U.S. Securities and Exchange Commission v. Deloitte Touche Tohmatsu Cpa Ltd. , 940 F. Supp. 2d 10 ( 2013 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
SECURITIES AND EXCHANGE
COMMISSION
Petitioner,
v. Civil Action No. 11-mc-512
(GK/DAR)
DELOITTE TOUCHE TOHMATSU
CPA LTD. I
Respondent.
MEMORANDUM OPINION
Petitioner Securities and Exchange Commission ("SEC 11
) filed
an Application for Order to Show Cause and for Order Requiring
Compliance with a Subpoena on September 8 1 2011 [Dkt. No. 1]. On
August 7 1 2012 1 Magistrate Judge Deborah A. Robinson entered a
minute order granting an Unopposed Motion for Stay of this
Action.
On December 3 1 2012 1 the SEC filed a Motion to Lift the
Stay [Dkt. No. 36]. Respondent Deloitte Touche Tohmatsu CPA Ltd.
("Deloitte 11
) opposed that Motion on January 7 1 2013 [Dkt. No.
42] 1 and filed a Motion to Extend the Stay [Dkt. No. 43]. The
SEC opposed Deloitte s Motion on January 24
1
1 2013 [Dkt. No. 45]
and filed a Reply in Support of its Motion to Lift the Stay
[Dkt. No. 44]. On March 4 1 2013 1 the Magistrate Judge issued a
Memorandum Opinion and Order granting the· SEC's Motion to Lift
the Stay and denying Deloitte's Motion to Extend the Stay
( "Order" ) [Dkt . No. 4 9] .
Deloitte objected to the Order within fourteen days as
permitted by Federal Rule of Civil Procedure 72(a) [Dkt. No.
53] . The SEC responded to Deloitte's Objections [Dkt. No. 55].
Upon consideration of the Order, the Objections, the Responses,
the lengthy, and informative, oral argument held before this
Court on April 11, 2013, and the entire record herein, the Court
upholds the Magistrate Judge's decision to grant the SEC's
Motion to Lift the Stay and to deny Deloitte's Motion to Extend
the Stay. Deloitte 1 s Objections are overruled.
Deloitte opposed a lifting of the stay and requested its
extension "pending the expeditious resolution of a parallel,
consolidated, and profession-wide administrative proceeding,"
pending . at the SEC. Opp 1 n of Deloitte to Motion to Life the
Stay 1. 1 Deloitte 1 s central argument is that the Magistrate
Judge applied the incorrect legal standard for determining
whether or not to grant a stay. The Court concludes that she
did apply the correct legal standard, relying upon Landis v. N.
Am. Co., 299 U.S. 248 (1936), namely, that in order to prevail,
1
Deloitte later substantially modified its position and
requested a stay until the Administrative Law Judge issued his
Initial Opinion.
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the party requesting a stay must "make out a clear case of
hardship or inequity in being required to go forward." Id. at
255.
Moreover, as she also pointed out, if the stay is of
"indefinite duration," the party must establish a "pressing
need" for it. Id.; Belize Soc. Dev. Ltd. v. Gov't of Belize, 668
F. 3d 724, 731-32 (D.C. Cir. 2012) (quoting Dellinger v.
Mitchell, 442 F.2d 782, 787 (D.C. Cir. 1971) (noting that
indefinite stay order must be supported by a "balanced finding
that such need overrides the injury to the party being stayed"),
cert. denied, 133 S. Ct. 274 (2012).
This Court will now analyze whether Deloitte is correct
that the two proceedings overlap in such a way that Deloitte
will suffer "hardship or inequity in being required to go
forward in this case." Landis, 299 U.S. at 255. 2
A. Overlapping Adjudications
Deloitte insists there is significant overlap between this
case and the Administrative Proceeding, In the Matter of BDO
China Dahua CPA Co. Ltd., et al., A.P. No. 3-15116, Order
Instituting Proceedings Pursuant to Rule 102 (e) (1) (iii) (Dec. 3,
2
In discussing the correct legal standard, the Magistrate
Judge may have, on occasion, used language more appropriate to
ruling on the underlying merits of the case. However, it is
clear from her citations to Landis, Belize, and Clinton v.
