October 8, Chair Mary Jo White Securities and Exchange Commission 101 F Street, NE Washington, DC Dear Chair White,

Transcription

1 October 8, 2015 Chair Mary Jo White Securities and Exchange Commission 101 F Street, NE Washington, DC Dear Chair White, As the Securities and Exchange Commission considers its responsibilities to name members of the Public Company Accounting Oversight Board, we the undersigned ask that you recuse yourself given the existence of, or appearance of, a conflict of interest between your official duties and the employment of your husband, John White. In brief, the majority of your household income derives from Mr. White s work as an attorney at Cravath, Swaine & Moore, LLP. At this firm, Mr. White s income derives, in part, from his relations with the PCAOB, where he is a member of the Standing Advisory Group (SAG). Since that membership turns on the pleasure of PCAOB members that you help appoint, your decisions as a government official affect your family income. Furthermore, because this matter can be plainly seen to have a direct and predictable effect on [your] spouse's compensation or employment, we request that you share with the public all ethical guidance that you have received since you have been nominated to be Chair of the SEC. As you know, the PCAOB was created by Congress in the aftermath of the widespread accounting-related misconduct involving Enron, World Com, and numerous other firms. Congress charged the PCAOB to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. 1 The financial crash of 2008 reinforced the need for better audit oversight, as firms such as Washington Mutual, then the largest savings-and-loan in the nation, failed only weeks after winning a clean audit ; Additionally, on July 21, 2010: Dodd- Frank Wall Street Reform and Consumer Protection Act is signed, expanding the PCAOB's oversight of the audits of brokers and dealers to include inspections, enforcement and standard setting authority 2 See Washington Mutual, annual report, with audit certification by Deloitte, (2008), available at: k.htm

2 This critical mission must be free of conflicts of interest and regulatory capture to successfully protect American interests. However, media reports indicate you may be considering a turn away from some of the reform initiatives undertaken by current Chair James Doty, such as efforts to require auditors to disclose more information to investors. This effort has generated pushback from the accounting industry and, sometimes, questioning from SEC officials about the audit panel s approach, according to news reports. 3 Generally, some have questioned whether your tenure at the SEC is compromised by your previous work as a white collar corporate attorney. 4 The controversy over whether or not to retain Doty underscores several aspects of that concern. Specifically, you seem to be responsive to the concerns of some of the big accounting firms, which Bloomberg has reported are clashing with Doty over his highlighting of the high rate of deficiencies found by PCAOB inspectors who comb through company audits. 5 While potentially troubling from the perspective of policy, the PCAOB selection process and your ability to make impartial decisions about who best should serve on the board cannot be viewed apart from the status of your husband and the decision s impact on your own household income. Your husband, John White, is a non-equity partner with the law firm of Cravath, Swaine & Moore, LLP. Cravath is a private firm that does not publish the income of its partners, but industry publications estimate that its annual partner income may be in excess of $3 million. 6 As a non-equity partner, Mr. White receives a fixed salary and an annual performance bonus, according to your ethics statement. 7 The salary of the SEC Chair is $165,000. While Mr. White s precise income is unknown to the public, it is safe to assume that it represents the large majority of your household income. The evidence that the PCAOB SAG spot is valuable to John White and Cravath is considerable; indeed, support for that conclusion can be found across the website of Cravath, where the law firm repeatedly uses White s PCAOB role in its marketing materials. 3 looking- at- outside- candidates- to- lead- audit- regulator- pcaob /sec- chair- s- conflicts- fuel- sympathy- for- wall- street- group- says /the- jockeying- has- begun- to- fill- a- high- paid- job- in- washington 6 See for example: Swaine- Moore/all- offices/compensation.php 7 PSa6u_HAhWLpB4KHUdEDxo&url=http%3A%2F%2Fwww.oge.gov%2FWorkArea%2FDownloadAsset.aspx%3Fid= &usg=AFQjCNEVxEJfcWWr0lDoorPQTcLb5AJIgw&sig2=Ljc_ozPsiVixaQuAcVQpww

