Mark Laccetti v. SEC , 885 F.3d 724 ( 2018 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 12, 2017 Decided March 23, 2018
No. 16-1368
MARK E. LACCETTI,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order of
the Securities & Exchange Commission
Douglas R. Cox argued the cause for petitioner. With him
on the briefs was Michael J. Scanlon.
Mark R. Freeman, Attorney, U.S. Department of Justice,
and Lisa K. Helvin, Senior Counsel, U.S. Securities and
Exchange Commission, argued the causes for respondent.
With them on the brief were Mark B. Stern and Jennifer L.
Utrecht, Attorneys, U.S. Department of Justice, Michael A.
Conley, Solicitor, and Dominick V. Freda, Assistant General
Counsel, Securities and Exchange Commission.
Before: GRIFFITH, KAVANAUGH, and WILKINS, Circuit
Judges.
2
Opinion for the Court filed by Circuit Judge KAVANAUGH.
KAVANAUGH, Circuit Judge: The Public Company
Accounting Oversight Board investigated an audit that had
been conducted by the Ernst & Young accounting firm. The
Board’s investigation focused in part on Mark Laccetti, who
was the Ernst & Young partner in charge of the audit. As part
of the investigation, the Board interviewed Laccetti. During
that investigative interview, the Board allowed Laccetti to be
accompanied by an Ernst & Young attorney. But the Board
denied Laccetti’s request to also be accompanied by an
accounting expert who would assist his counsel.
The Board ultimately charged Laccetti and found that he
had violated Board rules and auditing standards. The Board
sanctioned Laccetti, suspending him from the accounting
profession for two years and fining him $85,000. The
Securities and Exchange Commission affirmed the Board’s
decision.
Laccetti asks this Court to vacate the orders and sanctions
against him. Laccetti contends that the Board infringed his
right to counsel by unreasonably barring the accounting expert
from assisting his counsel at the interview. We agree. We
grant the petition for review, vacate the order of the Securities
and Exchange Commission, and remand with directions that
the Commission vacate the Board’s underlying orders and
sanctions.
***
Congress has mandated that Board investigations use “fair
procedures.” 15 U.S.C. § 7215(a). Implementing that
statute, the Board’s Rule 5109(b) provides: “Any person
3
compelled to testify” in a PCAOB investigative interview “may
be accompanied, represented and advised by counsel . . . .”
Rule 5102(c)(3) further allows the Board to limit attendance at
the interview to “(i) the person being examined and his or her
counsel . . . and (iv) such other persons as the Board . . .
determine[s] are appropriate . . . .”
Laccetti argues that the Board, in applying the rules,
unlawfully barred an accounting expert from assisting
Laccetti’s counsel at the investigative interview. The Board
stated that it denied Laccetti’s request because Laccetti’s expert
was employed at Ernst & Young. The Board did not want
Ernst & Young personnel present for the testimony of the Ernst
& Young witnesses because it apparently did not want Ernst &
Young personnel to monitor the investigation. That was the
sole reason provided by the Board for denying Laccetti’s
request.
The Board’s rationale suffers from three independent
flaws.
First, the arbitrary and capricious standard requires that an
agency’s action be reasonable and reasonably explained.
Here, the Board’s explanation for denying Laccetti’s request
was not reasonable.
An Ernst & Young employee was already planning to
attend (and did attend) Laccetti’s interview – namely, the Ernst
& Young attorney who accompanied Laccetti. Consistent
with Board policy and relevant ethics rules, that Ernst &Young
attorney could act as attorney for both Laccetti and the
company. See PCAOB Release No. 2003-015 at A2-19 (Sept.
29, 2003). Given the presence of the Ernst & Young attorney
at the interview, the Board’s rationale for excluding the Ernst
4
& Young accounting expert – that the Board did not want Ernst
& Young personnel to be present – makes no sense here. 1
In its brief and at oral argument, as in the underlying
agency orders, the Board has offered no good response to this
point. The Board has simply repeated again and again that it
had discretion to exclude an Ernst & Young accounting expert
so as to ensure that Ernst & Young personnel could not monitor
the investigation. Repetition does not equal logic. The
Board’s explanation, even when oft repeated, is not logical
given the fact that an Ernst & Young attorney attended
Laccetti’s investigative interview. Pressed hard on this
precise point at oral argument, the Board’s capable counsel
ultimately could muster no response and retreated to the
Board’s backup argument that any error by the Board in
denying Laccetti the assistance of an accounting expert at his
investigative interview was harmless error. See Tr. of Oral
Arg. at 34-36.
