Court Opinion

ID: 2660748
Source: CourtListenerOpinion
Date Created: 2014-04-03 05:10:14.645713+00
Date Added: 2024-06-11T13:24:46.984413
License: Public Domain

UNITED STATES DISTRICT COURT
                                    FOR THE DISTRICT OF COLUMBIA

SECURITIES AND EXCHANGE
COMMISSION

                   Petitioner,

          v.                                                           Civil Action No. 11-mc-512
                                                                                (GK/DAR)

DELOITTE TOUCHE TOHMATSU
CPA LTD. I

                   Respondent.

                                               MEMORANDUM OPINION

          Petitioner Securities and Exchange Commission ("SEC                                          11
                                                                                                            )   filed

an Application for Order to Show Cause and for Order Requiring

Compliance with a Subpoena on September 8                                     1   2011       [Dkt. No. 1]. On

August 7       1        2012   1   Magistrate Judge Deborah A.                        Robinson entered a

minute         order           granting         an          Unopposed      Motion     for      Stay    of        this

Action.

          On December 3              1       2012   1       the SEC filed a Motion to Lift the

Stay [Dkt. No. 36]. Respondent Deloitte Touche Tohmatsu CPA Ltd.

("Deloitte         11
                        )   opposed that Motion on January 7                             1    2013    [Dkt.       No.

42]   1   and filed a Motion to Extend the Stay                                       [Dkt.     No.   43].        The

SEC opposed Deloitte s Motion on January 24
                                         1
                                                                                  1   2013     [Dkt. No. 45]

and filed a                 Reply in Support of                         its Motion to Lift            the Stay

[Dkt. No. 44]. On March 4                               1   2013   1   the Magistrate Judge issued a
Memorandum Opinion and Order granting the· SEC's Motion to Lift

    the   Stay   and    denying      Deloitte's        Motion    to   Extend       the     Stay

    ( "Order" ) [Dkt . No. 4 9] .

          Deloitte     objected      to   the    Order     within     fourteen      days     as

permitted by Federal Rule                 of Civil       Procedure      72(a)     [Dkt.    No.

53] .      The SEC responded to Deloitte's Objections                     [Dkt. No. 55].

Upon consideration of the Order,                   the Objections,        the Responses,

the       lengthy,     and    informative,      oral     argument     held before          this

Court on April 11, 2013, and the entire record herein, the Court

upholds       the    Magistrate       Judge's      decision      to   grant       the     SEC's

Motion to Lift the Stay and to deny Deloitte's Motion to Extend

the Stay.        Deloitte 1 s Objections are overruled.

          Deloitte opposed a         lifting of the stay and requested its

extension        "pending      the   expeditious        resolution      of    a   parallel,

consolidated,          and    profession-wide           administrative        proceeding,"

pending . at the SEC.             Opp 1 n of Deloitte to Motion to Life the

Stay 1. 1        Deloitte 1 s     central       argument    is   that    the Magistrate

Judge       applied     the     incorrect       legal     standard      for     determining

whether or not to grant a stay.                     The Court concludes that she

did apply the correct legal standard, relying upon Landis v. N.

Am. Co., 299 U.S. 248             (1936), namely, that in order to prevail,

1
   Deloitte later substantially modified its     position and
requested a stay until the Administrative Law Judge issued his
Initial Opinion.
                                             -2-
the     party requesting             a     stay must         "make     out     a    clear case          of

hardship or inequity in being required to go forward."                                           Id.     at

255.

        Moreover,        as    she       also    pointed       out,     if      the    stay       is     of

"indefinite          duration,"          the     party      must     establish         a    "pressing

need" for it. Id.; Belize Soc. Dev. Ltd. v. Gov't of Belize, 668

F.     3d     724,     731-32       (D.C.       Cir.       2012)     (quoting         Dellinger          v.

Mitchell,        442     F.2d       782,       787     (D.C.   Cir.      1971)        (noting          that

indefinite stay order must be supported by a                                 "balanced finding

that such need overrides the injury to the party being stayed"),

cert. denied, 133 S. Ct. 274 (2012).