3 For instance, until Bloomberg published a piece on September 16 th containing criticism of this arrangement, Cravath s website marketed its Accounting Fraud practice by proudly noting that they have represented a variety of companies and accounting firms in investigations and litigation involving these types of issues before the DOJ, SEC, and other government agencies, as well the PCAOB and state boards of accountancy. Our team includes attorneys with formal accounting backgrounds as well as a current member of FASB s Financial Standard s Advisory Counsel and PCAOB s Standing Advisory Group. 8 (emphasis added; the same italicized language also appeared on the International version of their Investigations and White Collar Criminal Defense web page). 9 The specific boast about Cravath s team including a member of the PCAOB s Standing Advisory Group was deleted from the page shortly after the Bloomberg piece was published, as discussed by MarketWatch. 10 Other materials on the Cravath website indicate that on May 16 th, 2013, White was the keynote speaker at the Northeast Audit Committee Network meeting, presented by Tapestry Networks and held in New York City. John provided a regulatory update covering recent SEC, PCAOB, and FASB developments. 11 The Cravath website provides multiple examples of White discussing the PCAOB, 12 including the heightened focus by regulators on audit committees and new initiatives by the Public Company Accounting Oversight Board (PCAOB). 13 At a seminar presented by PricewaterhouseCoopers LLP in December of 2013, White was a panelist in a discussion of the current SEC environment and key priorities of the SEC, FASB and PCAOB, including Dodd-Frank rulemaking and enforcement. 14 The seminar host, PricewaterhouseCoopers LLP, is potentially one 8 and- white- collar- criminal- defense/ is how the Cravath website read re PCAOB from spring 2015 until Bloomberg published a piece calling Cravath s marketing materials into question; the altered version resides here: and- white- collar- criminal- defense/ 9 and- white- collar- criminal- defense/ is how the Cravath website read re PCAOB from spring 2015 until Bloomberg published a piece calling Cravath s marketing materials into question; the altered version resides here: and- white- collar- criminal- defense/ 10 firm- removes- references- to- sec- chiefs- husbands- ties- to- audit- regulator White- Speaks- to- Audit- Committee- Chairs / 12 White- Chairs- Panel- at- 34th- Annual- Corporate- and- Securities- Law- Institute / 13 White- Speaks- at- PLIs- 12th- Annual- Directors- Institute- on- Corporate- Governance / 14 White- Speaks- at- PwC- Seminar /

4 of the auditing firms particularly upset with Doty, and according to MarketWatch s Francine McKenna, John White s firm is go-to defender for sued audit firms, esp[ecially] PwC. 15 Furthermore, a series of Cravath marketing materials discuss the PCAOB, including over the summer: On July 20, 2015, Cravath prepared for its clients a memo entitled Recent SEC and PCAOB Guidance Affecting Foreign Private Issuers. The memo summarizes proposals and releases issued by the U.S. Securities and Exchange Commission and the U.S. Public Company Accounting Oversight Board that, once implemented, could significantly affect U.S. listed companies, including foreign private issuers. 16 The lead name on the SEC/PCAOB explainer for Cravath was John White. 17 The SAG is governed by Rule 3700 of the PCAOB. This rule provides that the PCAOB will convene this group to assist it in carrying out its responsibility to establish auditing and related professional practice standards. 18 Such advice is central to decisions ultimately rendered by the PCAOB. Such decisions weigh directly on the pecuniary interest of the audit industry. While this rule does not empower the advisory group members with authority to determine ultimate PCAOB decisions, the Administrative Procedures Act provides a basis for plaintiffs to block rules that fail to address advisory committee input. Whatever the limits of his statutory powers may be at the PCAOB, it cannot go unnoticed by any PCAOB board member with whom Mr. White interacts that he will return at the end of the day to a home that he shares with the SEC Chair. The Board that retained John White is made up of five members, two of whom (James Doty and Lewis Ferguson) are currently jockeying for the Chair and all of whose highly remunerative re-appointments require the support of the SEC Board. 19 One thing the Cravath website does not provide is a full list of John White clients. Without such a list, it becomes impossible to determine how many of them oppose Doty s reform efforts SEC- and- PCAOB- Guidance- Affecting- Foreign- Private- Issuers / /the- jockeying- has- begun- to- fill- a- high- paid- job- in- washington

