Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-08-01132/USCOURTS-caDC-08-01132-0/pdf.json

Parties Involved:
Gregory M. Dearlove
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 9, 2009 Decided July 24, 2009 

No. 08-1132 

GREGORY M. DEARLOVE, 

PETITIONER

v. 

SECURITIES AND EXCHANGE COMMISSION, 

RESPONDENT

On Petition for Review of an Order 

of the Securities & Exchange Commission 

Benjamin M. Zuffranieri Jr. argued the cause for 

petitioner. With him on the briefs were Joseph V. Sedita, 

Michelle L. Merola, and Robert J. Fluskey Jr. 

Tracey A. Hardin, Senior Counsel, Securities & 

Exchange Commission, argued the cause for respondent. 

With her on the brief were Brian G. Cartwright, General 

Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob 

H. Stillman, Solicitor, and Hope Hall Augustini, Senior 

Litigation Counsel. 

Before: GINSBURG and GRIFFITH, Circuit Judges, and 

RANDOLPH, Senior Circuit Judge. 

USCA Case #08-1132 Document #1197907 Filed: 07/24/2009 Page 1 of 13
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Opinion for the Court filed by Circuit Judge GINSBURG. 

 GINSBURG, Circuit Judge: Gregory Dearlove petitions for 

review of the decision of the Securities and Exchange 

Commission to debar him from practicing as an accountant 

before the SEC. The SEC concluded Dearlove engaged 

repeatedly in unreasonable conduct resulting in violations of 

applicable accounting principles and standards while serving 

as Deloitte & Touche’s “engagement partner” in charge of the 

2000 audit of Adelphia Communications Corporation. 

Dearlove argues the SEC committed an error of law, 

misapplied the applicable accounting principles and 

standards, and denied him due process. Because the SEC 

made no error of law, and substantial evidence supports its 

findings of fact, we deny the petition. 

I. Background 

 Deloitte audited Adelphia’s financial statements from 

1980 through 2002. An “engagement partner” had overall 

responsibility for each audit. In 2000 Deloitte rotated 

Dearlove onto the Adelphia account as the engagement 

partner, heading a team of 35 accountants. 

John Rigas had founded Adelphia in 1952 and he and his 

children were the controlling shareholders in 2000. Dearlove 

and the Deloitte team described the 2000 audit, like many 

prior audits of Adelphia, as posing “much greater than normal 

risk” because Adelphia engaged in numerous transactions 

with subsidiaries and affiliated entities, many of which were 

owned by members of the Rigas family. 

 In 2000 Adelphia was one of the largest cable television 

companies in the United States. It had doubled the number of 

cable subscribers it served by acquiring several other cable 

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companies late in 1999. Although its assets were growing, 

Adelphia’s debt grew substantially as well. The SEC found 

that prior to 2000: 

Adelphia, its subsidiaries, and some Rigas 

Entities entered as co-borrowers into a series 

of credit agreements. By 1999, Adelphia and 

the Rigas Entities had obtained $1.05 billion in 

credit; in 2000, they tripled their available 

credit and drew down essentially all of the 

funds available under the agreements. 

 

In the Matter of Gregory M. Dearlove, CPA, No 3-12064, 

2008 SEC LEXIS 223, at *5 (Jan. 31, 2008). 

 Deloitte issued its 2000 independent auditor’s report of 

Adelphia — signed by Dearlove — on March 29, 2001. Id. at 

*10. In January 2002, in the wake of the Enron scandal, the 

SEC released a statement regarding the disclosure of related 

party transactions. Id. at *10-11; see Statement About 

Management’s Discussion and Analysis of Financial 

Condition and Results of Operations, 67 Fed. Reg. 3,746 (Jan. 

25, 2002). In March Adelphia disclosed its obligations as codebtor with the Rigas Entities. Its share price declined from 

$30 in January 2002 to $0.30 in June, when it was de-listed 

by the NASDAQ. Dearlove, 2008 SEC LEXIS 223, at *11. 

