In an Opinion and Order entered on January 4, 2012 and a separate Order entered on January 5, 2012, Magistrate Judge Deborah Robinson granted the SEC’s motion for a order to show cause, requiring Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") to file a brief by mid-January 2012 and appear before the Court in early February to explain why it should not be required to respond to the SEC’s subpoena on it. The ruling is largely procedural, but it does set in a motion a round of briefing and a hearing to address whether the SEC can compel the Chinese accounting firm to respond to its subpoena.
In May 2011, the SEC commenced an investigation into Longtop Financial Technologies Limited ("Longtop"), a Cayman Islands corporation whose ADRs are traded on the New York Stock Exchange. Longtop’s principal offices are located in China, where D&T Shanghai served as its auditors until the accounting firm resigned in May 2011 after, according to the SEC, "discovering numerous financial improprieties" at Longtop.
On May 27, 2011, the SEC served its subpoena on D&T Shanghai’s former U.S. counsel, who, according to the Commission, represented that he had authority to accept service on behalf of the firm. The subpoena sought documents related to D&T Shanghai’s business and in particular, its activities as Longtop’s auditor for the period from January 1, 2007 to the date of the subpoena. The accounting firm, which is registered with the Public Company Accounting Oversight Board ("PCAOB"), acknowledged that it possessed "vast amounts of responsive documents," but refused to produce them to the Commission.
On July 8, 2011, new counsel for D&T Shanghai wrote to the SEC and explained that the firm was refusing to comply with the subpoena because, among other things: (1) it could not be compelled to produce documents that predated the July 21, 2010 passage of the Dodd-Frank Act; and (2) the production of any documents may subject the firm to sanctions under Chinese law.
On September 8, 2011, the SEC filed its Motion for an Order the Show Cause (supporting brief here). The SEC subsequently highlighted this subpoena enforcement action in its November 2010 report on enforcement statistics for the fiscal year ending on September 30, 2010 (previously discussed here). In the Motion, the SEC addressed the issues raised by D&T Shanghai, arguing that the firm misunderstood the basis for the subpoena – the SEC has long held the authority to issue such subpoenas. The SEC further argued that the "vague assertions of possible conflicts with a foreign law" did not justify D&T Shanghai’s non-compliance with the subpoena.
Following a hearing though, Magistrate Judge Robinson focused on a different issue, namely, the issue of whether she could issue such an Order if D&T Shanghai had not yet been served and appeared before her. Typically, service on an entity located aboard is accomplished under an internationally agreed-upon method, such as the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents. So, on October 7, 2011, Magistrate Judge Robinson issued a Minute Order requiring the SEC to submit a brief "to address (1) the authority for the proposition that the court can require Respondent to appear to show cause where Respondent has not been served and has not appeared, and (2) the authority for the request that service be permitted pursuant to Rule 4(f)(3) of the Federal Rules of Civil Procedure [service by other means] rather than Rule 4(f)(1) [service under the Hague Convention or some other internationally agreed-upon method]."
The SEC responded on October 13, 2011 by arguing that the Court could issue the order to show cause on an ex parte basis, pointing out that D&T Shanghai will have "the full protections provided by due process, and will have an opportunity to be heard on the merits of this case." The SEC also argued that it should not be required to "exhaust all possible means of serving a foreign person, including service through the Hague Convention," but should be permitted to serve its papers on D&T Shanghai’s U.S. counsel.
In a January 4, 2012 Opinion and Order, Magistrate Judge Robinson ruled that "service of the application is not a prerequisite to the issuance of the proposed show cause order." She noted that the D.C. Circuit "has repeatedly approved the issuance of a show cause order in a miscellaneous action brought by an agency, commission or corporation of the United States in the absence of prior service of the application upon the respondent." The Court also found that D&T Shanghai would not be prejudiced by the procedure – its counsel had already had numerous conversations with the SEC, received copies of the pleadings and actually attended the status conference (observing from the courtroom gallery).
In the January 5, 2012 Order to Show Cause, the Court directed D&T Shanghai to file responsive papers by January 20, 2012, addressing why it should not be ordered to respond to the Commission’s subpoena. The SEC will file its reply brief by January 27, 2012 and Judge Robinson will hear the motion on February 1, 2012.