regular and timely communication is an
unfortunate circumstance, to be sure . . . . However, the timely
progression of a lawsuit cannot turn on whether a party is fully
satisfied with the particular choice of an expert. Those are
decisions, including the due diligence necessary to guard against
difficulties arising from such decisions, that must be made by
parties within the scheduling time-frames imposed by the
Court.”); Adams v. Sch. Bd. of Hanover Cty., No. 3:05CV310, 2008
WL 5070454, at *4 (E.D. Va. Nov. 26, 2008) (“The arrival of new
counsel . . . does not entitle parties to conduct additional
discovery or otherwise set aside valid and binding orders of the
court.”); Kenny v. Cty. of Suffolk, No. CV 05-6112(ADS)(WDW),
2008 WL 4936856, at *1 (E.D.N.Y. Nov. 17, 2008) (“Incoming
counsel is bound by the actions of his or her predecessor, and to
hold otherwise would allow parties to create good cause simply
by switching counsel.” (quotation marks omitted)).
57
58 See, e.g., EEOC v. Rockwell Int’l Corp., 243 F.3d 1012, 1016
(7th Cir. 2001) (finding that district court had not abused its
discretion in denying EEOC’s untimely motion to supplement the
record where granting motion would have caused additional
delay and the proposed evidence was “irrelevant”); Sexton v. Gulf
Oil Corp., 809 F.2d 167, 170 (5th Cir. 1987) (finding that district
court had not erred in denying plaintiff’s untimely expert
designation where plaintiff had not, among other things,
App-51
error in the hearing officer’s decision not to amend the
scheduling order to allow Applicants to designate a
replacement expert.
C. The PCAOB did not deprive Applicants
of a right to a speedy trial or a jury trial.
Applicants assert that the PCAOB’s proceeding
should be dismissed because it deprived them of their
right to a speedy trial under the Sixth Amendment
and a jury trial under the Seventh Amendment. First,
Applicants waived these arguments by not raising
them before the PCAOB or providing any reasons for
their failure to do so. 59 Applicants contend that they
were not required to raise these arguments before the
PCAOB because “they were simply participating in
the forum required under the [Sarbanes-Oxley] Act”
and that the doctrine of exhaustion of administrative
remedies required them to “endure” these proceedings
before obtaining vindication. But the very purpose of
requiring parties to exhaust their administrative
remedies is to give agencies “‘an opportunity to correct
its own mistakes with respect to the programs it
administers before it is haled into federal court.’” 60
Although Applicants question the PCAOB hearing
officer’s competence to decide constitutional issues,
that still would not explain or excuse Applicants’
provided “a convincing showing that the experts’ inability to
testify significantly prejudiced plaintiff”).
59 See, e.g., Woodford v. Ngo, 548 U.S. 81, 88-90 (2006).
60 See, e.g., id. at 89 (quoting McCarthy v. Madigan, 503 U.S.
140, 145 (2006)).
App-52
failure to raise the issue before the Board. 61 Nor do
Applicants’ constitutional arguments fall within the
“rare case” in which we might exercise our discretion
to consider an untimely constitutional argument. 62
Applicants’ failure to raise their constitutional
arguments before the PCAOB is thus reason enough
to reject them.
Second, even if not waived, Applicants’
constitutional arguments lack merit. The Supreme
Court has made clear that the Sixth Amendment “is
specifically limited to ‘criminal prosecutions.’” 63
Applicants cite two district court cases for the
proposition that a monetary fine could be considered
61 See Free Enter. Fund v. PCAOB, 561 U.S. 477, 484 (2010)
(the PCAOB “was modeled on private
organizations in the securities industry”).
self-regulatory
62 optionsXpress, Inc., 2013 WL 5635987, at *5 (stating that a
party cannot obtain relief by, for the first time before the
Commission, “seek[ing] production of ‘potentially exculpatory
items’ that it ‘failed to bring . . . to the law judge’s
attention . . . even though it had been provided with documents
referring to them’ prior to the hearing”) (quoting KPMG Peat
Marwick LLP, Exchange Act Release No. 43862, 2001 WL 47245,
at *18 n.90 (Jan. 19, 2001)).
63 See, e.g., Hannah v. Larche, 363 U.S. 420, 440 n.16 (1960)
(finding respondents’ contention that the procedures adopted by
the Commission on Civil Rights violated the Sixth Amendment
did “not merit extensive discussion” because “the proceedings of
the Commission clearly do not fall within th[e] category [of
“criminal prosecutions]”); Jhirad v. Ferrandina, 536 F.2d 478,
485 n.9 (2d Cir. 1976) (holding that “the Sixth Amendment’s
guarantee to a speedy trial [is] limited by its terms to criminal
prosecutions”); Mission Sec. Corp., Exchange Act Release No.
63453, 2010 WL 5092727, at *9 n.23 (Dec. 7, 2010) (holding that
a FINRA disciplinary proceeding was not a criminal prosecution
for purposes of the Sixth Amendment).
