David J. CHECKOSKY and Norman A. Aldrich, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
No. 97-1137.
United States Court of Appeals, District of Columbia Circuit.
Decided March 27, 1998.
Argued Feb. 18, 1998.
139 F.3d 221
Moreover, even if the SSA does again deny a permit to the NTEU, it will presumably do so in a manner consistent with the FLRA‘s new interpretation of the Act. Any such denial would therefore have to depend upon a rationale different from the SSA‘s reason for denying the NTEU‘s permit in 1991. To decide now whether a hypothetical future permit denial by the SSA would violate the first amendment would be to risk giving an advisory opinion in an area where the court should be particularly keen to avoid any unnecessary ruling. See Clinton v. Jones, — U.S. —, n. 11, 117 S.Ct. 1636, 1642.n. 11, 137 L.Ed.2d 945 (1997) (“It has long been the Court‘s considered practice not to decide abstract, hypothetical or contingent questions ... or to decide any constitutional question in advance of the necessity for its decision....“).
In sum, the constitutional issue arising from the permit denials of 1991 may be moot as a practical matter. See Belton v. Washington Metropolitan Area Transit Authority, 20 F.3d 1197, 1203 (1994) (decision to require retrial based upon one issue makes other issue “moot as a practical matter although not in the strict sense“). The issue of mootness was not briefed by the parties, however, and the record before us is stale inasmuch as the FLRA has redefined, and may yet further redefine, the obligations of the SSA under the FSLMRA. We therefore remand this case for the district court to determine in the first instance, upon the basis of an updated record if that seems advisable, whether there is a live constitutional case or controversy between the parties.
IV. Conclusion
In No. 97-1204 the FLRA permissibly concluded that the SSA‘s denial of a permit to the NTEU did not “assist” the AFGE in violation of
So ordered.
Richard M. Humes, Associate General Counsel, Securities & Exchange Commission, argued the cause for respondent. With him on the brief were Richard H. Walker, General Counsel, Susan A. Yashar, Assistant General Counsel, and Paul Gonson, Solicitor, Washington, DC. Susan F. Wyderko, Counsel, entered an appearance.
Before: EDWARDS, Chief Judge, WILLIAMS and HENDERSON, Circuit Judges.
Opinion for the Court filed by Circuit Judge WILLLIAMS.
Concurring opinion filed by Circuit Judge HENDERSON.
WILLIAMS, Circuit Judge:
Six years ago the Securities and Exchange Commission found that two accountants had engaged in “improper professional conduct” in violation of the Commission‘s Rule 2(e)(1)(ii),
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Because the facts are recounted at length in the separate opinions of Judges Silberman and Randolph in Checkosky I, we supply only a brief summary. In the first half of the 1980s petitioners David Checkosky and Norman Aldrich, accountants at Coopers & Lybrand, performed a series of audits on behalf of Savin Corporation, a publicly traded company in the photocopier marketing business. During the years for which the audits were performed, Savin was trying (ultimately without success) to branch out into manufacturing by developing its own photocopier. Under generally accepted accounting principles (“GAAP“), costs of research and development must be expensed immediately rather than deferred. See Accounting For Research and Development Costs, Statement of Financial Accounting Standards No. 2, ¶ 12 (Fin. Accounting Standards Bd. 1974). But once R&D is complete, a company may defer so-called “start-up” costs, see id. at ¶ 10, treating them as a capital item, pre-
The Commission initiated disciplinary proceedings against Checkosky and Aldrich in 1987, charging that the two accountants had engaged in “improper professional conduct” in violation of Rule 2(e)(1)(ii).1 An administrative law judge suspended them for five years from “practicing before the Commission,” a broad term that encompasses preparation of any document for filing with the Commission.2 In 1992 the Commission affirmed the ALJ‘s finding that Checkosky and Aldrich had failed to observe GAAS and had improperly represented that Savin‘s financial statements complied with GAAP. In re David J. Checkosky & Norman A. Aldrich, 50 S.E.C. 1180 (1992). The Commission stated that “a mental awareness greater than negligence is not required” to state a violation of Rule 2(e)(1)(ii), but “note[d],” as if in passing, that Checkosky and Aldrich‘s conduct “did in fact rise to the level of recklessness.” Id. at 1197. The Commission thus affirmed the ALJ‘s finding that Checkosky and Aldrich violated Rule 2(e)(1)(ii). It reduced their suspension, however, from five years to two. Petitioners petitioned for review in this court on several grounds and we remanded to the Commission, holding that it had failed to adequately explain its interpretation and application of Rule 2(e)(1)(ii). Checkosky I, 23 F.3d at 454.