        This     Court     will      now analyze            whether Deloitte               is   correct

that    the two proceedings overlap in such a way that Deloitte

will     suffer        "hardship         or     inequity       in    being         required       to     go

forward in this case." Landis, 299 U.S.                             at 255. 2

        A.      Overlapping Adjudications

        Deloitte insists there is significant overlap between this

case and the Administrative                      Proceeding,          In the Matter of BDO

China        Dahua   CPA      Co.    Ltd.,       et     al.,    A.P.     No.       3-15116,       Order

Instituting Proceedings Pursuant to Rule 102 (e) (1) (iii)                                      (Dec. 3,
2
      In discussing the correct legal standard, the Magistrate
Judge may have, on occasion, used language more appropriate to
ruling on the underlying merits of the case.     However, it is
clear from her citations to Landis, Belize, and Clinton v.
Jones, 520 U.S. 681 (1997), that she understood the proper test
for evaluating a request for a stay.
                                                     -3-
2012)        ("Administrative            Proceeding")           [Dkt.     No.    42-2].    In    that

Proceeding the SEC is seeking an Order, pursuant to 17 C.F.R.                                        §

201.102 (e) (1),         to        bar     five     China-based           auditing       companies,

including           Deloitte,        from         "the     privilege        of     appearing        or

practicing"          before the Commission.                    The SEC claims that               those

firms have willfully refused to produce documents requested by

the Commission pursuant to Section 106 of the Sarbanes-Oxley Act

of 2002, codified at 15 U.S.C.                      §    7126.      The companies assert in

that    Proceeding,           as    Deloit te       does       in   the   present     case,       that

under Chinese law, they will be committing a crime and could be

subject        to     prosecution,           possible           conviction,        and     possible

imprisonment if they produce the requested documents.                                      None of

the     investigations             included        in    the     Administrative          Proceeding

involve       Longtop     Financial          Technologies,           Ltd.       ("Longtop"),       the

company being investigated in this case.

        In     the      Order            Instituting           Proceedings         ("OIP")   I     the

Commission ordered the Administrative Law Judge                                  ("ALJ") to issue

an "Initial Decision" 3 no later than 300 days from the date of

service,       which would be in late September,2013.                              See 17 C.F.R.

§   201.360 (a) (2)      (directing Commission to specify time period in

which        hearing     officer's           Initial        Decision        must     be      filed).

Deloitte is challenging the legality of service, and, therefore,
3
  The Initial Decision is the final administrative opinion
subject to appeal to the Commission. 17 C.F.R. § 201.410(a).
                              -4-
    the 300-day deadline for issuance of the decision may not be met

and may not even have begun to run during that time frame. 4

         Once an Initial Decision is filed,                            any party can then file

a petition for review of the decision with the Commission.                                             17

C.F.R.      §   201.410 (a).               That decision can then be appealed to our

Court of Appeals. 15 U.S.C.                          §    78y(a) (1)   ("A person aggrieved by

a final order of the Commission entered pursuant to this chapter

may obtain review of the order in .                                    the District of Columbia

Circuit                • II )   •

         By contrast,                this    case        revolves around the production of

documents         under             the    SEC's     general      subpoena    powers,       found      in

section 19(c) of the Securities Act of 1933, 15 U.S.C.                                      §    77s(c),

and section 21 (b)                    of    the    Securities Exchange Act            of    1934,      15

U.S.C.      §    78u(b).            The SEC served an administrative subpoena to

Deloitte         on   May            27,     2011,       almost    twenty-three       months         ago,

requesting documents related to an investigation into Deloitte's

activities as an auditor for Longtop. Application for Order to

Show Cause and For Order Requiring Compliance With a                                            Subpoena

    [Dkt. No. 1] .       Longtop is a foreign issuer whose securities were

traded in United States markets.

         Unlike       the           Administrative             Proceeding,    the     SEC       is    not

seeking         sanctions            against       Deloitte       in   this   case.        It     simply

4
     The 300 days runs from the date of service.
                                                         -5-
seeks     the      production       of       relevant       documents,        although          the        SEC

agrees that,         if this Court grants its Order Requiring Compliance

with Subpoena, and Deloitte continues to withhold the documents,

it would "seek any avenue or means" available,                                including seeking

a    contempt order,          "to be able to get the documents." Mot.                                     Hr' g

Tr. 44; see also 15 U.S.C.                    §    78u(c)    (giving court power to issue

an    order     requiring         the    production of             records        and    noting           that

failure to obey such an order "may be punished by [the]                                         court as

a contempt thereof").

        If    this    Court       did    cite       Deloitte       for     contempt,           its    order

would be appealable to our Court of Appeals.                                See In re Kessler,

100    F.3d 1015,          1016    (D.C.      Cir.        1996)     (noting       that    a     court       of

appeals      has     jurisdiction over               final        decisions       of     the    district

court     under      28    U.S.C.        §    1291,        and     that    "[f]or        purposes           of

appeal,      an order holding a                   litigant in contempt for failure to

obey a       discovery order is considered final") .                              Thus,        the final

decisions emanating from both the SEC and this Court would both

be    resolved by the             same decision-maker,                our Court           of Appeals.

Given that         fact,    this Court sees little danger of inconsistent

rulings      on Deloitte' s             underlying          concern       about    application              of

Chinese law.

