In the on-going dispute as to whether the SEC can enforce an investigative subpoena on an accounting firm in China, the parties have submitted differing proposed scheduling orders. Although the arguments between the parties focus on procedure at this point, they are potentially significant in that the Court is being asked to address actually how a party overseas who receives a subpoena will be required to respond. Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") located in China, argues that the Court should first determine if the SEC is required to serve the subpoena under the provisions the Hague Convention, and then allow discovery before the parties submit briefs and expert reports on the issue of whether the firm should respond to the subpoena. The SEC proposes that the parties go immediately to briefing and expert reports on the subpoena-response issue.
In connection with the SEC’s investigation into Longtop Financial Technologies Limited ("Longtop"), the SEC prepared a subpoena to D&T Shanghai (who served as Longtop’s auditors until the accounting firm resigned in May 2011 after, according to the SEC, "discovering numerous financial improprieties" at Longtop) and delivered a copy to the firm’s then-U.S. counsel. 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 an Application for an Order to Show Cause, requesting that the Court direct D&T Shanghai to appear before the Court to explain why it should not be required to respond to the SEC’s subpoena on it. In a January 4, 2012 Opinion and Order, Magistrate Judge Robinson stated that she would grant the motion, and issued the Show Cause Order on January 5, 2012, as discussed here. The Court originally set a briefing schedule and scheduled a hearing for February 1, 2012.
On January 11, 2012, D&T Shanghai filed a motion seeking clarification of the Magistrate Judge’s Order, raising a question of whether the Order was intended to require the SEC to serve D&T Shanghai under the terms of the Hague Convention, or whether the Order was intended to allow service on D&T Shanghai’s counsel by e-mail. The SEC opposed the motion on January 12, 2012 and D&T Shanghai filed a Reply Brief on January 25, 2012.
On January 11, 2012, D&T Shanghai also filed an Unopposed Motion to Vacate the Schedule and requested that the parties be permitted to negotiate a new schedule. In the motion, the accounting firm stated that it "believe[d] that the complexity of the issues presented here require thorough briefing, reliance upon experts knowledgeable in the relevant areas of foreign law, and limited discovery." Specifically, D&T Shanghai explained that "the issues presented here are novel and important," including, "jurisdictional and service issues … the SEC’s authority to issue subpoenas to entities abroad … the effect of the recently enacted Dodd-Frank Act on the responsibilities of foreign public accounting firms … and issues of international sovereignty when it has been asserted that the demands of two governments potentially are in conflict." The accounting firm elaborated on the conflicting government interests by arguing:
From [D&T Shanghai’s] perspective, one of [its] Chinese regulators, the China Securities Regulatory Commission, has made clear that any requests for [D&T Shanghai] documents located in the PRC from any foreign regulators (including the SEC) must come through the CSRC. The CSRC also has made clear that [D&T Shanghai] would violate China law if it were to produce documents relating to Longtop directly to the SEC. Resolution of these issues potentially will affect more than [D&T Shanghai]. The restrictions on the production of documents to foreign regulators under China law apply to all China-based accounting firms. And any ruling in this case may affect not only China-based accounting firms, but potentially US-based multinational corporations with significant operations in China, whose US-based auditors depend on the work of their foreign counterparts.
The Court directed the parties to submit a joint schedule (or, the parties could not agree, separate proposed schedules) by January 27, 2012. Given the dispute regarding service, the parties were unable to agree upon a schedule by that date.
D&T Shanghai submitted a proposed briefing schedule on January 27, 2012, proposing a bifurcated schedule. First, D&T Shanghai asks the Court to rule on its Motion to Clarify – if the Court denies that motion, D&T Shanghai plans to move to quash that order for improper service (reiterating its argument that service must be under the Hague Convention). The firm proposes a five-week briefing schedule on this issue (if necessary). Once that has been resolved, it proposes a truncated schedule for discovery over a period of up to seven weeks (the parties have agreed to limited discovery, focusing on the issue of Chinese law). After discovery has been completed, D&T Shanghai proposes that the parties then submit briefs and expert submissions over an eight-week period on the issue of the firm is required to respond to the subpoena.
The SEC also submitted a proposed schedule on January 27, 2012, arguing that there is no need for a bifurcated schedule in that the issue of service has been resolved (or will be resolved by the motion to clarify). The SEC also argues there is no need for discovery (pointing out that it "is the exception, not the rule, in subpoena enforcement actions") until D&T Shanghai has submitted its brief on the subpoena-response issue. Finally, the SEC suggests that the briefing on the issue of responding to the subpoena could be completed by early April.
The Court will be required to resolve these procedural issues before the parties can get to the heart of their dispute. Nonetheless, the resolution of these issues may be significant the next time an entity located abroad receives an SEC investigative subpoena.