On January 21, 1997 the Commission issued an opinion on remand affirming the suspensions. In re David J. Checkosky & Norman A. Aldrich, 7 Fed.Sec.L.Rep. (CCH) ¶ 74,386, at 63,421 (Jan. 21, 1997) (“1997 Op.“). Checkosky and Aldrich again petitioned for review in this court, again claiming (among many other things) that the Commission had failed to articulate an intelligible standard for “improper professional conduct” under Rule 2(e)(1)(ii). Because we agree with this claim, we do not address the others.
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In something of a tour de force, the Commission‘s 1997 opinion manages to both embrace and reject standards of (1) recklessness, (2) negligence and (3) strict liability—or so a careful (and intrepid) reader could find. It first appears to rely on a theory of recklessness. After a relatively brief survey of the facts, the opinion says: “We previously found that [Checkosky and Aldrich] engaged in improper professional conduct and that their conduct was reckless. We begin by explaining our reasons for this conclusion and why we continue to find their conduct reckless.” 1997 Op. at 63,426.3 But after
On review the Commission adhered to the second of these positions, disavowing any suggestion that recklessness is necessary for a violation of Rule 2(e)(1)(ii). At oral argument it likewise disclaimed reliance on recklessness as a standard for the substantive violation, see Transcript at 26-27, and hewed to the line adopted in its brief, treating recklessness as relevant only to the choice of sanction: “Only after concluding that petitioners had engaged in improper professional conduct did the Commission consider petitioners’ mental state to determine whether to impose a sanction.” Brief for Respondent at 49. Thus, although in fact the 1997 opinion began with a consideration of petitioners’ mental state, the Commission‘s present position confirms that recklessness was not an element of its substantive charge.
With recklessness out of the picture, negligence would seem to be the most obvious remaining candidate. But the 1997 opinion failed to adopt an intelligible negligence standard. Instead, as we have already noted, it said only, “We believe that Rule 2(e)(1)(ii) does not mandate a particular mental state and that negligent actions by a professional may, under certain circumstances, constitute improper professional conduct.” 1997 Op. at 63,430 (emphasis added). Elementary administrative law norms of fair notice and reasoned decisionmaking demand that the Commission define those circumstances with some degree of specificity. It has not done so.
The only further definition the Commission offered was its observation that negligent deviations from GAAS or GAAP will be held to violate Rule 2(e)(1)(ii) when they threaten the integrity of the Commission‘s processes. See, e.g., 1997 Op. at 63,429 (“Our conclusions about the propriety of particular professional conduct are driven by the impact on Commission processes of the specific facts presented in a given proceeding before us.“). This is fine as an identification of one of the main underlying purposes of Rule 2(e),4 but not as a standard for determining violations of the rule in disciplinary proceedings. Accountants and attorneys practicing in the securities field will draw little comfort from the knowledge that their missteps will escape sanction as long as they do not “threaten the integrity of the Commission‘s processes.” It is simply impossible to know in advance what sorts of negligent errors will meet this “standard“; we can imagine both narrow and potentially all-embracing constructions.
Finally, the Commission‘s opinion leaves open the possibility that a “standard” revolving around perceived danger to future processes might not even require a showing of negligence:
We wish to make clear, however, that the fact that GAAP and GAAS are professional standards against which we examine the conduct of accountants does not mean that every deviation from GAAP or GAAS is improper professional conduct warranting discipline under Rule 2(e)(1)(ii). Our processes are not necessarily threatened by innocent or even certain careless mistakes. At times, we have found improper professional conduct by accountants who engage in several deviations of [sic] GAAS or GAAP, or who deviated from GAAS or GAAP in more than one audit, or with more than one client. However, isolated failures may be so serious as to warrant discipline.
Not only does the opinion on remand provide no clear mental state standard to govern Rule 2(e)(1)(ii), it seems at times almost deliberately obscurantist on the question. For example, it observes unhelpfully that “[i]mproper professional conduct by accountants encompasses a range of conduct.” Id. at 63,429. Later the Commission cites several cases in which it has imposed sanctions for improper professional conduct, concluding with the following summary: “While the acts in each case demonstrated varying degrees of care or mental state, we concluded in each that the accountant had improperly certified that financial statements complied with the applicable auditing requirements and that the resulting financial statements could not be relied upon.” Id. at 63,430. However legitimate and, indeed, essential the Commission‘s concern about unreliable financial statements may be, it is no substitute for a clearly delineated standard. Instead, the Commission‘s statements come close to a self-proclaimed license to charge and prove improper professional conduct whenever it pleases, constrained only by its own discretion (combined, perhaps, with the standards of GAAS and GAAP).
In summary, the Commission‘s opinion yields no clear and coherent standard for violations of Rule 2(e)(1)(ii). Although we owe “substantial deference to an agency‘s interpretation of its own regulations,” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512; 114 S.Ct. 2381, 2386, 129 L.Ed.2d 405 (1994), we cannot defer to an agency when “we are at a loss to know what kind of standard it is applying or how it is applying that standard to this record.” United Food and Commercial Workers International Union v. NLRB, 880 F.2d 1422, 1435-36 (D.C. Cir. 1989).
