FEF v. PCAOB: The Board's Motion to Dismiss and the FEF Reply

In May 2006, the PCAOB moved to dismiss the complaint filed by the Free Enterprise Fund and Beckstead and Watts. PCAOB argues that the Sarbanes-Oxley Act created an exclusive process for administrative and judicial review of complaints concerning the Board’s actions. This process entails an administrative review by the SEC, followed by a right to appellate review in the circuit court of appeals. The PCAOB contends that the complaint’s claims can be addressed within the review mechanism developed by Congress, and that the plaintiffs are attempting to circumvent that process. In addition, the Board asserts that SEC interpretation of the Board’s authority is necessary before a claim of unconstitutionality can be raised, reasoning that the expertise of the Commission is required in the interpretation of the statutes they are charged with enforcing. The PCAOB also argues that the plaintiffs have not stated their claims with sufficient specificity to properly assert standing because FEF does not identify who its members are, how they have been injured, or which regulations caused those injuries.

Plaintiffs Free Enterprise Fund (FEF) and Beckstead and Watts responded to the PCAOB’s motion to dismiss, arguing three points. First, in response to the defendant’s claim that there is a lack of jurisdiction by the District Court, the plaintiffs argue that this claim is outside the scope of the review scheme constructed by Congress. Plaintiffs allege that the review system was intended to address those complaints involving the PCAOB’s rules and actions, and a complaint based on a constitutional challenge is outside the expertise of the Board or the SEC, and can thus be brought in the District Court instead of through the agencies. The plaintiffs further argue this point by emphasizing that they are not challenging the manner in which they are being regulated, but that they are challenging the regulator itself. Second, the plaintiffs assert that they do not need to assert a statutory cause of action because the claim arises from the Constitution itself. Third, in response to the argument  that FEF lacks standing, plaintiffs argue that the court need not resolve the issue because there is no challenge to co-plaintiff Beckstead and Watts’ standing, which makes the same claims as FEF. The plaintiffs also contend that FEF is not required to disclose the actual identities of its members, only that it must show an injury fairly traceable to the actions of the defendant. Plaintiffs claim that this they have done with sufficient detail for the pleadings stage.

PCAOB’s motion to dismiss

Plaintiffs’ response to PCAOB’s motion to dismiss