Gregory M. Dearlove v. Securities and Exchange Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 9, 2009 Decided July 24, 2009
No. 08-1132
GREGORY M. DEARLOVE ,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION ,
RESPONDENT
On Petition for Review of an Order
of the Securities & Exchange Commission
Benjamin M. Zuffranieri Jr. argued the cause for
petitioner. With him on the briefs were Joseph V. Sedita,
Michelle L. Merola, and Robert J. Fluskey Jr.
Tracey A. Hardin, Senior Counsel, Securities &
Exchange Commission, argued the cause for respondent.
With her on the brief were Brian G. Cartwright, General
Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob
H. Stillman, Solicitor, and Hope Hall Augustini, Senior
Litigation Counsel.
Before: GINSBURG and GRIFFITH, Circuit Judges, and
RANDOLPH , Senior Circuit Judge.

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Opinion for the Court filed by Circuit Judge GINSBURG.
GINSBURG, Circuit Judge: Gregory Dearlove petitions for
review of the decision of the Securities and Exchange
Commission to debar him from practicing as an accountant
before the SEC. The SEC concluded Dearlove engaged
repeatedly in unreasonable conduct resulting in violations of
applicable accounting principles and standards while serving
as Deloitte & Touche’s “engagement partner” in charge of the
2000 audit of Adelphia Communications Corporation.
Dearlove argues the SEC committed an error of law,
misapplied the applicable accounting principles and
standards, and denied him due process. Because the SEC
made no error of law, and substantial evidence supports its
findings of fact, we deny the petition.
I. Background
Deloitte audited Adelphia’s financial statements from
1980 through 2002. An “engagement partner” had overall
responsibility for each audit. In 2000 Deloitte rotated
Dearlove onto the Adelphia account as the engagement
partner, heading a team of 35 accountants.
John Rigas had founded Adelphia in 1952 and he and his
children were the controlling shareholders in 2000. Dearlove
and the Deloitte team described the 2000 audit, like many
prior audits of Adelphia, as posing “much greater than normal
risk” because Adelphia engaged in numerous transactions
with subsidiaries and affiliated entities, many of which were
owned by members of the Rigas family.
In 2000 Adelphia was one of the largest cable television
companies in the United States. It had doubled the number of
cable subscribers it served by acquiring several other cable

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companies late in 1999. Although its assets were growing,
Adelphia’s debt grew substantially as well. The SEC found
that prior to 2000:
Adelphia, its subsidiaries, and some Rigas
Entities entered as co-borrowers into a series
of credit agreements. By 1999, Adelphia and
the Rigas Entities had obtained $1.05 billion in
credit; in 2000, they tripled their available
credit and drew down essentially all of the
funds available under the agreements.
In the Matter of Gregory M. Dearlove, CPA, No 3-12064,
2008 SEC LEXIS 223, at *5 (Jan. 31, 2008).
Deloitte issued its 2000 independent auditor’s report of
Adelphia — signed by Dearlove — on March 29, 2001. Id. at
*10. In January 2002, in the wake of the Enron scandal, the
SEC released a statement regarding the disclosure of related
party transactions. Id. at *10-11; see Statement About
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, 67 Fed. Reg. 3,746 (Jan.
25, 2002). In March Adelphia disclosed its obligations as co-
debtor with the Rigas Entities. Its share price declined from
$30 in January 2002 to $0.30 in June, when it was de-listed
by the NASDAQ. Dearlove, 2008 SEC LEXIS 223, at *11.
In September 2002 the Department of Justice brought
criminal fraud charges against Adelphia officials, including
members of the Rigas family, see United States v. Rigas, 490
F.3d 208 (2d Cir. 2007), and Adelphia agreed to pay $715
million into a victims’ restitution fund as part of a settlement
with the Government, In re Adelphia Commc’ns Corp., 327
B.R. 143 (Bankr. S.D.N.Y. 2005). Dearlove, 2008 SEC
LEXIS 223, at *12.

