Free Enterprise Fund et al v. Public Company Accounting Oversight Board et al

REPLY to opposition to motion re Cross MOTION for Summary Judgment

D.D.C.October 11, 2006

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA FREE ENTERPRISE FUND, et al., Plaintiffs, -against- THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD, et al., Defendants, -and- UNITED STATES OF AMERICA, Intervenor. Civil Action No. 1:06-cv-00217-JR Judge Robertson DEFENDANTS’ REPLY MEMORANDUM IN SUPPORT OF CROSS-MOTION FOR SUMMARY JUDGMENT Lewis H. Ferguson (D.C. Bar No. 176312) J. Gordon Seymour (D.C. Bar No. 450051) Heidi E. Murdy (D.C. Bar No. 474680) PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD 1666 K Street, N.W. Washington, D.C. 20006 (202) 207-9162 (telephone) (202) 862-8430 (facsimile) Joe Robert Caldwell, Jr. (D.C. Bar No. 965137) James R. Doty (D.C. Bar No. 416785) Jeffrey A. Lamken (D.C. Bar No. 440547) Robert K. Kry (D.C. Bar No. 490545) Joshua A. Klein (D.C. Bar No. 489078) BAKER BOTTS, LLP 1299 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2400 (202) 639-7700 (telephone) (202) 639-7890 (facsimile) Counsel for Defendants Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 1 of 32 i TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 1 ARGUMENT.................................................................................................................................. 2 I. A STRAIGHTFORWARD APPLICATION OF CONTROLLING PRECEDENT MAKES CLEAR THAT THE BOARD IS CONSTITUTIONAL..................................... 2 A. Sarbanes-Oxley Is Constitutional Under the Appointments Clause ....................... 2 B. The Act Is Fully Consistent with Separation-of-Powers Principles ....................... 5 II. PLAINTIFFS’ APPOINTMENTS CLAUSE ARGUMENTS IGNORE THE STATUTORY TEXT AND HAVE NO BASIS IN PRECEDENT ................................... 6 A. Plaintiffs Fail To Demonstrate That Board Members Are Principal Officers ................................................................................................................... 6 B. Plaintiffs Fail To Overcome Overwhelming Authority Holding That Independent Agencies Like the SEC Are “Departments” .................................... 12 C. Plaintiffs Fail To Show That the Chairman Rather Than the Commission Is the SEC’s Head ................................................................................................. 13 III. PLAINTIFFS’ SEPARATION-OF-POWERS ARGUMENTS HAVE NO FOUNDATION IN HISTORY OR PRECEDENT .......................................................... 17 A. Plaintiffs’ Separation-of-Powers Arguments Are Foreclosed by Hennen and Perkins............................................................................................................ 18 B. The SEC’s Removal Authority Easily Satisfies Morrison ................................... 21 C. The Restrictions on the President’s Power To Remove SEC Commissioners Are Irrelevant .............................................................................. 23 D. The Cause Restrictions Are Severable.................................................................. 24 CONCLUSION............................................................................................................................. 25 Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 2 of 32 ii TABLE OF AUTHORITIES CASES1 Belenke v. SEC, 606 F.2d 193 (7th Cir. 1979).................................................................................9 Bowsher v. Synar, 478 U.S. 714 (1986).........................................................................................13 Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) ...............................9 Clark v. Martinez, 543 U.S. 371 (2005) ........................................................................................10 Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119 (9th Cir. 2005) ..............................8 Dismas Charities, Inc. v. Dep’t of Justice, 401 F.3d 666 (6th Cir. 2005) .......................................8 *Edmond v. United States, 520 U.S. 651 (1997) ................................................................... passim FEC v. NRA Political Victory Fund, 6 F.3d 821 (D.C. Cir. 1993) ................................................17 Freytag v. Comm’r, 501 U.S. 868 (1991) ..................................................................................4, 12 *In re Hennen, 38 U.S. 230 (1839)........................................................................................ passim Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000) .........................................................................15 MCI Telecomms. Corp. v. FCC, 57 F.3d 1136 (D.C. Cir. 1995).....................................................8 MFS Sec. Corp. v. SEC, 380 F.3d 611 (2d Cir. 2004) ...................................................................13 *Morrison v. Olson, 487 U.S. 654 (1988) ............................................................................. passim NASD v. SEC, 431 F.3d 803 (D.C. Cir. 2005) .................................................................................9 NTEU v. Reagan, 663 F.2d 239 (D.C. Cir. 1981)......................................................................5, 17 Nader v. Bork, 366 F. Supp. 104 (D.D.C. 1973) ...........................................................................23 Printz v. United States, 521 U.S. 898 (1997).................................................................................14 Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220 (1987) .....................................................9 Silver v. U.S. Postal Serv., 951 F.2d 1033 (9th Cir. 1991) ..............................................................4 1 Authorities on which we chiefly rely are marked by an asterisk. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 3 of 32 iii United States v. Gibson, 770 F.2d 306 (2d Cir. 1985).....................................................................9 United States v. Hartwell, 73 U.S. 385 (1867) ..............................................................................17 United States v. Jones, 763 F.2d 518 (2d Cir. 1985) .....................................................................17 United States v. Lane, 64 M.J. 1 (C.A.A.F. 2006).........................................................................17 United States v. Pabon-Cruz, 391 F.3d 86 (2d Cir. 2004)...............................................................9 *United States v. Perkins, 116 U.S. 483 (1886) .................................................................... passim *United States v. Salerno, 481 U.S. 739 (1987) ........................................................................2, 10 Weiss v. United States, 510 U.S. 163 (1994) .............................................................................7, 16 Williams Cos. v. FERC, 345 F.3d 910 (D.C. Cir. 2003)..................................................................9 Wonsover v. SEC, 205 F.3d 408 (D.C. Cir. 2000) .........................................................................22 CONSTITUTIONAL PROVISIONS AND STATUTES U.S. Const. art. II, § 2 ......................................................................................................................2 5 U.S.C. § 553..................................................................................................................................8 5 U.S.C. § 903 ...............................................................................................................................16 5 U.S.C. § 904 ...............................................................................................................................16 5 U.S.C. § 5349..............................................................................................................................10 7 U.S.C. § 2......................................................................................................................................4 7 U.S.C. § 6j...................................................................................................................................10 15 U.S.C. § 42..................................................................................................................................4 15 U.S.C. § 78d..........................................................................................................................2, 16 15 U.S.C. § 78d-1 ..........................................................................................................................15 15 U.S.C. § 78q..............................................................................................................................12 15 U.S.C. § 78s ....................................................................................................................8, 10, 15 Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 4 of 32 iv 15 U.S.C. § 78u..............................................................................................................................15 15 U.S.C. § 