In subpoena spat with Deloitte, no easy day for SEC lawyers

, The National Law Journal

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For more than an hour, because of a delayed start of a hearing, the lawyers tied up in a subpoena fight between securities regulators and the Chinese unit of the auditing company Deloitte milled about in a hallway in a downtown Washington courthouse.

The legal teams from the U.S. Securities and Exchange Commission and Deloitte Touche Tohmatsu CPA Ltd.'s counsel at Latham & Watkins and Sidley Austin had the opportunity on March 13 to use a room in the building to try to work out a deal that would void having a judge decide the matter. The opposing lawyers declined the invitation.

Instead, the attorneys faced off in Washington federal district court—for three hours—over whether the SEC should be allowed to squeeze audit work papers from Deloitte, in China, after having served the company's U.S. counsel with a subpoena in Washington in May 2011. One thing was clear: U.S. Magistrate Judge Deborah Robinson will be no rubber stamp for the government in a case that tests the scope of the subpoena power of the SEC.

Robinson pressed SEC lawyer David Mendel, assistant chief litigation counsel, for the authority the commission believes gives it the power to acquire documents, located in a foreign country, through a subpoena served in the United States.

Mendel didn't always have immediate answers for the judge, forcing the SEC's team, which included Matthew Solomon and Lisa Weinstein Deitch, to scramble during the hearing to try to satisfy the judge. (Solomon, a longtime former federal prosecutor, was named in April 2012 deputy chief litigation counsel at the SEC.)

The SEC administrative subpoena, served on Gibson, Dunn & Crutcher partner Douglas Cox, was validly issued and validly served, Mendel argued, giving the SEC access to audit papers anywhere in the world—in this case, in China. "It matters not at all that the documents are abroad in a foreign country," Mendel said.

Robinson wanted to know which federal criminal rule of civil procedure supports the SEC in the case. Mendel didn't have an answer. The judge, rather than forge ahead, gave the SEC team time to confer and to dig through legal books.

The authority, Mendel told the judge, is governed by regulation, not the federal rules of procedure. When Robinson asked for any statutory power in U.S. code, the SEC lawyers again huddled up—the second break in the proceedings to allow the government to provide the judge an answer to a question. When the hearing resumed, Mendel pointed to a section of the Securities Exchange Act that gives certain powers to the commission to make rules and regulations.

At that point, Mendel argued the substance of the SEC's position—that the government needs audit papers from Deloitte's unit in China to determine facts amid a "potentially massive" fraud investigation involving the securities of a company called Longtop Financial Technologies—a one-time client of Deloitte.

In November 2011, the SEC initiated an administrative proceeding that charged Longtop with failing to file current and accurate financial reports with the commission. An SEC official said then in a statement that "we are taking this action to protect investors because it appears there is no current and reliable information available to the investing public about Longtop."

Recently, the SEC tried for months to convince counterparts in China to turn over Deloitte's audit papers, but to no avail, Mendel said in court. The U.S. interest in the enforcement of securities laws, Mendel argued, outweighs China's interest in government secrecy.

Deloitte's lawyers, including Latham partner Miles Ruthberg, chair of the firm's litigation practice, and Sidley accounting partner Michael Warden, said in court papers in the dispute that disclosure of the information the SEC is demanding will violate Chinese law and expose Deloitte to potential criminal sanctions in that country.

Ruthberg stressed that argument in court Wednesday, telling the judge that "this is not speculation." The publication of state secrets in China, Ruthberg said, is punishable by jail time.

Ruthberg portrayed Deloitte as a witness in the case—the corporate entity that exposed, to U.S. securities officials, potential wrongdoing at Longtop. He also attacked the SEC's claim that the subpoena was validly issued and served, saying that U.S. counsel believed the subpoena was issued under a provision of the Sarbanes Oxley that addresses foreign public accounting firms. The acceptance of the subpoena, Ruthberg said, was based on a misunderstanding.

There's no case, Ruthberg argued, that allows the SEC to use the service of a subpoena on a U.S. lawyer to grab documents in a foreign country. The SEC, he said, wants Robinson "to rush into a ruling" as if the dispute were a routine subpoena enforcement matter. A ruling in favor of the SEC, Ruthberg said, "would turn our adversarial process on its head."

In December, the SEC brought an administrative proceeding against all the major China audit firms, including Deloitte's unit in that country. The administrative case, Deloitte's lawyers said, presents the same core issues that are in dispute in the fight over the subpoena.

"Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud," Robert Khuzami, then the director of the SEC's enforcement division, said in a statement last year. "Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."

Robinson didn't immediately rule on whether she will force Deloitte to comply wit h the subpoena. She took the dispute under advisement.

Contact Mike Scarcella at mscarcella@alm.com.

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