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Dearlove v. Securities and Exchange Commission

July 24, 2009

GREGORY M. DEARLOVE, PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION, RESPONDENT



On Petition for Review of an Order of the Securities & Exchange Commission.

The opinion of the court was delivered by: Ginsburg, Circuit Judge

Argued February 9, 2009

Before: GINSBURG and GRIFFITH, Circuit Judges, and RANDOLPH, Senior Circuit Judge.

Gregory Dearlove petitions for review of the decision of the Securities and Exchange Commission to debar him from practicing as an accountant before the SEC. The SEC concluded Dearlove engaged repeatedly in unreasonable conduct resulting in violations of applicable accounting principles and standards while serving as Deloitte & Touche's "engagement partner" in charge of the 2000 audit of Adelphia Communications Corporation. Dearlove argues the SEC committed an error of law, misapplied the applicable accounting principles and standards, and denied him due process. Because the SEC made no error of law, and substantial evidence supports its findings of fact, we deny the petition.

I. Background

Deloitte audited Adelphia's financial statements from 1980 through 2002. An "engagement partner" had overall responsibility for each audit. In 2000 Deloitte rotated Dearlove onto the Adelphia account as the engagement partner, heading a team of 35 accountants.

John Rigas had founded Adelphia in 1952 and he and his children were the controlling shareholders in 2000. Dearlove and the Deloitte team described the 2000 audit, like many prior audits of Adelphia, as posing "much greater than normal risk" because Adelphia engaged in numerous transactions with subsidiaries and affiliated entities, many of which were owned by members of the Rigas family.

In 2000 Adelphia was one of the largest cable television companies in the United States. It had doubled the number of cable subscribers it served by acquiring several other cable companies late in 1999. Although its assets were growing, Adelphia's debt grew substantially as well. The SEC found that prior to 2000:

Adelphia, its subsidiaries, and some Rigas Entities entered as co-borrowers into a series of credit agreements. By 1999, Adelphia and the Rigas Entities had obtained $1.05 billion in credit; in 2000, they tripled their available credit and drew down essentially all of the funds available under the agreements.

In the Matter of Gregory M. Dearlove, CPA, No 3-12064, 2008 SEC LEXIS 223, at *5 (Jan. 31, 2008).

Deloitte issued its 2000 independent auditor's report of Adelphia - signed by Dearlove - on March 29, 2001. Id. at *10. In January 2002, in the wake of the Enron scandal, the SEC released a statement regarding the disclosure of related party transactions. Id. at *10-11; see Statement About Management's Discussion and Analysis of Financial Condition and Results of Operations, 67 Fed. Reg. 3,746 (Jan. 25, 2002). In March Adelphia disclosed its obligations as co-debtor with the Rigas Entities. Its share price declined from $30 in January 2002 to $0.30 in June, when it was de-listed by the NASDAQ. Dearlove, 2008 SEC LEXIS 223, at *11. In September 2002 the Department of Justice brought criminal fraud charges against Adelphia officials, including members of the Rigas family, see United States v. Rigas, 490 F.3d 208 (2d Cir. 2007), and Adelphia agreed to pay $715 million into a victims' restitution fund as part of a settlement with the Government, In re Adelphia Commc'ns Corp., 327 B.R. 143 (Bankr. S.D.N.Y. 2005). Dearlove, 2008 SEC LEXIS 223, at *12.

In April 2005 the SEC brought and settled civil actions against Adelphia, members of the Rigas family, and Deloitte. Id. at *13-14. In September 2005 the SEC charged Dearlove with improper conduct resulting in a violation of applicable professional standards, including his approval of Adelphia's method of accounting for transactions between itself and one or more Rigas Entities, i.e.,related party transactions. The matter was referred to an Administrative Law Judge, who determined Dearlove had engaged in one instance of "highly unreasonable" conduct and repeated instances of "unreasonable" conduct, and permanently denied Dearlove the right to practice before the SEC. Upon review of the ALJ's decision, the SEC held Dearlove had engaged only in repeated instances of "unreasonable" conduct and denied him the right to practice before the SEC but provided he may apply for reinstatement after four years. Dearlove petitions for review of that decision.

II. Analysis

SEC Rule 102(e) provides the SEC may "deny, temporarily or permanently, the privilege of appearing or practicing before [the SEC] in any way to any person who is found by the Commission ... to have engaged in unethical or improper professional conduct." 17 C.F.R. § 201.102(e)(1)(ii). The Rule defines three classes of "improper professional conduct" for accountants: (1) "Intentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards," id. § 201.102(e)(1)(iv)(A); (2) "A single instance of highly unreasonable conduct that results in a violation of applicable professional standards," id. § 201.102(e)(1)(iv)(B)(1); and (3) "Repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a ...


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