In September 2002 the Department of Justice brought 

criminal fraud charges against Adelphia officials, including 

members of the Rigas family, see United States v. Rigas, 490 

F.3d 208 (2d Cir. 2007), and Adelphia agreed to pay $715 

million into a victims’ restitution fund as part of a settlement 

with the Government, In re Adelphia Commc’ns Corp., 327 

B.R. 143 (Bankr. S.D.N.Y. 2005). Dearlove, 2008 SEC 

LEXIS 223, at *12. 

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In April 2005 the SEC brought and settled civil actions 

against Adelphia, members of the Rigas family, and Deloitte. 

Id. at *13-14. In September 2005 the SEC charged Dearlove 

with improper conduct resulting in a violation of applicable 

professional standards, including his approval of Adelphia’s 

method of accounting for transactions between itself and one 

or more Rigas Entities, i.e., related party transactions. The 

matter was referred to an Administrative Law Judge, who 

determined Dearlove had engaged in one instance of “highly 

unreasonable” conduct and repeated instances of 

“unreasonable” conduct, and permanently denied Dearlove 

the right to practice before the SEC. Upon review of the 

ALJ’s decision, the SEC held Dearlove had engaged only in 

repeated instances of “unreasonable” conduct and denied him 

the right to practice before the SEC but provided he may 

apply for reinstatement after four years. Dearlove petitions 

for review of that decision. 

II. Analysis 

 SEC Rule 102(e) provides the SEC may “deny, 

temporarily or permanently, the privilege of appearing or 

practicing before [the SEC] in any way to any person who is 

found by the Commission ... to have engaged in unethical or 

improper professional conduct.” 17 C.F.R. § 

201.102(e)(1)(ii). The Rule defines three classes of 

“improper professional conduct” for accountants: (1) 

“Intentional or knowing conduct, including reckless conduct, 

that results in a violation of applicable professional 

standards,” id. § 201.102(e)(1)(iv)(A); (2) “A single instance 

of highly unreasonable conduct that results in a violation of 

applicable professional standards,” id. § 

201.102(e)(1)(iv)(B)(1); and (3) “Repeated instances of 

unreasonable conduct, each resulting in a violation of 

applicable professional standards, that indicate a lack of 

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competence to practice before the Commission,” id. § 

201.102(e)(1)(iv)(B)(2). The only issue here is the validity of 

the SEC’s determination that Dearlove repeatedly engaged in 

unreasonable conduct. 

The “applicable professional standards” referred to in 

Rule 102(e) include both the Generally Accepted Auditing 

Standards (GAAS) and the Generally Accepted Accounting 

Principles (GAAP). See Amendment to Rule 102(e) of the 

Commission’s Rules of Practice, 63 Fed. Reg. 57,164, 

57,166/3 (Oct. 26, 1998). The GAAS are “approved and 

adopted by the membership of the American Institute of 

Certified Public Accountants,” AICPA Codification of 

Statements of Auditing Standards § 150.02, and concern “the 

quality of the performance ... [and of] the judgment exercised 

by” an auditor, id. § 150.01. The GAAS require an auditor to 

have adequate training and audit proficiency, to maintain 

independence from the company being audited, and to 

exercise due professional care. Dearlove, 2008 SEC LEXIS 

223, at *16-17. The GAAS also set forth an auditor’s 

obligation to plan, supervise, and gather evidence in 

conducting an audit. Id. In contrast, the GAAP focus not 

upon an auditor’s judgment but upon how specific accounting 

tasks should be performed. See, e.g., Interpretation No. 39 of 

the FASB, ¶5 (“[I]t is a general principle of accounting that 

the offsetting of assets and liabilities in the balance sheet is 

improper except where a right or setoff exists”). The GAAP 

include statements published by the Federal Accounting 

Standards Advisory Board and by the AICPA. 

 Dearlove argues that in order to establish his conduct was 

unreasonable within the meaning of Rule 102(e)(1)(iv)(B)(2), 

the SEC had to hold he violated the common law negligence 

standard of care, as evidenced by expert testimony. He 

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further argues he was denied due process because the ALJ 

refused to postpone the hearing for 60 days. 

