SEC ALJ Sees the Relevant in the Room

October 20, 2016

Performing feats of magic and mind-reading on our main stage is the Securities and Exchange Commission's ("SEC's") Division of Enforcement. Having filed a case alleging that several respondents had failed to conduct audits in accordance with standards promulgated by the Public Company Accounting Oversight Board ("PCAOB"), Enforcement filed a motion to exclude certain anticipated testimony. Ah yes, that old bugaboo of possible, maybe, likely, perhaps, anticipated testimony. Having dusted off the SEC's ever-reliable crystal ball and peered into the future, Enforcement has also divined that the anticipated testimony will constitute nothing more than an improper defense. How nice that our federal regulator has the psychic ability to read minds and the power to alter the future!

Case in Point

In the Matter of David S. Hall, P.C. d/b/a The Hall Group CPAs, David S. Hall, CPA, Michelle L. Helterbran Cochran, CPA, And Susan A. Cisneros (Order Instituting Proceedings, '34 Act Rel. No. 77718; Acct and Audit. Enf. Rel No. 3771; Admin. Proc. File No. 3-17228 / April 26 2016), the SEC alleged, in pertinent part of its Order Instituting Proceedings ("OIP"):

The Hall Group, Hall, Helterbran, and Cisneros collectively failed to conduct at least 16 annual audits and 35 quarterly reviews in accordance with PCAOB standards in at least three ways: (1) they repeatedly failed to prepare adequate audit documentation in connection with audit and review engagements; (2) failed to conduct - or failed to obtain - an engagement quality review ("EQR") of audit and review engagements by a qualified reviewer; and (3) on at least four engagements, The Hall Group and Hall performed audit services while the firm's independence was impaired. As a result, The Hall Group falsely stated that it conducted its audits in accordance with PCAOB standards in at least 16 annual audit reports for eight issuers. Additionally, Hall, after becoming CFO of DynaResource, Inc., allowed Thakkar CPA to provide audit services to DynaResource, Inc. even though he knew he had a direct financial interest in and a business relationship with the company's external audit firm.

Page 3 of the OIP

Can You Read My Mind?

On October 11, 2016, Enforcement moved to exclude impermissible defenses and character evidence. In the Matter of David S. Hall, P.C. d/b/a The Hall Group CPAs, David S. Hall, CPA, Michelle L. Helterbran Cochran, CPA, And Susan A. Cisneros (Order on Division of Enforcement's Motions In Limine, Admin. Proc. Rulings Rel. No. 4255; Admin. Proc. File No. 3-17228 / October 14, 2016).  As set forth in pertinent part in the "Order":

The Division anticipates that Respondent Michelle L. Helterbran Cochran may present evidence that Respondent David S. Hall "was a demanding or domineering boss or that she only engaged in the conduct [alleged in the order instituting proceedings] to preserve her job to support her family" and that Respondent Susan A. Cisneros may seek to show that Hall "forced her hand." Div. Mot. at 2. According to the Division, this evidence should be excluded because "difficult personal or professional circumstances" do not excuse failure to comply with Public Company Accounting Oversight Board auditing standards. Id. The Division characterizes this anticipated evidence as supporting an "improper defense." Id.

As set forth above, Enforcement's Motion is premised, in part, upon that division's anticipation .  . . expectation, if you will . . . that Respondent Cochran and Respondent Cisneros may present a certain type of evidence of "difficult personal or professional circumstances." In characterizing the objections to such anticipated evidence, Enforcement characterizes the Respondents' goal a attempting to raise an "improper defense."

Talk about jumping the gun!

Enforcement has moved to exclude evidence that has not actually been presented but which the regulators anticipate may be offered.  I mean, gee, what the hell is the point of even having a hearing if those who filed the charges and prosecuted the case also get to decide what "anticipated" evidence should be excluded even before a respondent actually attempts such an introduction?

The Boss Man

Enforcement's evidentiary conjecture presents an interesting question as to whether it is improper for two women professionals to raise a defense that their alleged misconduct was prompted by, motivated by, instigated by (you insert your choice of predicate) "a demanding or domineering boss."  Enforcement disapprovingly suggests that the women might argue that their alleged misconduct was somehow excusable because they acted out of a desire to "preserve her job to support her family." In arguing its case for exclusion of such anticipated evidence, Enforcement takes the position that even if those anticipated defenses are raised, the existence of "difficult personal or professional circumstances" do not constitute a proper defense. In Enforcement's view, "the Devil made me do it," is not a viable defense.

The Relevant In the Room

In addressing the Motion, Administrative Law Judge ("ALJ") Cameron Elliot viewed the challenged evidence as raising an issue of "relevance." Applying a broad standard to his interpretation of relevance, the ALJ found no reason to exclude this anticipated evidence:

If, as the Division argues, evidence of personal hardship or job pressure is not relevant to Helterbran's or Cisneros's liability, that type of evidence may still demonstrate mitigating circumstances and be relevant to their level of personal culpability and to what, if any, sanction is appropriate . . .

. . .

[E[vidence of Hall's character, with the possible exception of his character for truthfulness if he testifies, is inadmissible. I will defer ruling on this motion because I would like to hear more from Helterbran and Cisneros about what testimony, if any, they intend to elicit from Hall and how that testimony relates to their defenses. I will address this motion orally at the beginning of the hearing.

ALJ Elliot denied the motion to exclude impermissible defenses and deferred his ruling of the motion to exclude character evidence. Apparently, the ALJ saw the relevant in the room.

Bill Singer's Comment

No need to read too much into this minor pre-hearing skirmish: It's part of the normal jockeying for early position that goes in with virtually all litigation. On the other hand, it is refreshing to see that ALJ Elliot remains a consistent skeptic, who is unwilling to bite down upon the enticing bait and who tries to run his proceedings in a fair manner. So much for crystal balls and mind reading.