These Men Could Kill SarbOx

(page 2 of 2)

Browse Issues

Browse the BusinessWeek Archive

Related Items

• The Making of Two Anti-Reg Bulldogs

Accountant Beckstead says SarbOx killed his auditing business Eric Millette

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Now the two are fashioning a "Republican OLC in exile," says John Elwood, a partner in the Supreme Court practice of the law firm Vinson & Elkins and a former OLC attorney. The OLC's focus on the Constitution and the balance between Presidential authority and Congress has long informed many of Carvin's and Francisco's arguments. Francisco is invoking the First Amendment in a bid to win Reynolds and other tobacco companies the right to promote chewing tobacco as a safer alternative to smoking. Similarly, when the government recently sought to slap tobacco companies with billions of dollars in penalties under federal racketeering laws, Carvin and Francisco successfully argued that the law didn't allow such penalties without criminal charges—effectively defanging the broader case. Carvin, meanwhile, represented EDS when it was a contractor for securities regulators and it botched the scoring of brokers' exams in 2005. Carvin argued successfully that Congress had protected the regulators—and therefore EDS, their contractor—when it established a comprehensive appeals scheme that precluded lawsuits seeking damages.

ATTACKING REFORM

In Beckstead, Carvin and Francisco are taking on their boldest challenge yet. The PCAOB was established as an independent nonprofit largely to let it pay market wages for its workers rather than civil servant salaries and to shield it from political influence. In 2004 seven PCAOB auditors descended on Beckstead & Watts to pore over its practices. The result was a detailed report listing deficiencies based on the SarbOx rules. Beckstead penned a spirited response, but he says the cost of complying was too great and he had to shut down his auditing practices.

The Free Enterprise Fund, a conservative group founded by anti-taxation crusader Stephen Moore, took interest in Beckstead's plight. When the fund introduced Beckstead to Carvin, the accountant jumped at the chance to sue. (So did Carvin; he and Francisco agreed to stay with the case even after the fund ran out of money to support the litigation.)

Carvin and Francisco charge that the PCAOB is unconstitutional. They argue that the Constitution requires Presidential appointment of the top members of so powerful a body as the PCAOB. Yet, they point out, PCAOB members are appointed by the Securities & Exchange Commission. The lawyers also contend that PCAOB's members are largely beyond Presidential discipline because of a variety of restrictions on their removal. Since the Constitution requires the President to "take care that the Laws be faithfully executed," the President must have the widest possible power to remove those responsible for the government's executive functions, they say. The PCAOB argues that it is constitutional. Backers say its members are low-level officers who don't have to be appointed by the President, and say the President and the SEC have plenty of tools to govern the board.

A ruling for Beckstead could invalidate a host of post-Enron reforms. Because of a drafting quirk, the entire body of Sarbanes-Oxley might fall if a significant legal flaw is found anywhere within the legislation, say some attorneys. Other lawyers say a ruling for Beckstead could call into question the legitimacy of other regulators' appointments. For example, the fixed terms of the Federal Reserve's seven governors limit the President's ability to remove them—a situation that theoretically could be proved invalid if the court sides with the broadest arguments being made by conservative lawyers filing briefs in the Beckstead case.

But even a less sweeping opinion would probably give Congress time to fix the law so that it conforms with the Constitution. That would give critics a chance to reopen SarbOx to debate—and even make major changes. "You create tremendous advantages for the minority [party] to get substantial amendments," Carvin says. Separately, the House is considering exempting small companies from key provisions of SarbOx.

After the Beckstead case, Carvin and Francisco plan to turn their attention to the Obama Administration's aggressive reform agenda. "The stakes are enormous, and you have agencies getting into all kinds of areas they've never gotten involved in," Carvin says. The two lawyers are already talking with potential clients who fear losing millions in executive pay at companies receiving federal assistance, and they're pondering a challenge to various pro-union executive orders by President Obama. More cases are likely. Says Carvin, "it's a target-rich environment."

Francis is a correspondent in BusinessWeek's Washington bureau.

Business Exchange

Track and share business topics across the Web.