Jones, 520 U.S. 681 (1997), that she understood the proper test
for evaluating a request for a stay.
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2012) ("Administrative Proceeding") [Dkt. No. 42-2]. In that
Proceeding the SEC is seeking an Order, pursuant to 17 C.F.R. §
201.102 (e) (1), to bar five China-based auditing companies,
including Deloitte, from "the privilege of appearing or
practicing" before the Commission. The SEC claims that those
firms have willfully refused to produce documents requested by
the Commission pursuant to Section 106 of the Sarbanes-Oxley Act
of 2002, codified at 15 U.S.C. § 7126. The companies assert in
that Proceeding, as Deloit te does in the present case, that
under Chinese law, they will be committing a crime and could be
subject to prosecution, possible conviction, and possible
imprisonment if they produce the requested documents. None of
the investigations included in the Administrative Proceeding
involve Longtop Financial Technologies, Ltd. ("Longtop"), the
company being investigated in this case.
In the Order Instituting Proceedings ("OIP") I the
Commission ordered the Administrative Law Judge ("ALJ") to issue
an "Initial Decision" 3 no later than 300 days from the date of
service, which would be in late September,2013. See 17 C.F.R.
§ 201.360 (a) (2) (directing Commission to specify time period in
which hearing officer's Initial Decision must be filed).
Deloitte is challenging the legality of service, and, therefore,
3
The Initial Decision is the final administrative opinion
subject to appeal to the Commission. 17 C.F.R. § 201.410(a).
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the 300-day deadline for issuance of the decision may not be met
and may not even have begun to run during that time frame. 4
Once an Initial Decision is filed, any party can then file
a petition for review of the decision with the Commission. 17
C.F.R. § 201.410 (a). That decision can then be appealed to our
Court of Appeals. 15 U.S.C. § 78y(a) (1) ("A person aggrieved by
a final order of the Commission entered pursuant to this chapter
may obtain review of the order in . the District of Columbia
Circuit • II ) •
By contrast, this case revolves around the production of
documents under the SEC's general subpoena powers, found in
section 19(c) of the Securities Act of 1933, 15 U.S.C. § 77s(c),
and section 21 (b) of the Securities Exchange Act of 1934, 15
U.S.C. § 78u(b). The SEC served an administrative subpoena to
Deloitte on May 27, 2011, almost twenty-three months ago,
requesting documents related to an investigation into Deloitte's
activities as an auditor for Longtop. Application for Order to
Show Cause and For Order Requiring Compliance With a Subpoena
[Dkt. No. 1] . Longtop is a foreign issuer whose securities were
traded in United States markets.
Unlike the Administrative Proceeding, the SEC is not
seeking sanctions against Deloitte in this case. It simply
4
The 300 days runs from the date of service.
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seeks the production of relevant documents, although the SEC
agrees that, if this Court grants its Order Requiring Compliance
with Subpoena, and Deloitte continues to withhold the documents,
it would "seek any avenue or means" available, including seeking
a contempt order, "to be able to get the documents." Mot. Hr' g
Tr. 44; see also 15 U.S.C. § 78u(c) (giving court power to issue
an order requiring the production of records and noting that
failure to obey such an order "may be punished by [the] court as
a contempt thereof").
If this Court did cite Deloitte for contempt, its order
would be appealable to our Court of Appeals. See In re Kessler,
100 F.3d 1015, 1016 (D.C. Cir. 1996) (noting that a court of
appeals has jurisdiction over final decisions of the district
court under 28 U.S.C. § 1291, and that "[f]or purposes of
appeal, an order holding a litigant in contempt for failure to
obey a discovery order is considered final") . Thus, the final
decisions emanating from both the SEC and this Court would both
be resolved by the same decision-maker, our Court of Appeals.
Given that fact, this Court sees little danger of inconsistent
rulings on Deloitte' s underlying concern about application of
Chinese law.