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In April 2005 the SEC brought and settled civil actions
against Adelphia, members of the Rigas family, and Deloitte.
Id. at *13-14. In September 2005 the SEC charged Dearlove
with improper conduct resulting in a violation of applicable
professional standards, including his approval of Adelphia’s
method of accounting for transactions between itself and one
or more Rigas Entities, i.e., related party transactions. The
matter was referred to an Administrative Law Judge, who
determined Dearlove had engaged in one instance of “highly
unreasonable” conduct and repeated instances of
“unreasonable” conduct, and permanently denied Dearlove
the right to practice before the SEC. Upon review of the
ALJ’s decision, the SEC held Dearlove had engaged only in
repeated instances of “unreasonable” conduct and denied him
the right to practice before the SEC but provided he may
apply for reinstatement after four years. Dearlove petitions
for review of that decision.
II. Analysis
SEC Rule 102(e) provides the SEC may “deny,
temporarily or permanently, the privilege of appearing or
practicing before [the SEC] in any way to any person who is
found by the Commission ... to have engaged in unethical or
improper professional conduct.” 17 C.F.R. §
201.102(e)(1)(ii). The Rule defines three classes of
“improper professional conduct” for accountants: (1)
“Intentional or knowing conduct, including reckless conduct,
that results in a violation of applicable professional
standards,” id. § 201.102(e)(1)(iv)(A); (2) “A single instance
of highly unreasonable conduct that results in a violation of
applicable professional standards,” id. §
201.102(e)(1)(iv)(B)(1); and (3) “Repeated instances of
unreasonable conduct, each resulting in a violation of
applicable professional standards, that indicate a lack of

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competence to practice before the Commission,” id. §
201.102(e)(1)(iv)(B)(2). The only issue here is the validity of
the SEC’s determination that Dearlove repeatedly engaged in
unreasonable conduct.
The “applicable professional standards” referred to in
Rule 102(e) include both the Generally Accepted Auditing
Standards (GAAS) and the Generally Accepted Accounting
Principles (GAAP). See Amendment to Rule 102(e) of the
Commission’s Rules of Practice, 63 Fed. Reg. 57,164,
57,166/3 (Oct. 26, 1998). The GAAS are “approved and
adopted by the membership of the American Institute of
Certified Public Accountants,” AICPA Codification of
Statements of Auditing Standards § 150.02, and concern “the
quality of the performance ... [and of] the judgment exercised
by” an auditor, id. § 150.01. The GAAS require an auditor to
have adequate training and audit proficiency, to maintain
independence from the company being audited, and to
exercise due professional care. Dearlove, 2008 SEC LEXIS
223, at *16-17. The GAAS also set forth an auditor’s
obligation to plan, supervise, and gather evidence in
conducting an audit. Id. In contrast, the GAAP focus not
upon an auditor’s judgment but upon how specific accounting
tasks should be performed. See, e.g., Interpretation No. 39 of
the FASB, ¶5 (“[I]t is a general principle of accounting that
the offsetting of assets and liabilities in the balance sheet is
improper except where a right or setoff exists”). The GAAP
include statements published by the Federal Accounting
Standards Advisory Board and by the AICPA.
Dearlove argues that in order to establish his conduct was
unreasonable within the meaning of Rule 102(e)(1)(iv)(B)(2),
the SEC had to hold he violated the common law negligence
standard of care, as evidenced by expert testimony. He

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further argues he was denied due process because the ALJ
refused to postpone the hearing for 60 days.
The SEC’s findings of fact are conclusive if supported by
substantial evidence. 15 U.S.C. § 78y(a)(4); Steadman v.
SEC, 450 U.S. 91, 96 n.12 (1981). We may not set aside the
SEC’s legal conclusions unless they are “arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with
law.” 5 U.S.C. § 706(2)(A); Nat’l Rural Elec. Coop. Ass’n v.
SEC, 276 F.3d 609, 614 (D.C. Cir. 2002).
We reject Dearlove’s legal argument and conclude the
appropriate standard of care in this case is supplied by the
GAAS; therefore, the SEC need not have received expert
testimony to establish the standard of care or to determine
whether Dearlove’s conduct was unreasonable. Moreover,
we find ample evidence in the record to support the SEC’s
conclusion that Dearlove engaged in repeated instances of
unreasonable conduct that resulted in a violation of
professional standards. We also reject Dearlove’s argument
that he was denied due process.
A. Rule 102(e)
This is not the first time we have encountered the
application of Rule 102(e) to an accountant, but it is the first
time we have reviewed a decision of the Commission
sanctioning an accountant’s conduct as merely
“unreasonable.” In Checkosky v. SEC, 139 F.3d 221 (1998)
(Checkosky II), we were concerned about the SEC’s
equivocation as to whether it could find improper professional
conduct where an accountant had acted negligently rather
than recklessly or with the intent to defraud. Id. at 223-24.
Because it was unclear whether simple negligence could
support a violation of Rule 102(e) and, considering the SEC’s