78w.............................................................................................................................15 15 U.S.C. § 80a-2...........................................................................................................................10 15 U.S.C. § 80a-3...........................................................................................................................10 15 U.S.C. § 80a-63.........................................................................................................................10 15 U.S.C. § 6758............................................................................................................................10 *Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745...................................... passim § 101, 15 U.S.C. § 7211.......................................................................................3, 4, 22, 25 § 103, 15 U.S.C. § 7213.....................................................................................................10 § 104, 15 U.S.C. § 7214.................................................................................................3, 16 § 105, 15 U.S.C. § 7215...................................................................................................3, 7 § 107, 15 U.S.C. § 7217............................................................................................. passim § 109, 15 U.S.C. § 7219...........................................................................................3, 11, 16 47 U.S.C. § 155................................................................................................................................4 LEGISLATIVE MATERIALS S. Rep. No. 107-205 (2002) ...........................................................................................................10 EXECUTIVE MATERIALS Applicability of Executive Order No. 12674 to Personnel of Regional Fishery Management Councils, 17 Op. Off. Legal Counsel 150 (1993) ........................................11 Authority of Civil Service Commission To Appoint a Chief Examiner, 37 Op. Att’y Gen. 227 (1933)............................................................................................................................4 The Constitutional Separation of Powers Between the President and Congress, 20 Op. Off. Legal Counsel 124 (1996) ............................................................................................4 Reorganization Plan No. 10, 15 Fed. Reg. 3175 (May 25, 1950)............................................15, 16 Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 5 of 32 v Special Message to the Congress Summarizing the New Reorganization Plans, Public Paper No. 1950-53 (Mar. 13, 1950), available at http://www.trumanlibrary.org/ publicpapers/index.php?pid=673&st=&st1=.....................................................................15 Special Message to the Congress Transmitting Reorganization Plans 1 Through 13 of 1950, Public Paper No. 1950-54 (Mar. 13, 1950), available at http://www.trumanlibrary.org/publicpapers/index.php?pid=674&st=&st1= ....................15 MISCELLANEOUS Steven G. Calabresi & Christopher S. Yoo, The Unitary Executive During the First Half- Century, 47 Case W. Res. L. Rev. 1451 (1997).................................................................12 Gerald Cullinan, The United States Postal Service (1973)............................................................12 GAO, Actions Needed To Improve PCAOB Selection Process (2002) .........................................17 History of the U.S. Postal Service, at http://www.usps.com/history/history/his1.htm..................12 Henry Learned, The President’s Cabinet (1912)...........................................................................12 Wesley Rich, The History of the United States Post Office to the Year 1829 (1924) ...................12 Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 6 of 32 1 INTRODUCTION Shorn of plaintiffs’ inapposite hypotheticals and distracting hyperbole, this case is straightforward—and wholly governed by precedent. Under Edmond v. United States, 520 U.S. 651 (1997), and Morrison v. Olson, 487 U.S. 654 (1988), the Board’s members are unquestionably “inferior officers” within the meaning of the Appointments Clause. Once that is recognized, plaintiffs’ remaining arguments collapse. The Appointments Clause makes clear that inferior officers may be appointed by the heads of departments like the SEC. The Supreme Court’s decision in In re Hennen, 38 U.S. 230 (1839), makes clear that, when Congress vests the authority to appoint an inferior officer in a department head, the President need not be given authority to remove him; that authority instead vests in the department head that appointed the inferior officer in the first place. And United States v. Perkins, 116 U.S. 483 (1886), holds that, when Congress vests appointment authority in a department head, it may restrict removal “as it deems best for the public interest.” Id. at 485. Plaintiffs do not ask this Court to apply those holdings. Instead, they ask this Court to ignore them. For example, while plaintiffs assail the “view” that Congress may prescribe the “ ‘conditions for removal’ that ‘it deems best for the public interest’ ” as a “radical understanding of the Excepting Clause,” Pl. Reply at 2-3 (emphasis omitted),1 that “view” is not merely ours. It is the Supreme Court’s: The standard is a direct quotation of the Court’s holding in Perkins. The only radical position in this case is plaintiffs’ proposal that the Court ignore governing Supreme Court precedent in favor of their own unprecedented position. 1 Citations to “Pl. Mem.” are to plaintiffs’ memorandum in support of their motion for summary judgment. Citations to “Def. Mem.” are to the Board’s memorandum in opposition and in support of its cross-motion for summary judgment. Citations to “U.S. Mem.” are to the United States’ memorandum in opposition and in support of its cross-motion for summary judgment. Citations to “Pl. Reply” are to plaintiffs’ combined reply and opposition. Citations to “Motion To Dismiss” are to the Board’s memorandum in support of its motion to dismiss. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 7 of 32 2 Plaintiffs’ remaining arguments are equally foreclosed. Their claim that Board members are principal rather than inferior officers cannot be reconciled with the terms of the statute or with Edmond and Morrison. Similarly, in arguing that the SEC is not a “department” and that the Commission is not its head, plaintiffs fight against 70 years of precedent—without citing a single contrary authority. With their Appointments Clause challenge foreclosed, plaintiffs seek refuge in a free-form separation-of-powers challenge. But there, too, plaintiffs’ claims have no foundation: The SEC’s pervasive oversight and removal authority are fully sufficient under governing precedent. Finally, to the extent there is any doubt about the scope of the SEC’s authority, plaintiffs cannot prevail: United States v. Salerno, 481 U.S. 739 (1987), precludes courts from declaring an act facially unconstitutional unless the challenger establishes that “no set of circumstances exists under which the Act would be valid.” Id. at 745 (emphasis added). ARGUMENT I. A STRAIGHTFORWARD APPLICATION OF CONTROLLING PRECEDENT MAKES CLEAR THAT THE BOARD IS CONSTITUTIONAL A. Sarbanes-Oxley Is Constitutional Under the Appointments Clause The Excepting Clause allows Congress to vest authority to appoint inferior officers in department heads. U.S. Const. art. II, § 2. That is exactly what Sarbanes-Oxley does. Board members are inferior officers. The SEC is a department. And the Commission is its head. 1. That Board members are at most “inferior officers” is inescapable. Under the Supreme Court’s decision in Edmond, “ ‘inferior officers’ are officers whose work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.” Edmond v. United States, 520 U.S. 651, 663 (1997). Here, the Commissioners of the SEC are “appointed by the President by and with the advice and consent of the Senate.” 