Davy v. S.E.C., No. 85-7328

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtBefore SNEED and FARRIS; FARRIS
Citation792 F.2d 1418
PartiesFed. Sec. L. Rep. P 92,799 Russell G. DAVY, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
Decision Date26 June 1986
Docket NumberNo. 85-7328

Page 1418

792 F.2d 1418
Fed. Sec. L. Rep. P 92,799
Russell G. DAVY, Petitioner,
v.
SECURITIES AND EXCHANGE COMMISSION, Respondent.
No. 85-7328.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted May 15, 1986.
Decided June 26, 1986.

Page 1419

Stuart D. Perlman, Chicago, Ill., for petitioner.

Ronald R. Massumi, Linda D. Fienberg, S.E.C., Washington, D.C., for respondent.

On Review from an Order by the United States Securities and Exchange Commission.

Before SNEED and FARRIS, Circuit Judges and McDONALD, * District Judge.

FARRIS, Circuit Judge:

Russell Davy, an accountant, appeals from an order issued by the Securities and

Page 1420

Exchange Commission under Rule 2(e) (17 C.F.R. 201.2(e) ) barring him from practice before the Commission. The SEC found that Davy had engaged in improper professional conduct and had willfully violated the federal securities laws by certifying financial statements which were inaccurate. The statements were subsequently used to register, market, and sell securities.
FACTS

This disciplinary action arises from an audit performed in 1979 by Davy, a Certified Public Accountant, on SNG Oil & Gas Company. Davy audited SNG at the request of its comptroller, Ian Allison, for its fiscal years 1977 and 1978. He had previously audited other companies for Allison, some of them publicly held and thus subject to the SEC's reporting requirements.

The audits of SNG that Davy performed in 1977 and 1978 revealed SNG to be little more than a shell. It was closely held with few assets and almost no on-going business activity. At the close of the 1979 fiscal year, Allison again asked Davy to perform an audit and certify the financial statements of SNG. Allison told Davy that the only change would be the contribution of some new assets, including real estate, by a new shareholder pursuant to an agreement. To verify that SNG owned the new assets, Allison provided only a journal entry and an unexecuted contract of transfer. Davy, in breach of his duty under Generally Accepted Auditing Standards to determine whether reported assets are actually owned by the audited corporation, sought no further documentation of the transfer. (The transfer in fact did not take place until after SNG's stock began publicly trading and the SEC began its investigation of SNG.)

The statements that Davy certified, in reliance upon Allison rather than through his own efforts, showed a nine-fold increase in shareholder's equity and an eleven-fold increase in total assets from 1978 to 1979. The statements also listed "Sales" and "Cost of Sales" as well as a note on "Inventory," even though Davy knew that this conveyed the false impression that SNG had on-going business operations.

On October 29, 1979, Davy signed the unqualified audit report, certifying that his audit was conducted in accordance with Generally Accepted Auditing Standards and that the financial statements were presented in conformity with Generally Accepted Accounting Principles. After issuing his report, Davy received an appraisal of the real estate, a bank confirmation, and an appraisal of the mineral rights, all of which showed ownership in persons other than SNG. Rather than investigating these inconsistencies and correcting his report, Davy ignored these discrepancies, filing the documents with his personal audit workpapers. Davy does not dispute that his audit violated Generally Accepted Auditing Standards and Generally Accepted Accounting Principles.

Davy's report and statements were filed with the SEC by Allison in December of 1979 as part of a registration statement for the public sale of SNG's stock. Allison also prepared a "due diligence" file which contained copies of the SEC filing and Davy's report. Allison gave a copy of the due diligence file to Davy, and Davy admits that he checked it to see if it contained his report.

By February 1, 1980, SNG was listed for trading. After two ten-day suspensions for "unusual and unexplained" market activity and a "lack of adequate and accurate public information about the [company's] operations and financial condition," trading in SNG's stock was suspended indefinitely.

