[author: David Smyth]
One of my favorite things as a legal researcher is when a court does my work for me. It doesn’t happen often, but sometimes a court takes a complicated subject and outlines the law with sufficient supporting authority to give comfort that by studying the opinion, readers have gotten a good start on understanding that law. The SEC essentially did that last month in a contested administrative proceeding concerning SEC Rule of Practice 102(e).
That rule gives the SEC a mechanism to prohibit professionals – including accountants and lawyers – from practicing before the Commission if they have done one of a fairly large number of basically bad things. The scope of potential acts is fairly wide, but includes federal securities law violations, as well as “unethical or improper conduct.” Even to be “lacking in character or integrity” can be enough to be temporarily or permanently barred from practicing before the Commission.
The SEC permanently suspended Michael C. Pattison, a CPA, in 2011 after a jury in the Northern District of California had found him liable for backdating stock options at Embarcadero Technologies from 2000 to 2005. Specifically, the court entered a judgment enjoining Pattison from violating Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1. The SEC then used that finding of liability as a springboard for its administrative proceeding. It sought Pattison’s suspension under Rule 102(e)(3), while allows the Commission to seek suspension when the defendant has been enjoined by a court of competent jurisdiction from violating the federal securities laws.
Pattison challenged the suspension, saying the SEC should have brought the proceeding under Rule 102(e)(1), which permits it to discipline an accountant for “improper professional conduct.” The SEC disagreed, saying suspending a respondent based on a separate injunction would not create a “chance of administrative sanctions with no standard.” The SEC went on:
To the contrary, the Rule has a structured, precise standard: Once the respondent has requested a hearing, the Division must establish that the respondent has been “permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the federal securities laws or of the rules and regulations thereunder” as the basis for the proceeding. Rule 102(e)(3) thus reflects our determination that a finding by a court of competent jurisdiction that a respondent has violated securities laws, or that an injunction against future violations is warranted, is a sufficient standard of unfitness for practice before the Commission that we “will afford a hearing only to consider mitigating or other factors why neither censure nor temporary or permanent disqualification should be imposed.”
The administrative opinion gives a substantial history of Rule 102(e) with bounteous footnotes and is a good starting place for anyone hoping to learn about the rule’s proper function. I recommend it.