The SEC’s findings of fact are conclusive if supported by 

substantial evidence. 15 U.S.C. § 78y(a)(4); Steadman v. 

SEC, 450 U.S. 91, 96 n.12 (1981). We may not set aside the 

SEC’s legal conclusions unless they are “arbitrary, capricious, 

an abuse of discretion, or otherwise not in accordance with 

law.” 5 U.S.C. § 706(2)(A); Nat’l Rural Elec. Coop. Ass’n v. 

SEC, 276 F.3d 609, 614 (D.C. Cir. 2002). 

We reject Dearlove’s legal argument and conclude the 

appropriate standard of care in this case is supplied by the 

GAAS; therefore, the SEC need not have received expert 

testimony to establish the standard of care or to determine 

whether Dearlove’s conduct was unreasonable. Moreover, 

we find ample evidence in the record to support the SEC’s 

conclusion that Dearlove engaged in repeated instances of 

unreasonable conduct that resulted in a violation of 

professional standards. We also reject Dearlove’s argument 

that he was denied due process. 

A. Rule 102(e) 

 

 This is not the first time we have encountered the 

application of Rule 102(e) to an accountant, but it is the first 

time we have reviewed a decision of the Commission 

sanctioning an accountant’s conduct as merely 

“unreasonable.” In Checkosky v. SEC, 139 F.3d 221 (1998) 

(Checkosky II), we were concerned about the SEC’s 

equivocation as to whether it could find improper professional 

conduct where an accountant had acted negligently rather 

than recklessly or with the intent to defraud. Id. at 223-24. 

Because it was unclear whether simple negligence could 

support a violation of Rule 102(e) and, considering the SEC’s 

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“failure to articulate a discernible standard,” we instructed the 

Commission to dismiss the proceedings under review. Id. at 

227. The SEC no longer has the problem we identified in 

Checkosky II; the SEC amended Rule 102(e) to make clear 

that an accountant need not have engaged in intentional, 

knowing, or reckless conduct to be in violation of the Rule. 

63 Fed. Reg. 57,164 (Oct. 26, 1998). 

Dearlove draws our attention to two elements of Rule 

102(e)(1)(iv)(B)(2): “Repeated instances of unreasonable 

conduct” and “each resulting in a violation of applicable 

professional standards.” He argues that to conclude one has 

violated the Rule, the SEC must determine not only that he 

violated applicable professional standards but also that his 

conduct was “unreasonable.” Because “one of GAAS’s 

General Standards is that due professional care is to be 

exercised in the performance of the audit and the preparation 

of the report,” Checkosky II, 139 F.3d at 225 n.5 (internal 

quotation marks omitted), Dearlove contends “unreasonable” 

conduct must mean something other than conduct below the 

standard of due professional care set forth in the GAAS. For 

support, he points to New York Pattern Jury Instructions § 

2:25, which states: 

 

A person who has special training and 

experience in a trade, when acting in the trade 

on behalf of others who are relying on his 

special skills, has the duty to use the same 

degree of skill and care that others in the same 

trade in the community would reasonably use 

in the same situation. 

From this, Dearlove reasons that to show he failed to use a 

reasonable degree of skill and care in auditing Adelphia, the 

SEC would have had to elicit expert testimony that his 

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conduct was unreasonable under the circumstances. 

Moreover, Dearlove argues the audit reports of his 

predecessors at Deloitte — whose audits were similar to his 

own — indicate his conduct was reasonable under the 

circumstances. 

 The SEC rejected Dearlove’s argument, observing about 

the GAAS (at p.9): 

AICPA membership approved and adopted 

the ten fundamental auditing standards .... 

AICPA’s Auditing Standards Board has 

developed and issued subsequent auditing 

standards through a due process that includes 

deliberation in meetings open to the public, 

public exposure of proposed standards, and a 

formal vote .... We therefore decline to create 

a separate standard of professional conduct 

for auditors that depends in each case on the 

behavior of a particular auditor’s 

predecessors. The accounting profession 

itself has already prescribed the applicable 

standards. 

