If auditors weren't already jittery enough about litigation risk, they're getting even more nervous over the possibility that litigation related to antifraud provisions in U.S. law could include securities fraud claims crossing international borders.
The Dodd-Frank Act gave the Securities and Exchange Commission the authority under existing antifraud rules in Section 10(b) of the Securities and Exchange Act of 1934 to take action in cases involving transnational securities fraud. Congress also instructed the SEC through Dodd-Frank to get some public feedback and conduct a study to determine the extent to which such actions should be allowed even for private litigants. The SEC issued a call for comments to kick off the study.
That prompted seven major firms, including all of the Big 4 firms, to pool their legal resources and plead for protection. In a joint comment letter to the SEC, the audit firms remind the SEC that they already face claims in the United States that are big enough to threaten their existence. Now they're worried that allowing private actions related to transnational securities fraud will enable that threat to seep into their international audit networks as well.
“Creation by the United States of a new, extraterritorial private cause of action would impose on non-U.S. audit firms the litigation burdens and threats now faced by U.S. audit firms,” the firms write. “We strongly oppose that step for several reasons.” It's not necessary to promote audit quality, the firms say. It would interfere with the policy choices of other sovereign nations, and it would harm investors by increasing costs and possibly further reducing competition among audit firms.
The U.S. Supreme Court ruled in June 2010 that the Exchange Act does not explicitly allow application of the antifraud provisions outside of U.S. capital markets, so no such authority exists. Only a month later, Dodd-Frank amended the Exchange Act to specifically give U.S. district courts jurisdiction to consider fraud allegations brought by the SEC or the U.S. government even when the underlying securities transactions took place outside the United States involving only foreign investors, or when they occur outside the United States but have an effect inside the United States.
The law also instructed the SEC to take a hard look at whether that same right should be extended to private litigants. That's the part that sends shivers down the spines of auditors. The seven firms trot out extensive data to illustrate the extent to which they are already targeted by private lawsuits in the United States. Yet, “there is no evidence that the merits of such suits have much if anything to do with their filing or settlement,” the firms say.
The SEC accepted comments through mid-February and plans to consider any comments as it undertakes its study.