I have been semi-following a very interesting lawsuit over the past few months.  It’s interesting primarily because of its potential impact on the regulatory environment if it is successful.

To bring you up to speed, two men (with financial backing) have brought a lawsuit that challenges the constitutionality of Sarbanes-Oxley (SOX).   A recent article on this lawsuit can be found here.  These lawyers are nominally representing an auditor from Nevada named Brad Beckstead, who is suing PCAOB (Public Company Accounting Oversight Board) because (he says) a SOX audit was so onerous that it ruined his auditing business.  The lawyers claim that they are working on this case without payment, probably because it not only gives them very high visibility, but also because it fits into their conservative political agenda.

Their suit claims that PCAOB is unconstitutional, primarily because it has great power, but its members are not chosen by the President, but by the SEC.  In addition, they claim that the members cannot be removed by the President, despite the fact that they work in the Executive branch.  And, without the ability to remove members from this group, the President cannot effectively ensure that the “laws of the nation are faithfully carried out.”  It’s certainly a novel challenge, to say the least.

One reason why this challenge is so concerning is that due to a “drafting quirk,” if any part of SOX is deemed to be invalid, the whole statute might be in question.  And, if SOX is declared unconstitutional, it would raise questions not only about the validity of other major regulations, but it even calls into question the whole regulatory structure itself.  And, if the Congress had to go back to SOX to re-negotiate it, I can’t even imagine the fireworks that would create.

The Supreme Court will take up this case on December 7 (interesting parallel – Pearl Harbor Day).  I am hoping that the suit will be thrown out.  But, with this Supreme Court, you never know what will happen.