Test of “Sarbanes-Oxley”
on Sep 23, 2008 at 12:32 pm
A case that a federal judge described as “the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years” is bound, ultimately, for the Supreme Court. Lawyers involved in the case, after filing a request for rehearing en banc in the D.C. Circuit Court on Friday, said that, if that fails, they will appeal to the Justices.
 Even a ruling by the en banc Circuit Court seems unlikely to end the case without Supreme Court review, given the importance of what is at stake. The case also is deeply enmeshed in the ongoing controversy over limits on presidential power, and, especially, the President’s authority over independent federal agencies.
The case involves the constitutionality of a key part of a 2002 federal law — the Sarbanes-Oxley Act, named for its legislative authors — that was passed in the wake of the Enron and Worldcom accounting scandals. The aim of the law is to protect investors from such scandals in publicly traded companies in the future by regulating the firms that do their accounting The Act created a new entity, the Public Company Accounting Oversight Board (PCAOB) to do the regulating.
The five members of the Board — a private board that exercises government powers — are not appointed and cannot be removed by the President. They are named by the Securities and Exchange Commission, which has limited removal power.
In the case of Free Enterprise Fund, et al., v. PCAOB, the Fund — a private advocacy group promoting limited government — along with a Nevada accounting firm that is regulated by the Board — challenged the constitutionality of the new regulatory body. The D.C. Circuit, in a spolit decision on Aug. 22, upheld the Board’s makeup.
In a ruling authored by Circuit Judge Judith W. Rogers and joined by Circuit Judge Janice Rogers Brown, the Court rejected arguments that the structure of the Board violated separation-of-powers principles or the Constitution’s clause on federal appointments.
The “facial challenge” to the law, the majority said, “runs afoul of the Supreme Court’s instruction regarding the nature of the President’s constitutional relationship with independent administrative agencies. Supreme Court precedent as we have it does not support [the challengers’] singular focus on removal powers as the be-all and end-all of Executive authority, but rather compels a more nuanced approach that examines the myriad means of Executive control.”
It was the dissenter, Circuit Judge Brett M. Kavanaugh, who penned the comment noted above about the historic import of the case.
“Upholding the PCAOB here,” the judge wrote, “would green-light Congress to create a host of similar entities. Congress cold thereby splinter executive power to a degree not previously permitted, in serious tension with Article II’s conception of a single President who can control his subordinates and the exercise of executive power.”
In the rehearing petition filed Friday by Free Enterprise Fund and the accounting firm of Beckstead and Watts, their lawyers called the Circuit Court ruling “radical and far-reaching” on a “question of first impression.”
The petition went on: “In short, under the separation-of-powers analysis adopted by the [Circuit Court] panel, Congress could cripple the President’s ability to perform his constitutionally appointed functions by creating ‘a new “Fifth Branch” of the Federal Government.'”
The law’s constitutionality was defended in the Circuit Court by the Justice Department, which intervened in the case to do so. Judge Kavanaugh, however, suggested that its defense of the law “has been rather tentative.” The Justice Department generally regards it as a part of its assignment to defend the validity of laws passed by Congress. Thus, even if the Circuit Court grants en banc review and strikes down the Board’s structure, an appeal to the Supreme Court would be highly likely.