The case reached the SEC after a full evidentiary hearing before an administrative law judge. 1 The SEC reviewed independently

Page 1421

the ALJ's findings, and, after briefing and argument, issued its order affirming the ALJ. The order held that Rule 2(e) was not ultra vires, that Davy was within the jurisdiction of the SEC, and that Davy had violated the rule.
STANDARD OF REVIEW

Davy's contentions that Rule 2(e) is beyond the statutory authority of the SEC and that the SEC lacks jurisdiction to discipline him are legal questions reviewable de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, --- U.S. ----, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

"The findings of the Commission as to the facts, if supported by substantial evidence, are conclusive." 15 U.S.C. Sec. 78y(a)(4). Substantial evidence is " 'more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.' " Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971) (quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938) ). If the evidence is susceptible of more than one rational interpretation, the panel...

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15 practice notes
  • Lewy v. Southern Pacific Transp. Co., No. 84-6160
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • 12 Septiembre 1986
    ...court's subject-matter jurisdiction under the FELA, or relating to statutory interpretation of the FELA and RLA. See Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir.1986) (statutory interpretation); Pro Sales, Inc. v. Texaco, Page 1287 U.S.A., 792 F.2d 1394, 1396 (9th Cir.1986) (subject-matter ju......
  • Checkosky v. S.E.C., Nos. 92-1396
    • United States
    • U.S. Court of Appeals — District of Columbia Circuit
    • 20 Mayo 1994
    ...The Second Circuit in Touche Ross & Co. v. SEC, 609 F.2d 570 (2d. Cir.1979)--whose reasoning the Ninth Circuit adopted in Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir.1986)--held that Rule 2(e) was validly promulgated under the Commission's " 'broad authority' to adopt those rules and regulati......
  • Practice and procedure: Improper professional conduct standards,
    • United States
    • Federal Register October 26, 1998
    • 26 Octubre 1998
    ...the Second Circuit recognized: \63\ See Touche Ross, 609 F.2d at 582; Sheldon v. SEC, 45 F.3d 1515, 1518 (11th Cir. 1995); Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir. 1986); see also Potts, 151 F.3d 810. [Rule 102(e)] represents an attempt by the Commission to protect the integrity of its ow......
  • Securities and Exchange Commission,
    • United States
    • Federal Register December 02, 2002
    • 2 Diciembre 2002
    ...``broad authority'' to adopt rules and regulations necessary to carry out the Commission's designated functions); Davy v. SEC, 792 F.2d 1418 (9th Cir. 1986)(concluding that the Commission had statutory authority to adopt Rule 102(e)); Checkosky v. SEC, 23 F.3d 452, 456 (D.C. Cir. 1994) (``'......
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12 cases
  • Lewy v. Southern Pacific Transp. Co., No. 84-6160
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • 12 Septiembre 1986
    ...court's subject-matter jurisdiction under the FELA, or relating to statutory interpretation of the FELA and RLA. See Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir.1986) (statutory interpretation); Pro Sales, Inc. v. Texaco, Page 1287 U.S.A., 792 F.2d 1394, 1396 (9th Cir.1986) (subject-matter ju......
  • Checkosky v. S.E.C., Nos. 92-1396
    • United States
    • U.S. Court of Appeals — District of Columbia Circuit
    • 20 Mayo 1994
    ...The Second Circuit in Touche Ross & Co. v. SEC, 609 F.2d 570 (2d. Cir.1979)--whose reasoning the Ninth Circuit adopted in Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir.1986)--held that Rule 2(e) was validly promulgated under the Commission's " 'broad authority' to adopt those rules and regulati......
  • Gadda v. Ashcroft, No. 02-15113.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • 20 Julio 2004
    ...to the Ninth Circuit bar coexist with the separate, independent powers of federal administrative agencies to do the same. Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir.1986) ("[A]gencies have been given the power to police the conduct of those who practice before them."); see also Checkosky v. ......
  • Gadda v. Ashcroft, No. 02-15113.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • 1 Abril 2004
    ...to the Ninth Circuit bar coexist with the separate, independent powers of federal administrative agencies to do the same. Davy v. SEC, 792 F.2d 1418, 1421 (9th Cir.1986) ("[A]gencies have been given the power to police the conduct of those who practice before them."); see also Checkosky v. ......
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