A federal trial judge in Washington today refused to put the brakes on the effort by U.S. securities regulators to squeeze audit documents from a Deloitte unit in China.
U.S. District Judge Gladys Kessler adopted the recommendation of a magistrate judge who'd determined the subpoena enforcement proceeding, which tests the scope of the power of the U.S. Securities and Exchange Commission to grab documents abroad, should no longer be subject to a stay order.
"It has been more than twenty-two months since the SEC first sought these documents from Deloitte," Kessler said in her ruling. "Obviously, a thorough, comprehensive investigation only gets more difficult with the passage of time."
Lawyers for Deloitte Touche Tohmatsu CPA Ltd., represented by teams from Sidley Austin and Latham & Watkins, fought to keep the case on ice as the securities agency’s lawyers negotiated with counterparts in China to try to obtain the documents.
Deloitte's attorneys, including Latham partner Miles Ruthberg in New York and Sidley partner Michael Warden in Washington, said the subpoena enforcement action in Washington should be put on hold pending the resolution of a parallel administrative action that's unfolding at the securities commission.
The SEC, which had earlier asked for the stay, didn’t want to wait any longer. In December, citing its inability to get documents from Chinese officials, the SEC filed court papers seeking to get the enforcement proceeding moving again. The SEC wants the documents as part of a separate investigation into whether Longtop Financial Technology Ltd.—Deloitte performed auditing work for the company—bilked investors.
"The SEC has a responsibility to complete this investigation and pursue these documents in a timely fashion in the venue available to it," Kessler said.
Kessler today looked at the two proceedings to determine whether any overlap was enough to cause "hardship or inequity" for Deloitte.
The SEC in the administrative proceeding is seeking an order that would bar Deloitte and four other auditing companies "the privilege of appearing or practicing" at the commission, Kessler said. That remedy, she said, "differs greatly" from what's being sought in the subpoena spat—the production of documents.
In the administrative case, regulators contend the auditing companies, which also include BDO China Dahua CPA Co. and Ernst & Young Hua Ming LLP, have refused to disclose audit work papers and other documents tied to Chinese companies the commission is investigating. The auditing companies argue the disclosure of the information would mark a criminal violation of Chinese law.
Deloitte, Kessler said today, failed to convince her that the auditing the company "will suffer from simultaneous litigation of the Administrative Proceeding with this case."
"Although both proceedings obviously concern document requests to foreign-based auditing firms and the scope of the SEC's authority to order such requests, it is significant that they involve different statutes, with different legal standards, and seek entirely different results," Kessler said.
Ruthberg and Warden were not immediately reached for comment this afternoon. Kessler today told the SEC to file papers, by May 1, in support of the enforcement of the subpoena.