Supreme Court weighs validity of anti-fraud law

AP News
Posted: Dec 07, 2009 2:00 PM

The Supreme Court cast doubt Monday on the validity of part of the anti-fraud law enacted in response to Enron and other corporate scandals early this decade.

The court heard arguments in a case over the composition of the board that was created to tighten oversight of internal controls and outside auditors following accounting scandals at Enron Corp., WorldCom Inc., Tyco International Ltd. and other corporations.

A small Nevada accounting firm and an anti-tax group brought the challenge to the 2002 Sarbanes-Oxley law, arguing that the board created by the law violates the Constitution's separation of powers mandate because the president cannot appoint or remove its members.

The board wields too much, unchecked power, Michael Carvin, the challengers' lawyer told the court.

The Securities and Exchange Commission, an independent federal agency, appoints the chairman and four directors of the Public Company Accounting Oversight Board. The accounting board is funded by fees on publicly traded companies according to their size.

Congress created the board to replace the accounting industry's own regulators amid the business scandals, giving it power to compel documents and testimony from accounting firms, and the authority to discipline accountants.

In addition to the oversight board, the 2002 law required greater financial disclosures and increased the criminal penalties for securities fraud. Parts of the law unrelated to the accounting oversight board are not threatened in this case.

Business interests, especially smaller public companies, have complained about the costs of complying with the requirement to file reports on the strength of their internal financial controls and fix any problems.

A House bill would free smaller publicly traded companies from the board's oversight. Some advocates for declaring the board unconstitutional believe it would be easier to make other changes in the Sarbanes-Oxley law if Congress, responding to a court decision, has to change how board members are appointed and may be removed.

The Obama administration and the board argued that it is constitutional because the president has ample authority to control what the board does, through the SEC.

Justice Anthony Kennedy, whose vote could be pivotal in this case, questioned whether the board is under SEC or presidential control. "The history and tradition of boards like this is that their investigative powers are independent," Kennedy said.

The five board members each earn more than $500,000 a year, a salary intended to attract top-flight talent.

But suppose, Justice Samuel Alito asked, the president objected to those salaries. "Suppose the President reads about this and he says, 'This is outrageous. I want to change it.' How can he do that?" Alito said, suggesting that the president would be powerless to do anything about it.

Jeffrey Lamken, the lawyer for the accounting oversight board, said the SEC has substantial power over the board. The SEC "can take away their salary as well, which is so close to being fired that I can't see any light between them, frankly, Your Honor," Lamken said.

A decision is expected by spring.

The case is Free Enterprise Fund v. Public Company Accounting Oversight Board, 08-861.