1
This is not a case where the Board sought to exclude all
company-affiliated personnel from the interview on the ground that
Laccetti wished to keep his testimony confidential from the company
and there was a legitimate concern that company-affiliated personnel
either could not or would not comply with Laccetti’s request. See,
e.g., D.C. Bar Ass’n, Ethics Op. 296, Joint Representation:
Confidentiality of Information (a client whose attorney represents
someone else in the same matter must provide informed consent
before attorney may disclose client’s confidences to the co-
client). Perhaps the Board could do that in an appropriate case if it
wished. But we need not consider that hypothetical in this case
because that is not what the Board did here. This is also not a case
where the Board identified some specific reason why the company-
affiliated accounting expert could not be present even if the
company-affiliated attorney could be present. We do not suggest
that such a distinction could never be drawn. But the Board did not
do so in this case.
5
Second, even if the Board wanted to bar an Ernst & Young-
affiliated accounting expert, that explanation would not justify
the Board’s denying Laccetti any accounting expert. Instead,
the Board could have told Laccetti that he could bring to the
interview an accounting expert who was not affiliated with
Ernst & Young. The Board did not do so. Rather, the
Board’s letter to Laccetti flatly stated that “the presence of a
technical expert consultant” is “not appropriate at this time.”
JA 458.
The Board nonetheless now claims (and the Commission
agreed) that its letter was not intended to suggest that Laccetti
could not bring any accounting expert, only that he could not
bring an Ernst & Young-affiliated expert. But the Board’s
letter said no such thing and cannot reasonably be read that
way. Indeed, we know that was not the intent of the letter,
because the letter informed Laccetti that, as an alternative,
Laccetti and his counsel could “consult[] with technical experts
before or after his testimony.” Id. (emphasis added). Even
though it provided that alternative, the Board did not say that
Laccetti could bring another accounting expert to assist his
counsel during the interview. By telling Laccetti that he could
bring an accounting expert to consult “before or after” his
testimony, did the Board somehow imply that Laccetti also
could bring an accounting expert to assist his counsel during
the interview? Of course not. Both on its face and when read
in context, the Board’s letter barred Laccetti from bringing an
accounting expert who could assist counsel during the
interview.
In short, the Board’s rationale for excluding this particular
accounting expert did not justify the Board’s blanket exclusion
of an accounting expert who could assist Laccetti and his
counsel during the interview.
6
Third, even putting those points aside, the Board’s rules
establish that the Board could not bar Laccetti from using an
accounting expert to assist his counsel in these circumstances.
In SEC v. Whitman, 613 F. Supp. 48 (D.D.C. 1985), a
district court in this circuit addressed an almost identical
question in the context of the Administrative Procedure Act.
Section 555(b) of the APA states: “A person compelled to
appear in person before an agency or representative thereof is
entitled to be accompanied, represented, and advised by
counsel or, if permitted by the agency, by other qualified
representative.” 5 U.S.C. § 555(b). In Whitman, the SEC
had allowed the witness to bring an attorney, but not an
accounting expert, to his interview. The Whitman Court ruled
that the SEC had impermissibly infringed the witness’s right to
counsel: “Given the extraordinary complexity of matters
raised in agency investigations in this modern day, counsel
trained only in the law, no matter how skillful, may on occasion
be less than fully equipped to serve the client in agency
proceedings. Unless the lawyer can receive substantive
guidance from an expert technician – in this case, an accountant
– when he determines in his professional judgment that such
assistance is essential, his client’s absolute right to counsel
during the proceedings would become substantially qualified.”
Whitman, 613 F. Supp. at 49. In this context, an expert is an
“extension of” counsel and gives “veritable meaning to the
witness’ right to counsel.” Id. at 50.