15 U.S.C. § 78d(a). And, as thoroughly demonstrated in our opening Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 8 of 32 3 brief, the SEC has pervasive authority to supervise and direct the Board’s work. Def. Mem. at 3- 7. The SEC reviews Board rules, which are without effect unless the SEC approves them. § 107(b)(2), 15 U.S.C. § 7217(b)(2). The SEC on its own initiative may abrogate, delete, or add to Board rules at any time. § 107(b)(5), 15 U.S.C. § 7217(b)(5). The Board’s inspections and disciplinary proceedings are conducted under SEC-approved rules, §§ 104(c), 105(a), 15 U.S.C. §§ 7214(c), 7215(a), and sanctions are stayed pending any SEC review unless the SEC orders otherwise, § 105(e)(1), 15 U.S.C. § 7215(e)(1). The Board’s budget must be approved by the SEC. § 109(b), 15 U.S.C. § 7219(b). The SEC selects Board members, § 101(e)(4)(A), 15 U.S.C. § 7211(e)(4)(A), and it can remove them for cause, § 107(d)(3), 15 U.S.C. § 7217(d)(3). Finally, under a provision that plaintiffs barely acknowledge, the SEC can rescind Board enforcement authority at any time in the public interest. § 107(d)(1), 15 U.S.C. § 7217(d)(1). Even this shortened list of SEC powers conclusively shows that the Board’s members are inferior officers. Like the Coast Guard judges held to be inferior officers in Edmond, Board members are subject to their superiors’ “administrative oversight,” 520 U.S. at 664; they operate under “ ‘rules of procedure’ ” prescribed or approved by their superiors, id.; and they can be removed by their superiors, id. Finally, and “significant[ly],” like the Coast Guard judges, the Board has “no power to render a final decision on behalf of the United States unless permitted to do so by other Executive officers.” Id. at 665. If the Coast Guard judges in Edmond were inferior, as the Supreme Court held, then Board members certainly are as well. Morrison v. Olson, 487 U.S. 654 (1988), makes this an even easier case. Board members are subject to far more control than the independent counsel held inferior there. The independent counsel could exercise the full prosecutorial authority of the Department of Justice, subject only to the requirement that she follow Department policy “ ‘except where not possible.’ ” Id. at 662. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 9 of 32 4 The Attorney General had no authority to direct, countermand, review, or otherwise control her actions. The Board, by contrast, has no criminal prosecutorial authority, and its disciplinary decisions are subject to thorough review by the SEC. Moreover, the SEC chooses the Board’s members. § 101(e)(4)(A), 15 U.S.C. § 7211(e)(4)(A). In Morrison, by contrast, the independent counsel was chosen by a three-judge court outside the Executive Branch. 487 U.S. at 661. 2. Nor can there be any doubt that the SEC is a “department.” In an unbroken line of decisions stretching back more than 70 years, the three branches of government have unanimously agreed that independent agencies are “departments” capable of appointing inferior officers. Congress has routinely vested appointment authority in independent agencies like the SEC. See, e.g., 7 U.S.C. § 2(a)(4) (CFTC); 15 U.S.C. § 42 (FTC); 47 U.S.C. § 155(e) (FCC). The Executive likewise has found such agencies to be departments. See The Constitutional Separation of Powers Between the President and Congress, 20 Op. Off. Legal Counsel 124, 152 (1996); Authority of Civil Service Commission To Appoint a Chief Examiner, 37 Op. Att’y Gen. 227 (1933). And every judicial authority to reach the issue has agreed that independent agencies like the SEC are departments. See Freytag v. Comm’r, 501 U.S. 868, 914-22 (1991) (Scalia, J., concurring in judgment, joined by O’Connor, Kennedy, and Souter, JJ.); Silver v. U.S. Postal Serv., 951 F.2d 1033, 1036-38 (9th Cir. 1991); id. at 1043-44 (O’Scannlain, J., dissenting). While plaintiffs attempt to cobble together a contrary argument from scattered stray remarks, every authority that has squarely considered the issue has rejected their position. 3. Equally clearly, the Commission is the SEC’s “head.” While plaintiffs renew their argument that a multimember commission cannot be the “head” of an agency for Appointments Clause purposes, Pl. Reply at 39-41, seven decades of authority reject the position. The Ninth Circuit in Silver and Attorney General opinions dating back to 1933 have Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 10 of 32 5 squarely held that a multimember commission can be the head of a department. Def. Mem. at 26. No authority has ever held otherwise. B. The Act Is Fully Consistent with Separation-of-Powers Principles The Act’s oversight and removal provisions are also entirely consistent with separation- of-powers principles. Notwithstanding plaintiffs’ focus on presidential removal authority, the Supreme Court’s decision in In re Hennen, 38 U.S. 230 (1839), clearly instructs that “the power of removal [is] incident to the power of appointment”; consequently, “the President has certainly no power to remove” inferior officers appointed by a department head. Id. at 259-60 (emphasis added); accord NTEU v. Reagan, 663 F.2d 239, 247 (D.C. Cir. 1981). And under the Supreme Court’s holding in United States v. Perkins, 116 U.S. 483 (1886), “when congress, by law, vests the appointment of inferior officers in the heads of departments, it may limit and restrict the power of removal as it deems best for the public interest.” Id. at 485 (emphasis added). Those principles are the beginning and the end of the separation-of-powers analysis in this case. Because the President has “no power to remove” inferior officers appointed by a department head, Hennen, 38 U.S. at 260, Congress cannot have violated separation of powers by vesting removal authority in the SEC rather than the President. And because Congress can limit the removal of such officers “as it deems best for the public interest,” Perkins, 116 U.S. at 485, Congress cannot have violated separation of powers by enumerating particular grounds for removal under § 107(d)(3), 15 U.S.C. § 2717(d)(3). Although plaintiffs object to that conclusion as “radical” (Reply at 2-3), the governing standard—that Congress may establish conditions for removal of such officers “as it deems best for the public interest”—is a direct quotation from Supreme Court precedent. Hennen and Perkins foreclose plaintiffs’ separation-of-powers claim. The conclusion that Sarbanes-Oxley satisfies separation-of-powers requirements is particularly clear given the oversight authority, including substantial authority to remove Board Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 11 of 32 6 members, that the Act grants to the SEC—an executive agency. See pp. 2-3, supra. Whether viewed alone or in combination, the SEC’s removal power and its more general oversight authority are more than sufficient to defeat plaintiffs’ claim of unconstitutional intrusion into Executive authority. II. PLAINTIFFS’ APPOINTMENTS CLAUSE ARGUMENTS IGNORE THE STATUTORY TEXT AND HAVE NO BASIS IN PRECEDENT Hemmed in by precedent on all sides, plaintiffs seek refuge through misdirection. They mischaracterize the terms of Sarbanes-Oxley and offer a revisionist description of controlling Supreme Court cases. Their arguments rest on a pastiche of citations and half-quotations taken out of context, and cannot justify departure from Supreme Court precedent. A. Plaintiffs Fail To Demonstrate That Board Members Are Principal Officers Notwithstanding the SEC’s pervasive oversight over the Board, plaintiffs assert that certain features of that oversight convert the Board’s members into principal officers. But in each instance, the text of the Act shows the SEC’s authority to be far greater than plaintiffs acknowledge, and binding precedent proves plaintiffs’ point to be immaterial. 1. Oversight. Plaintiffs assert that Board members are principal officers because the SEC only reviews Board decisions after the fact rather than directing them in advance. Pl. Reply at 33-34. That claim is foreclosed by Edmond. There, the Coast Guard judges’ superiors were statutorily barred from “attempt[ing] to influence (by threat of removal or otherwise) the outcome of individual proceedings.” 520 U.S. at 664. The superiors thus could not “direct” proceedings in particular cases; rather, they could exercise control only by prescribing rules and conducting appellate review of individual decisions after the fact. See id. at 664-65. The SEC can do precisely the same things here: It can prescribe and approve rules for the Board, and it can review Board decisions. Indeed, the SEC’s oversight is far more extensive than the review Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 12 of 32 7 in Edmond: Unlike the “narrow[]” and “limit[ed]” appellate review there, id. at 665, the SEC’s review is searching and independent. See pp. 8-10, infra.2 The notion that a superior must micromanage an inferior officer’s decisions is equally foreclosed by Morrison. In that case, the Attorney General had no power to direct decisions; the independent counsel merely had to follow general Department of Justice policies to the extent possible. 487 U.S. at 662. Yet the Supreme Court found the independent counsel “clearly” an inferior officer. Id. at 671. That Board members are inferior officers is even clearer here. 2. Notice and Comment. Plaintiffs reiterate their complaint that the SEC’s supervision is inadequate because the Act in some instances channels SEC control through well established procedures such as notice-and-comment rulemaking. As we pointed out (Def. Mem. at 20), however, almost all Board rules are without effect until the SEC approves them, § 107(b)(2), 15 U.S.C. § 7217(b)(2), and Board sanctions are stayed pending any SEC review unless the SEC orders otherwise, § 105(e)(1), 15 U.S.C. § 7215(e)(1). As a result, those procedures generally do not diminish the SEC’s control—rather, they diminish the Board’s authority by delaying the effectiveness of Board decisions until the SEC completes its review.3 2 Plaintiffs argue that, even if the SEC’s powers over the Board amount to “direct[ion] and supervis[ion]” under Edmond, that still is not enough to make Board members inferior officers in view of the breadth of their responsibilities and the restrictions on their removal. Pl. Reply at 35- 36. But plaintiffs’ only authorities for that point are a single Justice’s concurrence in one case and a single Justice’s dissent in another. See id. The views of single Justices cannot trump Edmond ’s express holding. Moreover, plaintiffs’ reliance on Justice Souter’s concurrence in Edmond (Reply at 31, 34, 35, 36) is unhelpful to their case for an additional reason. Justice Souter’s approach is highly deferential to Congress: “ ‘Where . . . the label that better fits an officer is fairly debatable, the fully rational congressional determination surely merits . . . tolerance.’ ” Weiss v. United States, 510 U.S. 163, 194 (1994) (Souter, J., concurring). In any event, nothing about the scope of the Board’s responsibilities or the SEC’s removal authority renders Board members principal officers. See Def. Mem. at 16; pp. 10-12, infra. 3 Plaintiffs complain that the SEC’s oversight is hampered by a provision allowing rules “ ‘concerned solely with the administration’ ” of the Board to take effect without prior SEC approval. Pl. Reply at 35 (quoting § 107(b)(4), 15 U.S.C. § 7217(b)(4) (incorporating 15 U.S.C. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 13 of 32 8 Moreover, as we also pointed out (Def. Mem. at 20-21), the SEC can forgo notice and comment when “impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. § 553(b)(B). Plaintiffs offer no response except to dismiss that exception as “limited.” Pl. Reply at 21. That ipse dixit aside, it is hard to see how supervision could be deemed ineffective based on a restriction the principal officer can forgo upon finding that the “public interest” so requires. In any event, notice and comment does not fetter the SEC. It ensures that the SEC’s consideration of Board rules benefits from the same public participation as the rules the SEC itself proposes. Notice and comment “assure[s] that the ‘agency will have before it the [relevant] facts and information,’” MCI Telecomms. Corp. v. FCC, 57 F.3d 1136, 1141 (D.C. Cir. 1995), and “give[s] those with interests affected by rules the chance to participate . . . [to] ensure fair treatment,” Dismas Charities, Inc. v. Dep’t of Justice, 401 F.3d 666, 678 (6th Cir. 2005). To suggest that provisions of the Constitution designed to “ensure political accountability” (Pl. Mem. at 35) require Congress to refuse public input is ironic, to say the least. Litigants often challenge “not being given an opportunity to comment,” but it is unprecedented for plaintiffs to “complain[] that they were given such an opportunity.” U.S. Mem. at 28. 3. Standards of Review. Plaintiffs’ contention that SEC review is too deferential (Reply at 20) is also meritless. Plaintiffs abandon their claim that Board sanctions are reviewed under a deferential standard. Compare Pl. Mem. at 9 (claiming that review is “circumscribed”), with Pl. Reply at 23 (conceding that review is “fairly broad”). While plaintiffs continue to complain about the standard of review for Board rules, that point fares no better. Sarbanes- § 78s(b)(3)(A))). That exception, however, is limited to internal “housekeeping” matters, see Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119, 1130 n.11 (9th Cir. 2005), and the SEC may abrogate such rules “summarily,” 15 U.S.C. § 78s(b)(3)(C). It is hard to see how supervision could be deemed ineffective based on an exception for mere housekeeping rules that the SEC can render ineffective at the stroke of a pen. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 14 of 32 9 Oxley incorporates provisions for review of SRO rules—provisions that courts have construed to require an “independent determination.” Belenke v. SEC, 606 F.2d 193, 198 (7th Cir. 1979); see also Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 233-34 (1987) (“[T]he Commission has broad authority to oversee and to regulate the rules adopted by the SROs . . . .”). As the D.C. Circuit has observed, “the legal views of the [SRO] must yield to the Commission’s view of the law.” NASD v. SEC, 431 F.3d 803, 806 (D.C. Cir. 2005). Plaintiffs’ analogy to Chevron deference (Reply at 20) thus falls short. Chevron governs review by courts, not agencies. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). Plaintiffs cite not one case in which a reviewing agency was required to give similar deference to a subordinate decisionmaker’s view of the law. Nothing in Sarbanes- Oxley purports to overturn the ordinary understanding that a subordinate’s legal views must yield to the Commission’s independent determination of the law. Plaintiffs urge that the statutory text requires deference because the SEC must “ ‘approve a proposed rule, if it finds that the rule is consistent with the requirements of this Act and the securities laws, or is necessary or appropriate in the public interest or for the protection of investors.’ ” Pl. Reply at 20 (quoting § 107(b)(3), 15 U.S.C. § 7217(b)(3) (emphasis added)). Plaintiffs thus claim that the SEC must approve even Board rules that are inconsistent with the securities laws, so long as they are “in the public interest.” That interpretation is absurd. No agency has ever been required to approve illegal rules. Congress obviously intended the SEC to review Board rules to ensure they are both consistent with the securities laws and in the public interest. See Williams Cos. v. FERC, 345 F.3d 910, 912 & n.1 (D.C. Cir. 2003) (disregarding the word “or” to avoid absurd result); United States v. Pabon-Cruz, 391 F.3d 86, 105 (2d Cir. 2004) (construing “and” to mean “or” to avoid absurd result); United States v. Gibson, 770 F.2d 306, Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 15 of 32 10 308 (2d Cir. 1985) (same).4 The SEC has consistently interpreted the statute in that fashion. See Defendants’ Statement of Material Facts Not in Genuine Dispute ¶ 13.5 Finally, to the extent there is any ambiguity in the statutory standard of review—and there is not—it must be resolved in a manner that renders the statute constitutional. See Salerno, 481 U.S. at 745; Clark v. Martinez, 543 U.S. 371, 381 (2005). If the statute can be construed to permit sufficiently demanding review, plaintiffs’ facial challenge must fail.6 4. Removal Authority. Plaintiffs also err in asserting (Reply at 31-33) that the Act’s modest restrictions on removal of Board members transform them into principal officers. Quite the opposite: The very fact that the SEC has removal authority—for cause or otherwise— reinforces the conclusion that Board members are inferior to the SEC. In Morrison, the Attorney 4 In numerous other statutes (including the Exchange Act), Congress instructed agencies to adopt rules that are in the public interest and consistent with governing law (or statutory purposes). See 15 U.S.C. § 78s(b)(3)(A); 5 U.S.C. § 5349(a); 7 U.S.C. § 6j(a)(2)(C); 15 U.S.C. § 80a- 2(a)(48)(B); 15 U.S.C. § 80a-3(c)(1)(B); 15 U.S.C. § 80a-63(b)(2); 15 U.S.C. § 6758(b)(4). Legislative history confirms Congress meant to do the same here. See S. Rep. No. 107-205, at 12 (2002) (“The Board is subject to SEC oversight and review to assure that the Board’s policies are consistent with the administration of the federal securities laws, and to protect the rights of accounting firms and individuals subject to the Board’s jurisdiction.” (emphasis added)). 5 Alternatively, the Court could construe the two tests in § 107(b)(3) to apply, respectively, to different categories of rules. The SEC would review rules required by the Act for consistency with the Act, and rules proposed under the Board’s discretionary authority for consistency with the public interest. See § 103(a)(1), 15 U.S.C. § 7213(a)(1) (requiring the Board to promulgate rules “as required by this Act or the rules of the Commission, or as may be necessary or appropriate in the public interest or for the protection of investors” (emphasis added)). 6 Plaintiffs argue that Salerno and Clark do not apply because the statutes in Edmond and Morrison “were interpreted in a straightforward manner.” Pl. Reply at 36 n.18. But that proves nothing: In both cases the statutes at issue were upheld without the need to resort to a narrow reading. Plaintiffs also argue that Salerno is inapplicable because their suit does not allege that the Board will exercise its discretion unlawfully. See id. Plaintiffs’ suit does assume, however, that the SEC will exercise its discretion unlawfully by not construing the statute in a manner that provides for constitutionally adequate supervision of the Board. Furthermore, as argued in defendants’ motion to dismiss, the need to speculate about how the SEC might interpret the statute underscores why plaintiffs should not be allowed to raise their claims outside Congress’s exclusive review mechanism. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 16 of 32 11 General’s power to remove for cause was counted as a factor in favor of, not against, a finding of inferior-officer status. 