App-53
quasi-criminal. 64 But the Supreme Court has stressed
that “only the clearest proof” will suffice “to override
legislative intent and transform . . . a civil remedy
into a criminal penalty.” 65 The courts and the
Commission have long rejected the argument that
Commission proceedings against a broker-dealer or
his representatives are quasi-criminal in nature, and
we find the reasoning of those cases applicable to the
PCAOB’s proceedings. 66
64 See United States v. Sanchez, 520 F. Supp. 1038, 1040 (S.D.
Fla. 1981) (noting that “the imposition of a fine as a penalty for
violation of the law can be considered ‘quasi-criminal’ in nature,”
but nevertheless stating that “[t]he term ‘quasi-criminal’ is not
here used to imply that the full panoply of constitutional
protections attendant to a true criminal proceeding should apply
in this context”); SEC v. Shanahan, 504 F. Supp. 2d 680, 683
(E.D. Mo. 2007) (citing cases holding that Fifth Amendment
privilege against self-incrimination may apply in quasi-criminal
proceedings where potential sanctions include fines, penalties, or
forfeiture).
65 Hudson v. United States, 522 U.S. 93, 100 (1997) (quotation
marks omitted) (determining that banking sanctions were civil in
nature and that the Sixth Amendment’s Double Jeopardy Clause
therefore did not prevent a subsequent criminal proceeding);
William F. Lincoln, Exchange Act Release No. 39629, 1998 WL
80228, at *4-5 (Feb. 9, 1998) (finding that administrative
proceeding did not violate the Sixth Amendment’s Double
Jeopardy Clause because a bar from associating with any broker,
dealer, or member of a national securities exchange or registered
securities exchange was not criminal in nature).
66 See, e.g., SEC v. Sirianni, 334 F. App’x 386, 389 (2d Cir. 2009)
(stating that “we are aware of no basis in law to conclude that an
SEC enforcement action is a ‘quasi-criminal’ proceeding, and
reject this argument”); Daniel Turov, Exchange Act Release No.
31649, 1992 WL 394575, at *3 (Dec. 23, 1992) (holding that a
disciplinary hearing before a self-regulatory organization is not a
“criminal prosecution” within the meaning of the Sixth
App-54
The Supreme Court has similarly held that “the
Seventh Amendment
is not
applicable
to
67
administrative proceedings.” Jury trials, the Court
has explained, “‘would be incompatible with the whole
concept of administrative adjudication.’” 68 The
Commission itself has held that rights under “the
Sixth and Seventh Amendments ha[ve] no relevance
to
a
proceeding . . . before
a
self-regulatory
organization,” which the Commission has noted is
neither a “criminal prosecution” within the meaning
of the Sixth Amendment nor a “suit at common law”
within the meaning of the Seventh Amendment. 69
This holds equally true for PCAOB proceedings. 70
Amendment); Milton J. Wallace, Exchange Act Release No.
11252, 1975 WL 162079, at *4 (Feb. 14, 1975) (holding that the
Sixth Amendment’s guarantee of a speedy trial was inapplicable
to remedial administrative proceedings).
67 Tull v. United States, 481 U.S. 412, 418, n.4 (1987).
Atlas Roofing Co. v. OSHRC, 430 U.S. 442, 454 (1977))
(emphasis deleted) (quoting Pernell v. Southall Realty, 416 U.S.
363, 383 (1974)); Granfinanciera, S.A. v. Nordberg, 492 U.S. 33,
80 (1989) (same); see also Daniel Turov, Exchange Act Release
No. 31649, 1992 WL 394575, at *3 (Dec. 23, 1992) (holding that a
disciplinary hearing before a self-regulatory organization is not a
“suit at common law” within the meaning of the Seventh
Amendment).
68
Turov, 1992 WL 394575, at *3 (rejecting applicant’s
contention that an NYSE disciplinary hearing violated his right
to a jury trial under the Sixth and Seventh Amendments).
69
70 See Free Enter. Fund, 561 U.S. at 484 (explaining that the
PCAOB is “modeled on private self-regulatory organizations in
the securities industry . . . that investigate and discipline their
own members subject to Commission oversight.”).
App-55
D. The Division of Enforcement complied
with its Brady v. Maryland obligations.
Applicants argue that the Division of
Enforcement did not comply with its obligations under
Brady v. Maryland. 71 Under Brady, the prosecution in
a criminal proceeding must disclose materially
exculpatory or impeaching evidence to the
defendant. 72 Although Brady has no direct application
to administrative proceedings, PCAOB Rule 5422(b) is
generally consistent with Brady. 73 As relevant here,
Applicants speculate that the Division of Enforcement
possessed evidence that no wrongdoing had occurred
and did not undertake sufficient efforts to determine
whether other exculpatory information existed.
Applicants waived these arguments by not raising
them before the Board and, in any event, they lack
merit.
We have held that parties cannot wait until their
appeal to the Commission before raising Brady
71 373 U.S. 83 (1963).
