On May 9, 2012, the SEC announced that it has filed an Administrative Proceeding against Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") for its refusal to provide the agency with audit work papers in connection with the Commission’s investigation of the accounting firm’s client for alleged accounting fraud. The Administrative Proceeding was filed while the Commission is in the midst of a subpoena enforcement action against the same accounting firm, that is scheduled to be heard in federal court in early June. The new matter is latest proceeding in the dispute over whether the SEC can compel the Chinese accounting firm to respond to its subpoena – the penalty which D&T Shanghai could face for its failure to comply is censure or being denied the ability to appear before the Commission.
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.
As part of its investigation of Longtop, the SEC subpoenaed documents from D&T Shanghai, and the discussions regarding that subpoena boiled over into litigation.
• On May 27, 2011, the SEC served its subpoena on D&T Shanghai’s former U.S. counsel (who had represented that he had authority to accept service). The accounting firm 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 a Motion for an Order to Show Cause in Federal Court in D.C., arguing, among other things, that the "vague assertions of possible conflicts with a foreign law" did not justify D&T Shanghai’s non-compliance with the subpoena.
• On October 7, 2011, Magistrate Judge Deborah 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 on Service Abroad of Judicial and Extrajudicial Documents or some other internationally agreed-upon method]."
• On October 13, 2010, the SEC responded 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 discussed here, Magistrate Judge Robinson granted the SEC’s motion for a order to show cause, ruling that "service of the application is not a prerequisite to the issuance of the proposed show cause order." She directed D&T Shanghai to file responsive papers addressing why it should not be ordered to respond to the Commission’s subpoena.
• As discussed here, in January 2012, D&T Shanghai filed: (1) 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; and (2) a Motion seeking to establish a revised briefing schedule.
• As discussed here, on February 1, 2012, Magistrate Judge Deborah Robinson issued a Minute Order which reiterated that the SEC can serve its Order to Show Cause on counsel for D&T Shanghai by e-mail.
D&T Shanghai, which is registered with the Public Company Accounting Oversight Board ("PCAOB"), filed its Brief in Response to the Order to Show Cause on April 11, 2012, arguing, among other things, that the China Securities Regulatory Commission ("CSRC") has prohibited D&T Shanghai from producing the work papers directly to the SEC (insisting that the SEC must work through the CSRC to obtain access to them). D&T Shanghai further argued that Chinese regulators "would be authorized to dissolve the firm entirely and to seek prison sentences up to life in prison for any [D&T Shanghai] partners and employees who participated in the violation," which represented an undue burden. D&T Shanghai also argued that the securities laws under which the SEC served the subpoena do not allow the Commission to obtain the documents located abroad. The accounting firm also argued that the Commission should be required to serve the subpoena under the Hague Convention (D&T Shanghai also moved to quash the subpoena for the same reason). The SEC will be filing a Reply Brief on May 23, 2012 and the matter is scheduled to be heard by Magistrate Judge Robinson on June 8, 2012.
The Administrative Proceeding filed yesterday begins the process which could result in the punishment of D&T Shanghai for its failure to respond to the subpoena. The SEC claimed that D&T Shanghai violated the Sarbanes-Oxley Act and the Securities Exchange Act of 1934 by failing to provide the SEC with the audit work papers, claiming, among other things that "Section 106(b) of Sarbanes-Oxley directs a foreign public accounting firm that issues an audit report, performs audit work or interim review’ to ‘produce the audit work papers of the foreign public accounting firm and all other documents of the firm related to such audit work’ to the Commission upon request." The Commission further stated:
it is appropriate that this proceeding be brought … to determine whether D&T Shanghai should be censured or denied the privilege of appearance and practice before the Commission for having willfully violated Section 106 of Sarbanes-Oxley.
D&T Shanghai is required to respond to the SEC’s Order commencing the Administrative Proceeding within twenty days.