Of course the agency was in a bind. On the one hand, reliance on negligence had its perils. Judge Silberman had noted in Checkosky I that adoption of a negligence standard might be ultra vires; given that much of the substantive law enforced by the Commission requires a showing of scienter, use of a negligence standard to penalize professionals might be viewed as a back-door expansion of its regulatory oversight powers. See Checkosky I, 23 F.3d at 459 (Silberman, J.).6 On the other hand a recklessness standard brought its own risks: there might not be substantial evidence to support a finding of reckless conduct.7 Nevertheless the Commission had to make a choice. There is no justification for the government depriving citizens of the opportunity to practice their
When an agency utterly fails to provide a standard for its decision, it runs afoul of more than one provision of the Administrative Procedure Act. As Judge Silberman noted in the first appearance of this case before us, we have held on occasion that an “agency‘s failure to state its reasoning or to adopt an intelligible decisional standard is so glaring that we can declare with confidence that the agency action was arbitrary and capricious.” Checkosky I, 23 F.3d at 463 (Silberman, J.). In addition, an agency violates the APA when it fails to include in its adjudicatory decision a meaningful “statement of findings and conclusions, and the reasons or basis therefor, on all the material issues of fact, law, or discretion presented on the record.”
There remains the question of remedy. In Greyhound Corp. v. ICC, 668 F.2d 1354 (D.C. Cir. 1981), we found for the second time that the Interstate Commerce Commission had failed to adequately justify its decision to maintain securities jurisdiction over the Greyhound holding company in light of ICC precedents that seemed to preclude such a ruling. In the second go-round, we noted that eight years had passed since Greyhound first requested relief from the agency. “The Commission,” we concluded, “has had ample time and opportunity to provide a reasoned explanation of the decision to continue the exercise of its securities jurisdiction. We find no useful purpose to be served by allowing the Commission another shot at the target.” Id. at 1364.
It is true, as then-Judge Thomas pointed out in a concurring opinion in 1991, that application of the Greyhound remedy ought to be “reserved for truly extraordinary situations,” since “legitimate concerns about judicial overreaching always militate in favor of affording the agency just one more chance to explain its decision.” Tennessee Gas Pipeline Co. v. FERC, 926 F.2d 1206, 1214 (D.C. Cir. 1991) (Thomas, J., concurring). Our use of the device has indeed been maximally sparing—Judge Thomas could not find a case in which we had applied it in the decade between Greyhound and Tennessee Gas Pipeline, and we have not found an example from the seven years since that decision. The case has, however, been followed in the Third Circuit. In Marshall v. Lansing, 839 F.2d 933 (3d Cir. 1988), that court upheld a district court order requiring the Parole Commission to recategorize a prisoner‘s offense as involving less than a kilogram of cocaine, after the Commission on remand had failed to offer an acceptable basis for its contrary finding: “When a court has already remanded a case to an administrative agency for failure to explain adequately its decision, and the agency, on remand, again fails to provide a reasoned basis for its conclusions, a reviewing court can set aside the agency‘s decision....” Id. at 945 (citing Greyhound).
This case presents the sort of extraordinary situation for which application of Greyhound is reserved. The disciplinary proceeding has dragged on for more than ten years. It is based on events that occurred as long ago as 1980. Our 1994 decision set the Commission a straightforward task: to “choose its standard and forthrightly apply it to this case.” Checkosky I, 23 F.3d at 462 (Silberman, J.). It has signally failed to do so.
Moreover, there are strong signs that the Commission is unlikely to settle on a uniform theory as to the necessary mental state for a violation of Rule 2(e)(1)(ii) anytime soon. In In re Robert D. Potts, 7 Fed.Sec.L.Rep. (CCH) ¶ 74,479, at 63,597 (Sept. 24, 1997), two Commissioners found that a concurring partner in an accounting firm had violated Rule 2(e)(1)(ii) by failing to comply with GAAS and representing that his client‘s financial statements accorded with GAAP. Id. at 63,604 & n. 40. Because these two Commissioners found the accountant‘s conduct reckless, they declined to address whether mere negligence can constitute improper professional conduct under Rule 2(e)(1)(ii). Id. at 63,605 n. 44. In his concur-
The case is remanded with instructions to dismiss the charge against petitioners.
So ordered.
KAREN LECRAFT HENDERSON, Circuit Judge, concurring:
I concur in the majority opinion but do not agree with the discussion on page 225 of the opinion incorporating dictum from Checkosky I that the Securities and Exchange Commission may lack the authority to ensure that the professionals who practice before it adhere to minimal levels of competence. I strongly believe that every regulatory body possesses—and must possess—authority to maintain the professional standards of its practitioners.