72 Id. at 87.
See PCAOB Rule 5422(b) (prohibiting interested PCAOB
divisions from withholding “documents that contain material
exculpatory evidence” in connection with a disciplinary
proceeding); cf. optionsXpress, Inc., Exchange Act Release No.
70698, 2013 WL 5635987, at *3 & n.15 (Oct. 16, 2013) (observing
that, “[a]lthough Brady has no direct application to civil or
administrative proceedings such as this one,” the Commission
incorporated the Brady doctrine by adopting Rule of Practice
230(b)(2), which “makes clear that the former subsection does not
‘authorize[] the Division . . . to withhold, contrary to the doctrine
of Brady[,] . . . documents that contain material exculpatory
evidence’”) (quoting 17 C.F.R. § 201.230(b)(2))
73
App-56
claims. 74 Here, Applicants themselves produced the
audit files (and attendant underlying metadata) about
which they complain. And the OIP and the Division of
Enforcement’s expert report put them on notice about
what factual allegations the Division of Enforcement
intended to establish at the hearing. Applicants had
the opportunity to request information from the
PCAOB, to present their own witnesses and evidence
at the hearing, and to cross-examine the PCAOB’s
witnesses about what the metadata may have shown.
Yet Applicants give no reason for waiting until now to
argue that the Division of Enforcement failed to
present or investigate allegedly exculpatory evidence.
We therefore find that Applicants waived their Bradyrelated arguments. 75
Applicants’ Brady-related arguments also lack
merit. According to Applicants, the Division of
Enforcement withheld metadata in the original,
corrupted Issuer A audit file that provided “direct
74 optionsXpress, Inc., 2013 WL 5635987, at *5 (stating that a
party cannot obtain relief by, for the first time before the
Commission, “seek[ing] production of ‘potentially exculpatory
items’ that it ‘failed to bring . . . to the law judge’s
attention . . . even though it had been provided with documents
referring to them’ prior to the hearing”).
See, e.g., id. (finding parties’ failure to raise Brady claim
before a law judge was sufficient, by itself, to deny that claim);
John Montelbano, Exchange Act Release No. 47227, 2003 WL
147562, at *12 (Jan. 22, 2003) (rejecting as “untimely” request for
the NASD to produce allegedly “withheld [and] buried”
documents when documents were not sought while case was
pending before a hearing panel); PCAOB Rule 5460(a) (requiring
party to “set forth specific findings and conclusions of the initial
decision as to which exception is taken” when filing a petition for
review with the Board).
75
App-57
evidence” that no wrongdoing occurred. Yet
Applicants themselves produced the Issuer A file,
stipulated that it was “corrupt and unreadable,” and
have provided no plausible showing that it
nevertheless contained exculpatory information.
Instead,
Applicants
speculate
that
further
investigation by the PCAOB might have produced
evidence that would aid their defense. This is not a
Brady argument, but an improper attempt to shift
responsibility for defending themselves to the
PCAOB. 76 And there can be no Brady violation where
any supposedly exculpatory evidence was in the
Applicants’ own possession. 77 And even if we assumed
that the Issuer A audit file Applicants initially
produced contained no metadata evidence of lateadded or modified documents, that would still not
overcome the other evidence that Applicants violated
76 See, e.g., United States v. Zambrana, 841 F.2d 1320, 1328
(7th Cir. 1988) (stating that, “[i]n the course of representing a
defendant, we remind defense counsel that it is incumbent upon
him to make specific requests for specific evidence in the
possession of the prosecution, and it is not the responsibility of
the prosecutor or the judge to do the work of the defense
counsel”); Kirlin Sec., Inc., Exchange Act Release No. 61135, 2009
WL 4731652, at *13 n.87 (Dec. 10, 2009) (stating that while the
burden of proving a violation rests with the regulatory agency,
“the applicant bears the burden of producing evidence to support
his claimed defenses”).
77 See, e.g., Rhoads v. Henry, 598 F.3d 495, 502 (9th Cir. 2010)
(“[N]o Brady violation occurs when a defendant possessed the
information that he claims was withheld.”); Brown v. Cain, 104
F.3d 744, 750 (5th Cir. 1997) (“The prosecution had no obligation
under Brady to produce for [the defendant] evidence or
information already known to him, or that he could have obtained
from other sources by exercising reasonable diligence.”).
App-58
the PCAOB’s rules by added or altering work papers
after the documentation completion dates without
disclosure to the PCAOB.
*
*
*
For the foregoing reasons, we sustain the Board’s
disciplinary action and, as a result, order that the
automatic stay under Sarbanes-Oxley Section 105(e)
be terminated. 78
An appropriate order will issue. 79
By the Commission (Acting Chairman PIWOWAR
and Commissioner STEIN).
78 15 U.S.C. § 7215(e)(1) (stating that an “[a]pplication to the
Commission for review . . . of any disciplinary action of the Board
shall operate as a stay of any such disciplinary action, unless and
until the Commission orders . . . that no such stay shall continue
to operate”).
79 We have considered all of the parties’ contentions. We have
rejected or sustained them to the extent that they are
inconsistent or in accord with the views expressed in this opinion.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.