We agree. All violations of the Rule, whether by 

intentional, knowing, highly unreasonable, or merely 

unreasonable conduct, are also violations of the GAAS; the 

term “unreasonable” as used in the Rule serves only to 

distinguish among degrees of deviation.∗

 Therefore, the SEC 

 

∗

 As we have noted before, “the converse — that all deviations 

from the GAAS are per se [unreasonable] — might not be true.” 

Checkosky II, 139 F.3d at 225 n.5. In other words, Rule 102(e) 

does not require the SEC to hold every violation of the GAAS 

amounts to improper professional conduct. 

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need not establish a standard of care separate from the GAAS 

in order to give meaning to Rule 102(e)(1)(iv)(B)(2). The 

Rule simply requires the SEC to engage in an objective 

inquiry whether Dearlove’s conduct was unreasonable in the 

specific factual circumstances at issue. Prior audits involving 

similar treatment of similar transactions may serve as 

evidence that a particular audit was not unreasonable, but the 

SEC is entitled to weigh that evidence along with other record 

evidence to determine, in its own expert view, whether the 

conduct at issue was unreasonable. 

 Among the conduct the SEC deemed unreasonable was 

Dearlove’s approval of Adelphia’s practice of netting an 

account receivable from one Rigas Entity against an account 

payable to another Rigas Entity. Thus, if Adelphia was owed 

$1 million by one Rigas Entity and itself owed $1.1 million to 

another Rigas Entity, then, rather than report both 

transactions, its balance sheet would show only the net $0.1 

million payable. In 2000 Adelphia’s aggregate accounts 

receivable from and aggregate accounts payable to Rigas 

Entities were each more than $1 billion, but Adelphia’s 

balance sheet showed only a “Related Party Receivable” of 

about $3 million. Dearlove, 2008 SEC LEXIS 223, at *25. 

 Dearlove explained his approval of Adelphia’s netting by 

pointing out that prior Deloitte engagement partners had done 

the same. The SEC (at p.14) held reliance upon prior audits 

was unreasonable, particularly in light of changed 

circumstances 

because this audit generally called for 

heightened skepticism and because this 

account, in particular, involved related party 

transactions and a precipitous drop in the 

amount of net receivables that Adelphia 

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reported compared to prior years. Moreover, 

Dearlove’s unquestioning reliance on prior 

audit conclusions is precisely the result that 

audit partner rotation was designed to remedy. 

 Having determined Dearlove’s conduct was 

unreasonable, the SEC turned to the applicable professional 

standards. The GAAS required that when an audit posed 

greater than normal risk — as Dearlove had determined the 

Adelphia audit did — there must be “more extensive 

supervision by the auditor with final responsibility for the 

engagement during both the planning and conduct of the 

engagement.” AICPA Clarification § 312.17. The SEC 

found “no evidence, in the audit workpapers or elsewhere in 

the record, that Dearlove gave any consideration to the 

propriety of Adelphia’s netting during the 2000 audit or that 

the audit team conducted any analysis” of the accounting 

requirement at issue. Dearlove, 2008 SEC LEXIS 223, at 

*32. As a consequence, the SEC held Dearlove violated the 

GAAS. 

Turning to the GAAP, Interpretation No. 39 of the FASB 

provides a party may use a credit to offset a debt on its 

balance sheet only when (1) each of two parties owes the 

other a determinable amount; (2) the reporting party has the 

right to set off the amount owed against the amount owed by 

the other party; (3) the reporting party intends to set off; and 

(4) the right to set off is enforceable at law. FIN 39 ¶5. The 

SEC held Adelphia violated the GAAP because its netting 

involved more than two parties: “Adelphia netted the 

accounts payable and receivable of its various subsidiaries 

against the accounts payable and receivable of various Rigas 

Entities on a global basis ... [and] netting is appropriate only 

when two parties are involved.” Dearlove, 2008 SEC LEXIS 

223, at *27. 