487 U.S. at 671. As the OLC has explained, “the very ability to remove for ‘cause’ presupposes that the officer or body that has the removal power must supervise the subordinate officer at least to the extent needed to determine whether ‘cause’ for removal exists.” Applicability of Executive Order No. 12674 to Personnel of Regional Fishery Management Councils, 17 Op. Off. Legal Counsel 150, 156 n.19 (1993). And the Supreme Court’s holding in Perkins—that Congress may “limit and restrict the power of removal [of inferior officers] as it deems best for the public interest,” 116 U.S. at 485—would be meaningless if any significant exercise of that power transformed inferior officers into principal officers. Nor does it matter that Sarbanes-Oxley enumerates three particular grounds for removal rather than providing for general “for cause” removal. § 107(d)(3), 15 U.S.C. § 7217(d)(3). The Act’s removal provisions do not constrain the SEC nearly as much as plaintiffs claim. See pp. 21-22, infra. And this certainly is not a case like Fishery Management Councils where the limits render the removal authority wholly illusory. The statute there, after all, gave appointees a veto over their own removal. 17 Op. Off. Legal Counsel at 157. Nothing of that sort exists here. Finally, even if the removal provisions did weigh against inferior-officer status here, that one factor would plainly be insufficient to overcome the many other indicia that Board members are inferior to the SEC. Board rules have no effect unless approved by the SEC, and Board sanctions are inoperative pending any SEC review unless the SEC orders otherwise. The SEC can amend the Board’s rules at any time, approve or disapprove the Board’s budget,7 and strip 7 Plaintiffs’ repeated claims that the Board “sets its own budget,” Pl. Reply at 19, “finances itself through its own taxation,” id. at 30, and enjoys “extraordinary autonomy from the normal budgetary and administrative process,” id., simply ignore the SEC’s extensive budget oversight. See § 109(b), 15 U.S.C. § 7219(b); Def. Mem. at 5-6. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 17 of 32 12 the Board of all enforcement authority in the public interest.8 In light of those extensive powers, the notion that Board members are principal rather than inferior officers is fanciful.9 B. Plaintiffs Fail To Overcome Overwhelming Authority Holding That Independent Agencies Like the SEC Are “Departments” Every authority that has ever addressed whether independent agencies like the SEC are “departments” within the meaning of the Appointments Clause has answered that question in the affirmative. Plaintiffs cite no case that has reached the opposite conclusion. They assert (Pl. Reply at 37) that Freytag “compel[s]” a contrary conclusion, but that case expressly refused to decide the issue. See 501 U.S. at 887 n.4. Given that, Freytag hardly justifies a reversal of 70 years of unbroken agreement across all three branches of government. Freytag at most held that “departments” were limited to “executive divisions like the Cabinet-level departments.” Id. at 886 (emphasis added).10 The SEC is “like” a cabinet department in the respects that matter: It exercises significant authority over an important part of 8 See also U.S. Mem. at 8 (SEC’s “general rulemaking authority affords the SEC significant additional means of control over the PCAOB. For example, the SEC could adopt rules that would enable it to take immediate action to require the PCAOB to stop or start a PCAOB inspection, investigation, or disciplinary proceeding.”). 9 Plaintiffs’ argument that Board members are principal officers because the Board “does not report under any organizational plan to the SEC or anyone else” (Reply at 30) is mystifying. The Act itself constitutes an “organizational plan,” and it requires the Board to “report[]” to the SEC as often as the SEC directs. § 107(a), 15 U.S.C. § 7217(a) (incorporating 15 U.S.C. § 78q(a)(1)). Nor is there any merit to plaintiffs’ reliance on Board members’ salaries. Pl. Reply at 36. The difference between principal and inferior officers is direction and supervision, not pay level. 10 Clearly, an agency need not actually be a cabinet agency to constitute a department; non- cabinet agencies such as the Post Office have long appointed inferior officers. See Def. Mem. at 23. Plaintiffs claim there is some dispute whether the Post Office was a cabinet agency at the time of the framing (Reply at 38 n.20), but the article on which they rely does not even address that issue. See Steven G. Calabresi & Christopher S. Yoo, The Unitary Executive During the First Half-Century, 47 Case W. Res. L. Rev. 1451, 1480-83 (1997). It is incontestable that the Postmaster General was not a cabinet officer until 1829. See History of the U.S. Postal Service, at http://www.usps.com/history/history/his1.htm; Henry Learned, The President’s Cabinet 244 (1912); Wesley Rich, The History of the United States Post Office to the Year 1829, at 132-36 (1924); Gerald Cullinan, The United States Postal Service 54 (1973). Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 18 of 32 13 national policy; and its Commissioners are appointed by the President, removable by the President, and report to no one else but the President. See Def. Mem. at 24-25. Plaintiffs argue that the SEC is different from a cabinet department because it is “politically unaccountable” and “ ‘independent’ ” of presidential control. Pl. Reply at 38-39. But that substitutes rhetoric for legal analysis. The SEC is not a separate sovereign. It is part of the Executive Branch; its members are appointed by, removable by, and answerable only to, the President. While good-cause restrictions on removal of SEC Commissioners may limit the President’s control, they do not mean that he has no control, or that the SEC is unconnected to the Executive Branch. The President may remove an SEC Commissioner for “ ‘inefficiency, neglect of duty or malfeasance in office,’ ” MFS Sec. Corp. v. SEC, 380 F.3d 611, 619 (2d Cir. 2004), a standard the Supreme Court has described as “very broad,” authorizing removal “for any number of actual or perceived transgressions.” Bowsher v. Synar, 478 U.S. 714, 729 (1986). Just like the Attorney General’s power to remove the independent counsel for cause in Morrison, the President’s power to remove SEC Commissioners “provides the Executive with substantial ability to ensure that the laws are ‘faithfully executed.’ ” 487 U.S. at 696. Plaintiffs ask this Court to disregard 70 years of settled precedent and issue a ruling that would cause chaos in the operation of administrative agencies. Only the most compelling authority could justify such a course. Plaintiffs offer no authority at all. C. Plaintiffs Fail To Show That the Chairman Rather Than the Commission Is the SEC’s Head 1. Every authority to have addressed whether a multimember commission can be the “head” of a department has answered that question in the affirmative. Plaintiffs criticize those authorities as “contain[ing] no analysis of the origins and purpose of the term ‘Heads of Departments,’ ” Pl. Reply at 41, but plaintiffs’ own authorities do not even mention “heads of Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 19 of 32 14 departments.” Instead, they explain why the Framers lodged appointment of principal officers in the single President. Def. Mem. at 26. The Framers expressed that preference in the constitutional text by expressly requiring that the President appoint those officers. But they nowhere required that department heads be single individuals. That some sources spoke “broadly and unqualifiedly about the benefits of lodging the appointment power in a single individual,” Pl. Reply at 40, is not enough. The Framers did not constitutionalize every policy preference they had.11 In fact, the Framers embraced multimember appointments in the Excepting Clause by lodging the power to appoint inferior officers in the “courts of law,” which (like the three-judge court in Morrison) were often multimember bodies. See Def. Mem. at 26; U.S. Mem. at 23. Plaintiffs’ effort to distinguish judicial appointments from executive appointments (Reply at 40) is unpersuasive. The threat of corruption or patronage in appointment may be present in either case. Yet the Framers had no objection to appointing judicial clerks by committee. 2. Unable to cite a single authority in American history holding that a multimember body cannot be a department head, plaintiffs alternatively argue that the Commission is not the head of the SEC. But plaintiffs’ only authority is a single order—President Truman’s Reorganization Plan No. 10. Pl. Reply at 41-42. That plan did not purport to make the Chairman the “head” of the SEC for Appointments Clause purposes. It merely transferred certain internal administrative duties from the Commission to the Chairman, while preserving the role of the Commission as a whole. The plan itself provided that “[i]n carrying out any of his 11 Tellingly, plaintiffs’ quotation from Printz (Reply at 40) is incomplete. The full quote is: “[I]f, as petitioners contend, earlier Congresses avoided use of [a] highly attractive power, we would have reason to believe that the power was thought not to exist.” Printz v. United States, 521 U.S. 898, 905 (1997). The phrase “highly attractive”—omitted by plaintiffs—is crucial. If a practice was not “highly attractive,” early Congresses’ failure to use it says nothing about its constitutionality. Those Congresses could simply have chosen not to use it as a policy matter. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 20 of 32 15 functions under the provisions of this section the Chairman shall be governed by general policies of the Commission and by such regulatory decisions, findings, and determinations as the Commission may by law be authorized to make.” Reorganization Plan No. 10, § 1(b)(1), 15 Fed. Reg. 3175, 3175 (May 25, 1950). It also provided that “[t]he appointment by the Chairman of the heads of major administrative units under the Commission shall be subject to the approval of the Commission,” id. § 1(b)(2), and that “[t]here are hereby reserved to the Commission its functions with respect to revising budget estimates and with respect to determining upon the distribution of appropriated funds according to major programs and purposes,” id. § 1(b)(4). The plan thus acknowledges the Commission’s authority throughout.12 Even as reorganized, the Commission acts as a collective body in exercising its most important powers. The Commission, not the Chairman, promulgates rules. 15 U.S.C. § 78w(a)(1). The Commission, not the Chairman, investigates and sues to enjoin violations of the securities laws. 15 U.S.C. § 78u. The Commission, not the Chairman, reviews disciplinary sanctions. 15 U.S.C. § 78d-1(b). And the Commission, not the Chairman, registers and supervises SROs. 15 U.S.C. § 78s. The President himself explained that the transferred functions pertain only to “day-to-day direction and internal administration,” and that “the substantive aspects of regulation—that is, the determination of policies, the formulation and issuance of rules, and the adjudication of cases . . . are left in the board or commission as a whole.” Special Message to the Congress Summarizing the New Reorganization Plans, Public Paper No. 1950-53 (Mar. 13, 1950), available at http://www.trumanlibrary.org/publicpapers/ index.php?pid=673&st=&st1=; see also Special Message to the Congress Transmitting 12 The Chairman’s authority to appoint personnel other than heads of major administrative units without Commission approval is not an indication that he alone is the “head” of the Commission. Personnel who are not inferior officers need not be appointed by a department head. See Landry v. FDIC, 204 F.3d 1125, 1130-34 (D.C. Cir. 2000). Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 21 of 32 16 Reorganization Plans 1 Through 13 of 1950, Public Paper No. 1950-54 (Mar. 13, 1950), available at http://www.trumanlibrary.org/publicpapers/index.php?pid=674&st=&st1= (“The fact that under these reorganization plans the commissions retain all substantive responsibilities deserves special emphasis. The plans only eliminate multi-headed supervision of internal administrative functioning. The commissions retain policy control . . . .”).13 Sarbanes-Oxley continues that pattern: The Commission, not the Chairman, reviews Board rules and sanctions, § 107(b)-(c), 15 U.S.C. § 7217(b)-(c), reviews Board inspection reports, § 104(h), 15 U.S.C. § 7214(h), approves the Board’s budget, § 109(b), 15 U.S.C. § 7219(b), and disciplines Board members, § 107(d)(3), 15 U.S.C. § 7217(d)(3). And Congress’s decision to grant the Commission power to appoint Board members is itself evidence that the Commission is the “head” of the department. Ultimately, the question is not whether the Chairman possesses some additional responsibilities that other Commissioners do not, but whether the Chairman’s powers are so clearly more significant than the Commission’s that Congress’s judgment about who is the “head” must be rejected. See Weiss v. United States, 510 U.S. 163, 194 (1994) (Souter, J., concurring) (“[I]n the presence of doubt deference to the political branches’ judgment is appropriate . . . .”). Plaintiffs have failed to make that showing. 13 Plaintiffs point to a provision of the Reorganization Act of 1949 that authorized the President to “ ‘provide for the appointment and pay of the head and one or more officers of any agency.’ ” Pl. Reply at 42 (quoting 5 U.S.C. § 904(2)). But there is no evidence that Plan No. 10 was an exercise of that authority, rather than the more general reorganization authority under 5 U.S.C. § 903. To the contrary, § 904(2) requires the President to make a specified finding and also requires that the new “head” be either a civil-service position or a Senate-confirmed position, 5 U.S.C. § 904; neither condition was met here. (The Senate confirms each Commissioner, 15 U.S.C. § 78d(a), but the President alone designates the Chairman from among the Commissioners, Reorganization Plan No. 10, § 3, 15 Fed. Reg. at 3175.) Furthermore, the Reorganization Act itself provides that “the head of an agency [may] be an individual or a commission or board with more than one member.” 5 U.S.C. § 904 (emphasis added). Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 22 of 32 17 3. Plaintiffs, in any event, have shown no injury traceable to Congress’s decision to vest appointment authority in the Commission as a whole. Even if the Chairman were the head of the SEC, Congress could still limit his role to approving or disapproving candidates selected by the Commission. See NTEU, 663 F.2d at 246 n.9; United States v. Hartwell, 73 U.S. 385, 393-94 (1867).14 And the Chairman in fact voted for every candidate selected. Def. Mem. at 27.15 Plaintiffs’ claimed injury thus rests on an unlikely chain of assumptions: that, had the Chairman known the other Commissioners could only select candidates and not vote to approve them, he would have voted against one (even though he in fact voted for all); that the candidate ultimately approved would have adopted different standards and practices; and that those standards and practices would have been less burdensome rather than more. The causation standard for Appointments Clause challenges may be forgiving, but it is not non-existent. See Motion To Dismiss at 43 (citing cases). Plaintiffs’ speculative argument fails.16 III. PLAINTIFFS’ SEPARATION-OF-POWERS ARGUMENTS HAVE NO FOUNDATION IN HISTORY OR PRECEDENT Plaintiffs also urge that the Act violates separation of powers by “insulating” the Board from presidential control. Pl. Reply at 1. That argument has no basis in history or precedent. 14 Contrary to plaintiffs’ claim (Reply at 43 n.24), both NTEU and Hartwell specifically address officer status under the Appointments Clause. See NTEU, 663 F.2d at 246 n.9 (citing “U.S. Const. art. II, § 2”); Hartwell, 73 U.S. at 393-94 (officer was “appointed . . . within the meaning of the constitutional provision”). 15 Plaintiffs claim the Chairman’s vote was influenced by the other Commissioners (Reply at 43- 44), but their source does not show that the Chairman voted for a candidate he did not ultimately prefer. See GAO, Actions Needed To Improve PCAOB Selection Process 10 (2002). 16 Plaintiffs’ contrary authorities (Reply at 43 n.23) are inapposite. Each involved a non-voting member improperly present on the committee that directly caused the plaintiff’s injury by prosecuting or deciding a case. See FEC v. NRA Political Victory Fund, 6 F.3d 821, 825 (D.C. Cir. 1993) (FEC officer in enforcement action); United States v. Jones, 763 F.2d 518, 523 (2d Cir. 1985) (alternate juror); United States v. Lane, 64 M.J. 1 (C.A.A.F. 2006) (judge on panel). Plaintiffs are not complaining about injuries caused by the presence of a non-voting member on the Board. They are complaining about the committee that appointed the Board. The chain of causation in the latter case is much more tenuous. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 23 of 32 18 A. Plaintiffs’ Separation-of-Powers Arguments Are Foreclosed by Hennen and Perkins Despite having relied on historical sources extensively in their initial memorandum, plaintiffs now abandon any pretense that history supports their claims. For example: • Plaintiffs originally relied on the Federalist Papers. Pl. Mem. at 1, 13, 18, 23, 24. The Board pointed out that The Federalist No. 77 directly contradicts their position. Def. Mem. at 30 n.17. Plaintiffs offer no response. • Plaintiffs initially relied heavily on the legislative “decision of 1789.” Pl. Mem. at 1, 12- 13, 15, 18. The Board pointed out that virtually every speaker in that debate contradicted plaintiffs’ position. Def. Mem. at 30 & nn.15-16. Plaintiffs abandon the argument. • Plaintiffs’ initial brief relied on Justice Story’s Commentaries. Pl. Mem. at 40-41. The Board pointed out that Story contradicted their position. Def. Mem. at 34-35. Plaintiffs now dismiss Story’s views as “idiosyncratic.” Pl. Reply at 7 n.5. This Court need not delve into history, however, because Supreme Court precedent forecloses plaintiffs’ claims. The Supreme Court long ago rejected plaintiffs’ position that the President himself must have authority to remove all inferior officers: Hennen states with unmistakable clarity that the power to remove follows the power to appoint, and that the President therefore has no power to remove an inferior officer appointed by a department head. 38 U.S. at 259-60. And the Supreme Court has just as squarely rejected plaintiffs’ challenge to the limitations on the SEC’s removal power: Perkins holds in no uncertain terms that, where Congress vests authority to appoint an inferior officer in a department head, it may restrict removal “as it deems best for the public interest.” 