DC Circuit Holds PCAOB Improperly Denied Target of Investigation Access to Expert Assistance

Securities Litigation, Investigations & Enforcement Alert | March.28.2018

Authors: Paul Rugani, Andrew Morris, Thomas Kidera and Aoife Duffy

A D.C. Circuit panel unanimously ruled that the Public Company Accounting Oversight Board ("PCAOB") acted unlawfully by denying former Ernst & Young partner Marc Laccetti his right to bring an accounting expert to an investigative interview. The March 23rd decision in Laccetti v. Securities & Exchange Commission potentially throws the validity of many pending PCAOB investigations into question and provides important procedural rights to the subjects of those investigations.

Laccetti was investigated and sanctioned by the PCAOB in connection with Ernst & Young's audit of Taro Pharmaceutical Industries, Ltd.'s 2004 financial statements. The PCAOB's rules provide witnesses interviewed by the PCAOB the right to be represented by counsel. However, the PCAOB had interpreted that rule as limited to lawyers only. Accordingly, when Laccetti was interviewed during the PCAOB's investigation, the PCAOB permitted Lacetti to be accompanied by an in-house Ernst & Young lawyer but refused his request that an Ernst & Young accounting expert also be present. The PCAOB advised Laccetti that he and his counsel could consult with an expert before or after testifying, but that the presence of any technical expert was "not appropriate" at the interview. Following that interview, in a decision subsequently affirmed by the Securities and Exchange Commission ("SEC"), the PCAOB fined Laccetti $85,000 and suspended him from the accounting profession for two years.

On appeal, Laccetti argued that the PCAOB's decision to bar the accounting expert from the interview was unreasonable and that it violated his right to counsel. The sole reason the PCAOB provided for denying Laccetti's request was that it did not want Ernst & Young personnel present during the interview to monitor the investigation. The D.C. Circuit rejected this argument as unreasonable on its face. After all, the PCAOB expressly permitted a lawyer from Ernst & Young's in-house legal team to attend the interview. And the PCAOB's stated desire to prevent an Ernst & Young employee from monitoring the interview could not be squared with the fact that it refused to let Laccetti bring any accounting expert at all. The court also held that the right to counsel provided by the PCAOB's rules encompasses the right to have an expert assist a legal representative during an investigative interview. The court noted that the ability to have expert assistance as part of the right to counsel had long been available under SEC proceedings and other proceedings governed by the Administrative Procedure Act. Nothing in the PCAOB's rules suggested that the right to counsel they provided should be any narrower than the rights afforded under the APA. However, the court expressly left open the possibility that the PCAOB could amend its rules to bring about a different result, subject to statutory and constitutional limitations. The court reversed the underlying order and sanctions, rejecting the PCAOB's argument that any error in denying the right to counsel was harmless, but did not foreclose the PCAOB from reopening a new enforcement action against Laccetti.

Although the court claimed its holding was an "exceedingly narrow" one, it provides important protections to individuals subject to PCAOB investigations, confirming that they have a right to be accompanied by counsel including an accounting expert of their choosing. The decision also enhances the ability of accounting firms to assist individuals who become targets of investigations. And the decision suggests that any pending proceeding in which the PCAOB denied a witness the right to expert assistance will, at the very least, need to have new testimony taken with adequate assistance available. The number of investigative matters affected could be substantial.

The procedural background of the Laccetti case also illustrates the practical difficulties that arise when administrative agencies violate the rights of individuals they investigate. The investigative interview of Laccetti took place in 2007 and the applicable procedural rules meant that Laccetti was forced to receive a PCAOB sanction and pursue an administrative appeal to the SEC before he could finally obtain judicial review. The great majority of PCAOB respondents who are threatened with charges settle their proceedings. Indeed, in the eleven years Laccetti's matter has been pending, scores of PCAOB respondents have agreed to accept sanctions rather than take their cases to trial and through the multi-level appeals process. Many of these individuals likely were denied expert assistance during investigative interviews just like Laccetti, but lacked the resources to pursue the years-long legal process necessary to vindicate their rights.