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The two-party rule makes the reporting party’s balance 

sheet a more accurate depiction of its financial heath by 

preventing the reporting party from using the amount it owes 

one entity to hide the amount it is owed by another that may 

be less than creditworthy. Netting a receivable unlikely to be 

paid against a debt owed to another party is simply a way to 

make the debt and the dubious receivable disappear from the 

reporting party’s balance sheet — and that is just what 

Adelphia did in 2000. In his defense, Dearlove asserts that 

“variations in the ownership structures of the Rigas Entities 

did not alter the fact that the Rigas family controlled those 

entities.” This rather innocuous observation addresses neither 

the letter nor the purpose of the two-party rule. 

 It is therefore clear the SEC analyzed the record as 

required by Rule 102(e)(1)(iv)(B)(2): It determined first that 

Dearlove’s conduct was unreasonable in the circumstances 

and second that it resulted in a violation of professional 

standards — both the GAAS and the GAAP. Because the 

GAAS focus upon an auditor’s performance and require him 

to exercise due professional care, we reject Dearlove’s 

attempt to fault the SEC for marshaling the same evidence to 

show his conduct was unreasonable and that he failed to 

exercise due professional care in performing the audit.∗ 

 

∗

 In addition to holding Dearlove violated Rule 102(e) by netting 

Adelphia’s accounts receivable from and accounts payable to 

various Rigas Entities, the SEC held he violated the Rule in the 

way he (1) accounted for debt co-borrowed by Adelphia and the 

Rigas Entities, (2) accounted for debt owed by Adelphia to a third 

party as debt owed by a Rigas Entity to a third party, and (3) 

classified certain debt transactions between Adelphia and Rigas 

Entities as stock sales. Dearlove argues this conduct did not violate 

the GAAS or lead to a violation of the GAAP but his arguments are 

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B. Due Process of Law 

 Dearlove asked the ALJ and then the SEC to postpone 

his hearing for 60 days lest he have only four months in 

which to review a massive record — compiled by the SEC 

over several years of investigation — and to prepare for the 

hearing. Dearlove now argues the Commission denied him 

due process by forcing him to prepare for the hearing in too 

short a period of time. 

 “The SEC, like a trial judge, enjoys broad discretion in 

deciding whether to grant a continuance.” Falcon Trading 

Group v. SEC, 102 F.3d 579, 581 (D.C. Cir. 1996); cf. Ungar 

v. Sarafite, 376 U.S. 575, 589 (1964) (“The matter of 

continuance is traditionally within the discretion of the trial 

judge”). And the Commission has a “policy of strongly 

disfavoring ... requests” for postponement. 17 C.F.R. § 

201.161(b)(1). 

That policy operates within the framework of a rule 

requiring the Commission or an ALJ, in evaluating a request 

for postponement, to consider and weigh five factors: 

(i) The length of the proceeding to date; (ii) 

The number of postponements ... already 

granted; (iii) The stage of the proceedings at 

the time of the request; (iv) The impact of the 

request on the hearing officer’s ability to 

complete the proceeding in the time specified 

 

unconvincing for much the same reasons as those discussed above 

and do not warrant separate treatment in this opinion. 

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by the Commission; and (v) Any other such 

matters as justice may require. 

 

Id. 

 

Dearlove argues the ALJ erred by treating the time 

specified by the Commission to complete the proceeding as 

mandatory, when in fact he could have extended the deadline. 

The SEC rejected this argument because it found the ALJ 

considered the time limit as but one of the required five 

factors. Our review of the ALJ’s Order confirms the SEC’s 

decision: The ALJ considered each of the five factors 

specified in the rules and treated none as dispositive. 

Considering the broad discretion the agency has in ordering 

the conduct of its proceedings, see Falcon Trading Group,

supra, we reject Dearlove’s due process argument. 

III. Conclusion 

 In sum, we reject Dearlove’s contention that Rule 

102(e)(1)(iv)(B)(2) required the SEC to evaluate his conduct 

of the 2000 Adelphia audit against the common law 

negligence standard; the GAAS supplied the applicable 

standard and did not require the SEC to elicit expert 

testimony that an accountant’s conduct was unreasonable 

under the circumstances. Here the record evidence supports 

the SEC’s conclusions that Dearlove’s conduct was 

unreasonable and that he was not denied due process. The 

petition for review is therefore 

Denied. 

 

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