Although both proceedings obviously concern document
requests to foreign-based auditing firms and the scope of the
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SEC's authority to order such requests, it is significant that
they involve different statutes, with different legal standards,
and seek entirely different results. The remedy sought in the
Administrative Proceeding differs greatly from what is sought in
this case. In the former, the SEC seeks to bar the five firms
from "appearing or practicing" before the Commission; in this
case, the SEC merely seeks production of documents.
In sum, Deloitte has failed to show any "hardship or
inequity," Landis, 299 U.S. at 255, it will suffer from
simultaneous litigation of the Administrative Proceeding with
this case.
B. Balance of Interests
Not only has Deloitte failed to establish that requiring it
to litigate this case while the Administrative Proceeding is
pending will subject it to ~hardship or inequity," the balance
of the interests as a whole do not support extending the stay.
The SEC made clear at oral argument that the Administrative
Proceeding did not concern and could not result in production of
those documents it deems necessary to conduct the Longtop
investigation in this case. Mot. Hr'g Tr. 25-26. The SEC insists
that those documents and this investigation are important to its
~central mission," which involves investigating potential
violations of the securities laws and protection of the public.
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Id. 23-25; see also Gabelli v. S.E.C., 133 S. Ct. 1216, 1222
(2013) (noting that "a central mission of the Commission is to
investigate potential violations of the federal securities
laws") (citations and internal quotations omitted).
The SEC is attempting to investigate whether Longtop or any
other entity associated with it committed fraud on the American
investing public. Mot. Hr'g Tr. 24-25. Moreover, if fraud was
committed, the SEC argues that it will also attempt to ascertain
the scope of that fraud, how it was committed, who was involved,
and how it went undetected for so long. Id. These are
undoubtedly important questions to the SEC and to the American
investors who may have been defrauded.
It has been more than twenty-two months since the SEC first
sought these documents from Deloitte. Obviously, a thorough,
comprehensive investigation only gets more difficult with the
passage of time. "If the SEC suspects that a company has
violated the securities laws, it must be able to respond
quickly; it must be able to obtain relevant information
concerning the alleged violation and to seek prompt judicial
redress if necessary." SEC v. Dresser Indus., Inc., 628 F.2d
1368, 1377 (D.C. Cir. 1980) (en bane). In short, the SEC has a
responsibility to complete this investigation and pursue these
documents in a timely fashion in the venue available to it.
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The SEC's interest in obtaining these documents in a timely
fashion would be hindered if the stay was granted, particularly
because even the modified stay requested by Deloitte would, as a
practical matter, be indefinite and could easily extend for a
significant period of time. See Belize Soc., 668 F.2d at 731-32.
Although the Commission ordered the ALJ to produce an Initial
Decision in approximately late September, litigation of
Deloitte's challenge to the method of service will likely delay
that decision. If Deloitte prevailed, the SEC would then be
required to proceed under the Hague Convention, which would add
at least another six months to the 300 days already allotted the
ALJ to issue his Initial Decision. Thus, for all intents and
purposes, Deloitte' s request is for an indefinite stay- -which
must not "override[] the injury to the party being stayed." Id.
Such a request for an indefinite stay must not only
demonstrate "hardship or inequity," Landis, 299 U.S. at 255, but
also be justified by a "pressing need." Id.; Belize Soc., 668
F.3d at 731-32. Deloitte has not met that standard. There is no
significant burden placed on Deloitte by requiring it to
litigate these two very different proceedings simultaneously.
There is no overlap of issues that would justify staying this
case for "judicial efficiency." And the SEC has effectively
demonstrated that this case is the only way it can obtain the
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documents it needs to conduct the Longtop investigation. Thus,
after "weigh[ing] competing interests," Landis, 299 U.S. at 254-
55, the Court concludes that Deloitte has not established that
it is entitled to a further stay of proceedings in this action.
C. Conclusion
For the foregoing reasons, the Court adopts the Magistrate
Judge's conclusion to grant the SEC's Motion to Lift the Stay
and deny Deloitte's Motion to Extend the Stay. An Order shall
accompany this Memorandum Opinion.
/s/
April 22, 2013 Gladys Kessl 1
United States District Judge
Copies to: attorneys on record via ECF
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