U.S. High Court Finds Portion Of Sarbanes-Oxley Act Unconstitutional

U.S. High Court Finds Portion Of Sarbanes-Oxley Act Unconstitutional

WASHINGTON, D.C. - (Mealey's) The formation and oversight structure of the Public Company Accounting Oversight Board (PCAOB), an independent administrative agency created under the Sarbanes-Oxley Act of 2002 (SOX), violates the U.S. Constitution, a 5-4 majority of the U.S. Supreme Court ruled June 28 (Free Enterprise Fund and Beckstead and Watts, LLP. v. Public Company Accounting Oversight Board, et al, No.08-861, U.S. Sup.).

Chief Justice John G. Roberts Jr. delivered the opinion of the court and was joined by Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas and Samuel Alito.  Justice Stephen Breyer delivered an opinion for the dissent and was joined by Justices John Paul Stevens, Ruth Bader Ginsburg and Sonia Sotomayor.

Beckstead and Watts, a Nevada accounting firm, joined Free Enterprise Fund in filing a facial constitutional challenge in the U.S. District Court for the District of Columbia against the PCAOB after the board initiated a formal investigation against it for deficiencies in audits performed by the firm.  Judge James Robertson rejected their claims, and the petitioners appealed to the D.C. Circuit U.S. Court of Appeals.

On Sept. 19, 2008, a panel majority ruled that the District Court did not err in determining that the plaintiffs had failed to present sufficient evidence to show that the PCAOB violates the appointments clause (Article II, Section 2) of the U.S. Constitution.  This clause grants the power to appoint high-level government officials to the president, the courts or the heads of departments - not to a commission such as the Securities and Exchange Commission.

The Free Enterprise Fund filed its petition for a writ of certiorari with the U.S. Supreme Court on Jan. 5, 2009, and the Supreme Court granted certiorari on May 18, 2009.

The Supreme Court held that by "granting the Board executive power without the Executive's oversight, this Act subverts the President's ability to ensure that the laws are faithfully executed - as well as the public's ability to pass judgment on his efforts.  The Act's restrictions are incompatible with the Constitution's separation of powers."

"Without the ability to oversee the Board, or to attribute the Board's failings to those whom he can oversee, the President is no longer the judge of the Board's conduct.  He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member's breach of faith.  If this dispersion of responsibility were allowed to stand, Congress could multiply it further by adding still more layers of good-cause tenure.  Such diffusion of power carries with it a diffusion of accountability; without a clear and effective chain of command, the public cannot determine where the blame for a pernicious measure should fall.  The Act's restrictions are therefore incompatible with the Constitution's separation of powers," the Supreme Court ruled.

The Supreme Court ruled, however, that the existence of the board does not violate the separation of powers and allowed it to continue to function as before but held that the members may be removed at will by the SEC.

[Editor's Note:  Full coverage will be in the July issue of Mealey's Emerging Securities Litigation.  In the meantime, the opinion is available at www.mealeysonline.com or by calling the Customer Support Department at 1-800-833-9844.  Document #57-100713-045Z.  For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]

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For more information, call editor Dylan McGuire at 610-205-1114, or e-mail him at dylan.mcguire@lexisnexis.com.