5 You acknowledged the conflict of interest stemming from your husband s work in your ethics letter. You have further pledged to refrain from decisions that may affect your husband s income. You note, however, that you will take those decisions if permitted by an ethics officer pursuant to 18 USC 208 (b)(1). We believe this is a porous safeguard as the ethics officer is subordinate to you. 20 John White s appointment to the SAG may have been approved by SEC Ethics officials, as suggested in your hearing testimony, 21 but even if not in direct violation of ethics laws, the arrangement is at least evocative of the sort of activity that runs contrary to the anti-nepotism statute. The Office of Government Ethics makes clear that the anti-nepotism statute applies to spousal interests: The first restriction is found at section 3110 of title 5 of the United States Code. Section 3110, commonly referred to as the "anti-nepotism" statute, bars a public official from appointing, employing or promoting individuals who are relatives of the public official. The statute and the implementing regulations make it clear that even recommending a relative for appointment or promotion is barred. 5 U.S.C. 3110(b); 5 C.F.R (a). Thus, while spouses could work in the same office, one spouse could not hire the other spouse to work there as well, or even recommend the other spouse for promotion. Indeed, such an action could also constitute a violation of the criminal conflict of interest statute, 18 U.S.C Section 208 prohibits an employee from participating as a Government employee in any matter that would affect his financial interest. This would include the financial interests of certain other persons, including an employee's spouse, which are attributed to the employee under section (emphasis added) Additionally, the Office of Government Ethics makes clear in discussing the BRIBERY, GRAFT, AND CONFLICTS OF INTEREST section of the federal criminal code 23 that Similarly, section 208 requires disqualification not only from business transactions, but from any judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest or other particular matter, in which the employee has a financial interest. And, as noted above, section 208 extends the 20 The ethics office is explained on the website, available at: shrg80698/html/CHRG- 113shrg80698.htm title18/html/uscode title18- parti- chap11- sec208.htm

6 disqualification requirement to interests of persons other than the executive branch employee by imputing the financial interests of certain others to him. Whereas there was some question whether a financial interest had to be substantial in order to be covered by section 434, section 208 clearly applies to all matters in which the employee has a financial interest, even if that financial interest is insubstantial. 24 (emphasis added) Between your nomination and confirmation to your current position, you promised in writing to rely on written waivers on matters that directly related to John White s employment at Cravath. Here s the text from your Ethics letter written to the SEC s Designated Agency Ethics Officer on February 5 th, 2013: I will not participate personally and substantially in any particular matter that has a direct and predictable effect on my spouse's compensation or employment with the firm, unless I first obtain a written waiver, pursuant to 18 U.S.C. 208(b)(1). (emphasis added) However, on September 24 th, the SEC s Alternate Designated Agency Ethics Official Danae Serrano told Jeff Hauser of the Center for Effective Government that Mary Jo White has received no 18 U.S.C. 208(b)(1) or (b)(3) waivers. In summary: (1) Reports indicate that businesses with current, or potential, business with John White at Cravath want to see Doty pushed aside; (2) That Doty and Ferguson were among those who re-appointed John White, and they and their colleagues on the PCAOB job have a strong professional financial interest in maintaining a positive relationship with SEC Chair Mary Jo White; and (3) John White s ongoing lucrative partnership at Cravath 25 benefits from the access and influence he receives from his continuing role with the PCAOB. For these reasons, we write to call on you to recuse yourself from dealing with the task of selecting the leadership and membership of the PCAOB moving into the future. Your continued involvement in these issues given your husband s professional and financial stake in his role in the PCAOB creates, at the very least, the appearance of a conflict of interest Affairs- and- Budget/Reports- and- Testimony/Substantive- Reports- to- Congress/Report- on- Criminal- Conflict- of- Interest- Laws- (January- 2006)/ 25 how- rich- is- mary- jo- white- debevoise- partner- and- likely- future- sec- chair/

7 An SEC employee told MarketWatch that agency ethics professionals reviewed John White s participation in the PCAOB advisory committee when SEC Chairwoman White first took the job. 26 In order for the public to gain confidence that this apparent conflict of interest has not been an actual conflict of interest in violation of, e.g. 18 U.S.C. 208, 27 we also request that you share with the public all ethical guidance that you have received since you have been nominated to be Chair of the SEC. Finally, we request that the terms of John White s partnership with Cravath be made public, as well as a list of his clients. Without the release of that information, material as it directly affects the family income of the SEC Chair, the public that relies on the SEC to enforce laws concerning disclosure lacks the ability to assess whether the SEC is adhering to ethical requirements. Certainly, the SEC would be well served by an SEC Chair freer of entanglements one that could interact with the PCAOB without real or apparent conflicts in interest but that is not is the situation. We hope that you live up to your commitments and recuse yourself from all personnel decisions with respect to the Board of the PCAOB for so long as that Board has power over your husband s continued appointment to the SAG. Signed, Alliance for a Just Society American Family Voices Campaign for America's Future Center for Effective Government Center for Popular Democracy Community Organizations in Action Communications Workers of America Democracy for America 26 firm- removes- references- to- sec- chiefs- husbands- ties- to- audit- regulator ?mod=mw_share_twitter 27 and- Regulations/Statutes/18- U- S- C- - %C2%A Acts- affecting- a- personal- financial- interest/ and title18/html/uscode title18- parti- chap11- sec208.htm

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