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United States v. Middendorf

United States District Court for the Southern District of New York

July 17, 2018, Decided; July 17, 2018, Filed

18-CR-36 (JPO)

Opinion

OPINION AND ORDER

J. PAUL OETKEN, District Judge:

Defendants David Middendorf, Thomas Whittle, David Britt, Cynthia Holder, and Jeffrey Wada are charged in a five-count indictment with offenses relating to an alleged scheme to improve KPMG's performance on inspections conducted by the Public Company Accounting Oversight Board ("PCAOB") by passing confidential PCAOB information to select KPMG employees. (Dkt. No. 1 ("Indictment").) Before the Court are several motions to dismiss the Indictment. For the reasons that follow, the motions are denied.

I. Background

The following factual background is taken from the Indictment, the allegations of which are assumed true solely for purposes of these motions, as explained in Section II below.

To register securities with the Securities and Exchange Commission ("SEC"), publicly traded companies must prepare and disclose annual financial statements that have been audited by registered public accounting firms. (Indictment ¶ 2.) The PCAOB, a nonprofit [*3]  corporation created by the Sarbanes-Oxley Act of 2002 ("SOX"), conducts inspections of these auditors to ensure their compliance with SOX, SEC, and PCAOB rules. (Id. ¶ 4.) SOX requires the PCAOB to prepare written inspection reports which are then shared with the SEC and, in part, with the public. (Id. ¶¶ 9, 11.) The SEC uses the information contained in these inspection reports to carry out its regulatory, oversight, and enforcement responsibilities. (Id. ¶ 11.)

The six largest accounting firms in the United States are subject to the PCAOB's Global Network Firm ("GNF") program. (Id. ¶ 5.) Every year, for each GNF firm, the PCAOB selects a list of audits for PCAOB review. (Id. ¶ 6.) These lists are kept "highly confidential," and the PCAOB generally does not inform the auditor which of its accounts will be inspected until after the firm's 45-day window for documenting previously completed work, called the "documentation period," has lapsed. (Id. ¶¶ 3, 8.) PCAOB Ethics Rule 9 imposes a lifetime prohibition on current or former PCAOB employees sharing confidential PCAOB information—including, in particular, non-public information about which audits have been selected for inspection. (Id. ¶¶ [*4]  13-14.)

KPMG LLP ("KPMG") is an accounting firm subject to the PCAOB's GNF program. (Id. ¶ 15.) KPMG fared poorly in its 2013 and 2014 PCAOB inspections, so in 2015 the firm began making a concerted effort to improve its inspection performance. (Id. ¶¶ 16-18.) The Indictment alleges that in addition to KPMG's various lawful efforts, a handful of KPMG and PCAOB employees orchestrated a scheme to give KPMG access to the PCAOB's confidential list of audits selected for inspection. (Id. ¶¶ 18, 27.) Defendants are alleged to have participated in that scheme.

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2018 U.S. Dist. LEXIS 118850 *; 2018 WL 3443117

UNITED STATES OF AMERICA -v- DAVID MIDDENDORF, THOMAS WHITTLE, DAVID BRITT, CYNTHIA HOLDER, and JEFFREY WADA, Defendants.

Subsequent History: Motion denied by United States v. Middendorf, 2018 U.S. Dist. LEXIS 139980 (S.D.N.Y., Aug. 17, 2018)

Motion for new trial denied by, Motion denied by United States v. Middendorf, 2019 U.S. Dist. LEXIS 153287 (S.D.N.Y., Sept. 9, 2019)

CORE TERMS

Indictment, inspection, confidential, confidential information, conspiracy, wire fraud, defraud, alleges, audits, license, dishonest, charges, Defendants', conspired, deceitful, embezzled, employees, fraudulent, functions, documents, obstruct, Counts, scheme to defraud, intangible, selections, lists, conspiracy to defraud, business information, motion to dismiss, misappropriating