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From Securities Regulation Daily, February 27, 2019

Petition asks High Court to clarify how to mount Appointments Clause challenge

By Amy Leisinger, J.D.

Petitioners argue that Ninth Circuit failed to adequately consider their challenge to the appointment of a PCAOB hearing officer and improperly denied their claim for failure to specifically name the Appointments Clause as the basis for it.

A new petition for certiorari asks the Supreme Court to address whether petitioners who timely challenge the constitutional validity of the appointment of an administrative adjudicating officer are ineligible for relief unless they specifically cite "the Appointments Clause" as the basis for their constitutional objections. The petitioners also assert that judicial divisions have developed with regard to what constitutes a "timely" objection and that clarification is necessary given the importance of this constitutional safeguard. The Court should resolve the conflict and to provide guidance to aid courts to uniformly adjudicate whether a "timely challenge" has been made entitling a petitioner to relief (Kabani & Company, Inc. v. SEC, February 22, 2019).

PCAOB proceedings. During an investigation of accounting firm Kabani & Company, the PCAOB’s Division of Enforcement identified numerous documents that were added or altered before the inspection staff arrived. A PCAOB hearing officer issued an initial decision in April 2014 finding that the respondents violated the board’s rules by altering documents and attempting to deceive the inspectors about deficiencies in the work papers. In May 2014, the respondents moved to recuse the PCAOB, arguing that recusal was required as a matter of constitutional law, specifically expressing concerns regarding the hearing officer. The PCAOB refused and eventually affirmed the hearing officer’s findings and imposition of sanctions. The SEC later sustained the revocation of the firm’s registration and the bars and penalties imposed on the individual respondents.

The respondents then petitioned the Ninth Circuit for review, maintaining that they were deprived of due process and that the administrative forum was unfairly biased and unconstitutional. The Ninth Circuit denied the petition for review, finding that the petitioners forfeited their Appointments Clause claim by failing to raise it in their briefs or before the agency.

Clarification requested. In their petition, the parties noted that, in Lucia v. SEC, the Supreme Court held that SEC administrative law judges are "Officers of the United States" subject to the Appointments Clause and reaffirmed that "‘one who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case’ is entitled to relief." However, the petitioners argued, lower courts have struggled to define what constitutes a "timely challenge" and have divided over when, and to what extent, a party must make the "timely challenge." The petitioners noted that the Sixth Circuit has held that a petitioner need not "mention the Appointments Clause issue in front of the administrative law judge," as long as it identifies the issue at a later point, but that, in the Tenth Circuit, a petitioner must mention the issue in administrative filings.

According to the petition, the Ninth Circuit added to the uncertainty by refusing to entertain a challenge to the appointment of the PCAOB hearing officer, despite the petitioners’ earlier challenges to the constitutional validity of the administrative framework, because the petitioners did not specifically invoke "the Appointments Clause" as the basis for objection. The petitioners argued that, despite the uniform applicability of the U.S Constitution, petitioners in different jurisdictions have different burdens for raising challenges to administrative appointments. Further, they contended, requiring the specific verbiage of "the Appointments Clause" imposes an "unduly rigid requirement," and the Ninth Circuit did not address why any forfeiture of the claim was not excusable.

"[O]ther courts beside the Ninth Circuit would have entertained Petitioners’ Appointments Clause challenge, rather than dismissing it out of hand," the petitioners explained.

The petitioners noted that the Court did not articulate any minimum requirements or otherwise provide any specific guidance in Lucia to help lower courts determine whether a party has made a "timely challenge" to an unconstitutional appointment. They urged the Court to grant review establish a uniform standard that reflects the significance of the Appointments Clause.

Attorneys: George W. Hicks, Jr. (Kirkland & Ellis LLP) for Kabani & Co., Inc.

Companies: Kabani & Co., Inc.

MainStory: TopStory Enforcement PCAOBNews SECNewsSpeeches SupremeCtNews

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