       Although           both     proceedings              obviously         concern           document

requests      to     foreign-based auditing                  firms       and the        scope        of    the

                                                    -6-
SEC's authority to order such requests,                              it is significant that

they involve different statutes, with different legal standards,

and seek entirely different                     results.     The remedy sought            in the

Administrative Proceeding differs greatly from what is sought in

this case.            In the former,          the SEC seeks to bar the five firms

from    "appearing or practicing"                   before      the Commission;          in this

case, the SEC merely seeks production of documents.

        In     sum,    Deloitte         has     failed     to    show     any    "hardship     or

inequity,"        Landis,         299    U.S.       at   255,        it   will    suffer     from

simultaneous          litigation        of    the    Administrative         Proceeding       with

this case.

        B.      Balance of Interests

        Not only has Deloitte failed to establish that requiring it

to   litigate         this   case       while    the Administrative              Proceeding    is

pending will subject it to                    ~hardship      or inequity,"         the balance

of the interests as a whole do not support extending the stay.

        The SEC made clear at oral argument that the Administrative

Proceeding did not concern and could not result in production of

those        documents       it   deems       necessary         to    conduct     the     Longtop

investigation in this case. Mot. Hr'g Tr. 25-26. The SEC insists

that those documents and this investigation are important to its

~central        mission,"         which         involves        investigating           potential

violations of the securities laws and protection of the public.

                                                 -7-
Id.   23-25;        see also Gabelli v.            S.E.C.,          133 S.    Ct.       1216,   1222

(2013)     (noting that "a central mission of the Commission is to

investigate          potential       violations          of    the        federal       securities

laws")    (citations and internal quotations omitted).

      The SEC is attempting to investigate whether Longtop or any

other entity associated with it committed fraud on the American

investing public.             Mot.   Hr'g Tr.       24-25.      Moreover,          if fraud was

committed, the SEC argues that it will also attempt to ascertain

the scope of that fraud, how it was committed, who was involved,

and   how      it      went     undetected         for    so        long.    Id.        These    are

undoubtedly important questions to the SEC and to the American

investors who may have been defrauded.

      It has been more than twenty-two months since the SEC first

sought     these       documents     from    Deloitte.          Obviously,          a    thorough,

comprehensive          investigation only gets more difficult with the

passage     of      time.     "If    the    SEC     suspects          that    a     company      has

violated     the       securities      laws,        it    must       be     able    to     respond

quickly;       it     must     be    able     to     obtain          relevant           information

concerning       the    alleged violation            and       to    seek prompt           judicial

redress if necessary."                SEC v.       Dresser Indus.,            Inc.,       628 F.2d

1368, 1377       (D.C. Cir. 1980)           (en bane).          In short, the SEC has a

responsibility to complete this investigation and pursue these

documents in a timely fashion in the venue available to it.

                                             -8-
       The SEC's interest in obtaining these documents in a timely

fashion would be hindered if the stay was granted, particularly

because even the modified stay requested by Deloitte would, as a

practical matter,           be indefinite and could easily extend for a

significant period of time. See Belize Soc., 668 F.2d at 731-32.

Although the Commission ordered the ALJ to produce an Initial

Decision       in     approximately          late        September,           litigation           of

Deloitte's challenge to the method of service will likely delay

that   decision.       If    Deloitte    prevailed,            the     SEC    would    then        be

required to proceed under the Hague Convention, which would add

at least another six months to the 300 days already allotted the

ALJ to issue his Initial Decision.                        Thus,      for all intents and

purposes,     Deloitte' s      request       is    for    an    indefinite          stay- -which

must not "override[] the injury to the party being stayed."                                      Id.

       Such    a    request     for     an    indefinite          stay       must     not        only

demonstrate "hardship or inequity," Landis, 299 U.S. at 255, but

also be      justified by a          "pressing need."            Id.;      Belize Soc.,           668

F.3d at 731-32. Deloitte has not met that standard. There is no

significant         burden    placed     on       Deloitte        by       requiring        it     to

litigate      these    two    very    different          proceedings         simultaneously.

There is no overlap of issues that would justify staying this

case   for    "judicial       efficiency."         And     the       SEC     has    effectively

demonstrated that this case is the only way it can obtain the

                                             -9-
documents it needs to conduct the Longtop investigation.      Thus,

after "weigh[ing] competing interests," Landis, 299 U.S. at 254-

55,   the Court concludes that Deloitte has not established that

it is entitled to a further stay of proceedings in this action.

      C.   Conclusion

      For the foregoing reasons,   the Court adopts the Magistrate

Judge's conclusion to grant the SEC's Motion to Lift the Stay

and deny Deloitte's Motion to Extend the Stay.       An Order shall

accompany this Memorandum Opinion.

                                       /s/
April 22, 2013                        Gladys Kessl 1
                                      United States District Judge

Copies to: attorneys on record via ECF

                               -10-