The Board here does not challenge Whitman’s analysis of
the APA’s right to counsel. But the Board maintains (and the
Commission agreed) that Whitman’s analysis is not persuasive
in this case because Whitman dealt with the APA, not with the
Board’s rules. The Board says that its rules are different. We
disagree that the right to counsel guaranteed by the Board’s
rules can reasonably be read to be less than the right to counsel
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guaranteed in the APA. We find no meaningful distinction
between the right to counsel in the APA and the right to counsel
in the Board’s rules. To be sure, the Board’s rules grant the
Board discretion to exclude “other persons” from an
investigative interview as the Board deems “appropriate.”
But that grant of authority does not entitle the Board to infringe
the right to counsel. The insight of Whitman – to reiterate, a
case that the Board does not dispute here – is that the right to
counsel in this context encompasses the right to have the
assistance of an accounting expert during the interview. 2
Under the Board’s rules, the Board therefore may not bar
a witness from bringing an accounting expert who could assist
the witness’s counsel during an investigative interview. (To
prevent monitoring, the Board may exclude a company-
affiliated accounting expert when no other company-affiliated
personnel are allowed at the interview.) To be clear, the Board
is always free to change its rules, subject to constitutional and
statutory constraints. Our holding on this point is therefore
exceedingly narrow. All we conclude in this case is that the
Board, under its current rules, must allow a witness the
assistance of an accounting expert when such an expert could
assist counsel at an investigative interview. Our conclusion is
especially narrow because the Board itself has long directed its
staff to “permit a technical consultant to be present during
investigative testimony.” PCAOB Release No. 2003-15 at
2
If the Board in the future wants to argue that Whitman was
wrongly decided, we can consider that argument. But the Board has
not advanced such an argument in this case. On the contrary, at oral
argument, the Board’s counsel was specifically asked about
Whitman, and the Board’s counsel did not say that Whitman was
wrongly decided or that the Court should consider that question here.
See Tr. of Oral Arg. at 37. Rather, counsel simply argued that the
right to counsel in the APA was broader than the right to counsel in
the Board’s rules.
8
A2-18. So our decision on this point means no more than that
the Board must apply its rules as the Board already applies its
rules. The problem is that the Board did not follow its rules in
this particular case.
In sum, for those three independent reasons, we conclude
that the Board acted unlawfully when it barred Laccetti from
bringing an accounting expert to assist his counsel at the
investigative interview.
As a backup, the Board argues (and the Commission
agreed) that any error in denying Laccetti’s right to counsel was
harmless because any error in denying the right to counsel did
not affect the charging decision against Laccetti. See 5 U.S.C.
§ 706. We disagree.
In response to the Board’s harmless error argument,
Laccetti first contends that, in the context of a Board
investigation, infringement of the right to counsel at an
investigative interview is a structural defect not susceptible to
harmless error analysis. Laccetti says that there is no good or
meaningful way to assess whether the Board’s infringement of
the right to counsel at an investigative interview affected
Laccetti’s answers and thereby tainted the Board’s later
decisions to bring charges and find liability.
We need not consider the question of whether this kind of
error is a structural error not susceptible to harmless error
analysis. Even if the effect of such an error can be
meaningfully assessed such that the denial of counsel were
subject to harmless error analysis, the Commission itself
conceded in this case that the Board’s “decision to institute
proceedings” against Laccetti “may have been based in part
upon his investigative testimony,” which occurred without the
accounting expert present. In the Matter of the Application of
9
Mark E. Laccetti, CPA For Review of Disciplinary Action
Taken by the PCAOB, Exchange Act Release No. 78764, 2016
WL 4582401, at *15 (Sept. 2, 2016). The Board’s
infringement of Laccetti’s right to counsel was not harmless in
this case.
Therefore, the only reasonable remedy is for the Board, if
it chooses and if the law otherwise permits, to open a new
disciplinary proceeding against Laccetti and, if it chooses to re-
interview Laccetti, to do so without violating his right to
counsel. The right to counsel is guaranteed by the Board’s
rules. Infringement of that right is a serious matter. We
cannot sweep that violation under the rug in the manner
advocated by the Board in this case.
***
We grant the petition for review, vacate the order of the
Securities and Exchange Commission, and remand with
directions that the Commission vacate the Board’s underlying
orders and sanctions. In light of our judgment, we need not
and do not reach Laccetti’s broader constitutional and statutory
challenges.
So ordered.