116 U.S. at 485. Plaintiffs seek to escape Hennen and Perkins by rewriting the cases’ rationales. They claim that Hennen merely holds that “the President must exercise his removal authority [over inferior officers] ‘through’ his ‘alter egos.’ ” Pl. Reply at 5, 7-8. But Hennen nowhere suggests that. The words “through” and “alter ego” do not even appear in the opinion. Rather, Hennen reasoned that, because “the power of removal [is] incident to the power of appointment,” “the Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 24 of 32 19 President has certainly no power to remove” those he did not appoint. 38 U.S. at 259-60. Hennen thus explained that the President has “no power” to remove inferior officers appointed by department heads—not that he does have power but must exercise it indirectly.17 Plaintiffs likewise err in claiming that Perkins stands only for the point that Congress may condition removal on cause, defined broadly to include any “ ‘failure to accept supervision.’ ” Pl. Reply at 7 & n.4, 10. Whether or not the naval cadet in Perkins could have been court-martialed for refusing to follow orders is beside the point. That fact, even if true, was not mentioned once in the Court’s opinion. The express rationale for the decision was that “when congress, by law, vests the appointment of inferior officers in the heads of departments, it may limit and restrict the power of removal as it deems best for the public interest.” 116 U.S. at 485 (emphasis added). The fact that plaintiffs can imagine an alternative rationale more consistent with their revisionist understanding of executive power is no reason for this Court to ignore what the Supreme Court actually wrote. Plaintiffs’ claim that “no case has suggested that the determinant of Congress’s power to restrict removal turns on whether the officer is ‘inferior’ or principal” (Reply at 9) likewise flies in the face of Perkins, which makes precisely that distinction. 116 U.S. at 484-85.18 17 Quoting Hennen’s proviso “ ‘in the absence of all constitutional provision or statutory regulation,’ ” Pl. Reply at 7 (emphasis omitted), plaintiffs urge that there is a constitutional requirement of presidential removal authority here. But no provision of the Constitution requires inferior officers to be removable by the President rather than the department head who appointed them. Hennen had in mind express restrictions such as Article III’s life-tenure provision for judges. See 38 U.S. at 258-59. Hennen’s statement that the President has “no power” to remove inferior officers appointed by a department head would be a nullity if separation-of-powers principles required the President to have that power in any event. 18 Plaintiffs’ overwrought hypotheticals have no bearing here. For example, Congress could not create plaintiffs’ hypothetical “Law Enforcement Commission” (Reply at 4) because Perkins is limited to inferior officers appointed by department heads; principal officers with permanent, wide-ranging, criminal prosecutorial authority who exercise no quasi-adjudicative or quasi- legislative functions must be removable at will. See Morrison, 487 U.S. at 690. Similarly, Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 25 of 32 20 Plaintiffs seek refuge in Morrison v. Olson, 487 U.S. 654 (1988) (Pl. Reply at 5-10). They assert that, if Hennen and Perkins meant what they said, the Court in Morrison “[c]ould have resolved th[e] case” more easily by simply relying on those two decisions. Pl. Reply at 5. But Morrison did not involve an inferior officer appointed by a department head in the traditional mold of Hennen and Perkins. Although the independent counsel was removable by the Attorney General, she was appointed by a three-judge court. 487 U.S. at 661, 663. Hennen thus did not necessarily apply, because removal authority did not follow appointment authority. 38 U.S. at 259-60. Nor did Perkins necessarily apply, because Perkins by its terms addresses only appointments by “heads of departments,” 116 U.S. at 485, not courts. See Morrison, 487 U.S. at 723-24 (Scalia, J., dissenting) (observing that the statute would require a “considerable . . . extension” of Perkins because the Executive had “full discretion in neither the selection nor the removal of a purely executive officer”). Given that Hennen and Perkins did not necessarily apply in Morrison, it is not surprising that the Court engaged in a broader separation-of-powers analysis. That hardly means that Hennen and Perkins cease to be good law in contexts where they do apply. In any event, plaintiffs lose sight of the obvious fact that Morrison upheld the independent-counsel statute. It is hard to see how a decision upholding that statute could “confirm[]” that Sarbanes-Oxley is unconstitutional, much less do so “beyond all doubt.” Pl. Reply at 5. Morrison’s holdings about what conditions were sufficient for constitutionality there are not holdings about what conditions are necessary for constitutionality here. That the Attorney General had “ ‘ample’ ” removal authority there (Pl. Reply at 6), for example, does not mean courts can now ignore Hennen and Perkins and strike down any law providing for less Congress could not rely on Perkins to grant “permanent tenure” (Pl. Reply at 3) because Perkins refers only to “limit[ing] and restrict[ing]” removal, not abolishing it. 116 U.S. at 485. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 26 of 32 21 removal authority than existed in Morrison. Hennen and Perkins are dispositive here. B. The SEC’s Removal Authority Easily Satisfies Morrison Even if one were to assume that Morrison overruled Hennen and Perkins sub silentio, plaintiffs’ challenge would still fail. Under Morrison, removal restrictions are permissible unless they “unduly trammel[] on executive authority.” 487 U.S. at 691. Sarbanes-Oxley does not even remotely approach that line. This is not a case where Congress has granted removal power to an entity unconnected to the Executive Branch, such as Congress itself. To the contrary, the SEC is part of the Executive Branch. See Def. Mem. at 25 n.11. And, contrary to plaintiffs’ claims (Reply at 12-14), the SEC’s power to remove Board members is substantial. 1. As an initial matter, the adequacy of the SEC’s removal authority must be evaluated in light of the SEC’s entire range of oversight powers, not in isolation. The SEC has pervasive authority over the Board, including power to review Board decisions, to amend Board rules, or to rescind Board enforcement authority. See pp. 2-3, supra. The SEC does not need even the broad removal authority it enjoys, because Board members cannot take legally operative positions with which the SEC disagrees. For that reason, plaintiffs miss the mark in emphasizing the importance accorded to broad removal authority in Morrison. Pl. Reply at 17-18. Broad removal authority was important in Morrison only because the Attorney General had virtually no other means of control. He did not appoint the independent counsel, did not approve her budget, could not review or countermand her decisions, and certainly could not withdraw her enforcement authority whenever the “public interest” required. Had the Attorney General possessed those far-reaching powers—as the SEC does here—the details of his removal authority would have been of much less consequence. 2. Even focusing on removal power alone, the SEC’s oversight is plainly sufficient. The SEC concededly can remove Board members for intentional misconduct. § 107(d)(3)(A)- Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 27 of 32 22 (B), 15 U.S.C. § 7217(d)(3)(A)-(B) (Pl. Reply at 13). And it concededly can remove Board members for negligent failure to enforce the Act. § 107(d)(3)(C), 15 U.S.C. § 7217(d)(3)(C) (Pl. Reply at 13). That is a far cry from giving Board members—who are appointed for only five- year terms, § 101(e)(5)(A), 15 U.S.C. § 7211(e)(5)(A)—“permanent tenure.” Pl. Reply at 3. Contrary to plaintiffs’ claims, moreover, the SEC could remove a Board member who “launches deep and onerous investigations into what he erroneously perceives as violations of law, or who otherwise interprets and enforces the securities laws in a manner that the SEC believes is completely improper,” or who did not “know that he was abusing his authority or violating the law.” Pl. Reply at 12-13. Plaintiffs simply ignore applicable D.C. Circuit precedent. The unambiguous holding of Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000), is that negligent misinterpretations of the law are “willful” misconduct as that term is used in the securities laws. See Def. Mem. at 36-37. Wonsover does not render the term “willful” “utterly meaningless” (Pl. Reply at 13). It merely recognizes the longstanding rule that, in the securities context, “willfulness” refers to volition and knowledge about what one is doing; it does not require knowledge that one’s conduct is wrongful. And even if Wonsover left any doubt on this point (which it did not), any ambiguity could not justify striking down the Act in this facial challenge. See p. 10, supra.19 19 Plaintiffs also argue that Board members could not be removed for interpreting the law “in a manner about which reasonable people could disagree.” Pl. Reply at 13. But the remedy for reasonable misinterpretations of the law is reversal, not removal; if a Board member persists after the SEC corrects his misunderstanding, he can then be removed for willful misconduct. § 107(d)(3)(A)-(B), 15 U.S.C. § 7217(d)(3)(A)-(B). Plaintiffs further err in claiming “there is no apparent reason” for the Act’s removal restrictions. Pl. Reply at 27. The Board performs quasi- adjudicative functions. Congress reasonably could have concluded that those functions would be performed more effectively if Board members were removable only for cause, and more effectively still if the grounds constituting “cause” were spelled out in detail. Def. Mem. at 35. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 28 of 32 23 C. The Restrictions on the President’s Power To Remove SEC Commissioners Are Irrelevant Although Hennen clearly establishes that the President need not have any power—direct or indirect—to remove inferior officers appointed by a department head, see pp. 18-19, supra, plaintiffs’ claim would fail even if the President were required to have such power. Plaintiffs admit that the President can be required to exercise any removal authority over inferior officers indirectly, through his oversight of their superiors. Pl. Reply at 5. Nonetheless, plaintiffs claim that applying the ordinary rule here offends executive power because the Commissioners of the SEC (unlike the Attorney General or the Secretary of Defense) are removable only for cause. Id. at 11, 14-16. That claim defies logic. The SEC promulgates rules to govern the securities markets, imposes sanctions for securities-law violations, and makes countless other regulatory decisions of national import. Plaintiffs do not argue that the SEC itself is unconstitutional, even though all those decisions are made by Commissioners who are removable only for cause. It is hard to understand why the SEC’s personnel decisions—its choices about whether to fire or retain the inferior officers it appoints and supervises—should be subject to more pervasive presidential control than any of its other important discretionary functions. In any event, plaintiffs exaggerate the difference this for-cause restriction makes on the President’s control over the Board. Where a principal officer is removable at will but his inferior is removable only for cause—an arrangement plaintiffs concede to be constitutional (Reply at 10)—the President’s removal power is already limited: The President must show cause for the inferior’s removal.20 Adding a for-cause restriction to the principal officer does not significantly 20 Moreover, requiring the President to exercise removal authority through that principal officer materially reduces his control. The President must not only fire the superior but also locate—and potentially win Senate confirmation for—a replacement willing to carry out his bidding. As the Watergate “Saturday Night Massacre” demonstrates, that is not always an easy task. See Nader v. Bork, 366 F. Supp. 104, 107 (D.D.C. 1973). Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 29 of 32 24 change the President’s authority: The President must still show cause for the inferior’s removal, and must also show that the principal’s failure to remove was a neglect of duty. See Def. Mem. at 33-34. The President’s authority to remove in the latter case may be modestly narrower, but it is hardly “nonexistent.” Pl. Reply at 14. Plaintiffs embellish the distinction with a variety of adjectives (e.g., “completely and unreasonably derelict,” Reply at 15), but the bottom line is that the President’s power to remove Board members—assuming he must have that power—is not “completely stripped.” Morrison, 487 U.S. at 692. Rather, he has the same power over the SEC’s removal decisions as he has over any other discretionary SEC decision. Plaintiffs thus miss the point in arguing that the restrictions on removal of SEC Commissioners hinder the President’s “pursuit of what he views as the best enforcement policies and the best view of the securities laws.” Pl. Reply at 15. That is true of the President’s oversight of the SEC in general. The very concept of an independent agency is that Congress has placed some limits on the President’s control over the agency’s agenda. Limiting the President’s control over the agency’s personnel decisions in the same manner cannot possibly “unduly trammel[] on executive authority.” Morrison, 487 U.S. at 691.21 D. The Cause Restrictions Are Severable Finally, even if the restrictions on the SEC’s removal authority were somehow invalid— and they are not—they should be severed. Contrary to plaintiffs’ claims (Reply at 27), severance 21 Plaintiffs also argue that the Act’s oversight provisions “taken as a whole” are inadequate. Pl. Reply at 16-27. As we explained (Def. Mem. at 39), the question whether the SEC’s oversight satisfies separation of powers is no different from the question whether the SEC’s oversight is adequate to render Board members inferior officers—the two inquiries are basically the same. Compare Morrison, 487 U.S. at 671-73, with id. at 695-96 (relying on essentially the same factors to conclude that the independent counsel was an inferior officer and that the Attorney General’s supervision satisfied separation of powers). And the President is not required to have direct oversight over Board members, because he supervises the principal officers to whom they report. See Def. Mem. at 39-41. Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 30 of 32 25 would not require the Court to “rewrite” the statute. The Court would simply strike § 107(d)(3) itself, as well as the phrase “in accordance with section 107(d)(3)” from § 101(e)(6), leaving the SEC with general “for cause” removal authority under § 101(e)(6), 15 U.S.C. § 2711(e)(6). The question is not whether severance would alter the balance Congress had in mind (Pl. Reply at 28), but whether it would be more consistent with congressional intent than striking down the entire Act. See Def. Mem. at 38-39. Plainly, Congress was more concerned about restoring investor confidence in audited financial statements than about whether the SEC’s power to remove Board members would be governed by a general “for cause” standard or by three particular enumerated “causes.” It is utterly implausible to think that Congress—after initially drafting a bill that included no removal provisions at all (Def. Mem. at 38) and then adding removal provisions without comment in a single subsection of a bill that spans more than 60 pages of the Statutes at Large—would now prefer to see the entire Act struck down. CONCLUSION For the foregoing reasons, defendants’ cross-motion for summary judgment should be granted. Dated: October 11, 2006 Respectfully submitted, Lewis H. Ferguson (D.C. Bar No. 176312) J. Gordon Seymour (D.C. Bar No. 450051) Heidi E. Murdy (D.C. Bar No. 474680) PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD 1666 K Street, N.W. Washington, D.C. 20006 (202) 207-9162 (telephone) (202) 862-8430 (facsimile) /s/ Jeffrey A. Lamken Joe Robert Caldwell, Jr. (D.C. Bar No. 965137) James R. Doty (D.C. Bar No. 416785) Jeffrey A. Lamken (D.C. Bar No. 440547) Robert K. Kry (D.C. Bar No. 490545) Joshua A. Klein (D.C. Bar No. 489078) BAKER BOTTS, LLP 1299 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2400 (202) 639-7700 (telephone) (202) 639-7890 (facsimile) Counsel for Defendants Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 31 of 32 26 CERTIFICATE OF SERVICE I hereby certify that on October 11, 2006, a true and correct copy of the foregoing was served by the court’s electronic case filing system on all parties subscribing thereto, and by overnight express mail upon the following: Michael A. Carvin Noel J. Francisco Christian G. Vergonis JONES DAY 51 Louisiana Avenue, N.W. Washington, D.C. 20001 Viet D. Dinh Wendy Keefer BANCROFT ASSOCIATES PLLC 601 13th St., N.W. Suite No. 930 South Washington, D.C. 20005 Sam Kazman Hans Bader COMPETITIVE ENTERPRISE INSTITUTE 1001 Connecticut Avenue, N.W. Suite 1250 Washington, D.C. 20036 Kenneth W. Starr 24569 Via De Casa Malibu, CA 90265 Robert J. Katerberg U.S. DEPARTMENT OF JUSTICE 20 Massachusetts Avenue, N.W. Washington, D.C. 20001 Kathryn Comerford Todd WILEY, REIN & FIELDING LLP 1776 K Street, N.W. Washington, D.C. 20006 Miles Jarrad Wright WEIL, GOTSHAL & MANGES, LLP 1300 I Street, N.W. Suite 900 Washington, D.C. 20005 Roderick M. Hills HILLS, STERN & MORLEY 901 15th Street, N.W. Suite 400 Washington, D.C. 20005 /s/ Joshua Klein Case 1:06-cv-00217-JR Document 49 Filed 10/11/2006 Page 32 of 32