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“failure to articulate a discernible standard,” we instructed the
Commission to dismiss the proceedings under review. Id. at
227. The SEC no longer has the problem we identified in
Checkosky II; the SEC amended Rule 102(e) to make clear
that an accountant need not have engaged in intentional,
knowing, or reckless conduct to be in violation of the Rule.
63 Fed. Reg. 57,164 (Oct. 26, 1998).
Dearlove draws our attention to two elements of Rule
102(e)(1)(iv)(B)(2): “Repeated instances of unreasonable
conduct” and “each resulting in a violation of applicable
professional standards.” He argues that to conclude one has
violated the Rule, the SEC must determine not only that he
violated applicable professional standards but also that his
conduct was “unreasonable.” Because “one of GAAS’s
General Standards is that due professional care is to be
exercised in the performance of the audit and the preparation
of the report,” Checkosky II, 139 F.3d at 225 n.5 (internal
quotation marks omitted), Dearlove contends “unreasonable”
conduct must mean something other than conduct below the
standard of due professional care set forth in the GAAS. For
support, he points to New York Pattern Jury Instructions §
2:25, which states:
A person who has special training and
experience in a trade, when acting in the trade
on behalf of others who are relying on his
special skills, has the duty to use the same
degree of skill and care that others in the same
trade in the community would reasonably use
in the same situation.
From this, Dearlove reasons that to show he failed to use a
reasonable degree of skill and care in auditing Adelphia, the
SEC would have had to elicit expert testimony that his

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conduct was unreasonable under the circumstances.
Moreover, Dearlove argues the audit reports of his
predecessors at Deloitte — whose audits were similar to his
own — indicate his conduct was reasonable under the
circumstances.
The SEC rejected Dearlove’s argument, observing about
the GAAS (at p.9):
AICPA membership approved and adopted
the ten fundamental auditing standards ....
AICPA’s Auditing Standards Board has
developed and issued subsequent auditing
standards through a due process that includes
deliberation in meetings open to the public,
public exposure of proposed standards, and a
formal vote .... We therefore decline to create
a separate standard of professional conduct
for auditors that depends in each case on the
behavior of a particular auditor’s
predecessors. The accounting profession
itself has already prescribed the applicable
standards.
We agree. All violations of the Rule, whether by
intentional, knowing, highly unreasonable, or merely
unreasonable conduct, are also violations of the GAAS; the
term “unreasonable” as used in the Rule serves only to
distinguish among degrees of deviation.∗ Therefore, the SEC
∗ As we have noted before, “the converse — that all deviations
from the GAAS are per se [unreasonable] — might not be true.”
Checkosky II, 139 F.3d at 225 n.5. In other words, Rule 102(e)
does not require the SEC to hold every violation of the GAAS
amounts to improper professional conduct.

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need not establish a standard of care separate from the GAAS
in order to give meaning to Rule 102(e)(1)(iv)(B)(2). The
Rule simply requires the SEC to engage in an objective
inquiry whether Dearlove’s conduct was unreasonable in the
specific factual circumstances at issue. Prior audits involving
similar treatment of similar transactions may serve as
evidence that a particular audit was not unreasonable, but the
SEC is entitled to weigh that evidence along with other record
evidence to determine, in its own expert view, whether the
conduct at issue was unreasonable.
Among the conduct the SEC deemed unreasonable was
Dearlove’s approval of Adelphia’s practice of netting an
account receivable from one Rigas Entity against an account
payable to another Rigas Entity. Thus, if Adelphia was owed
$1 million by one Rigas Entity and itself owed $1.1 million to
another Rigas Entity, then, rather than report both
transactions, its balance sheet would show only the net $0.1
million payable. In 2000 Adelphia’s aggregate accounts
receivable from and aggregate accounts payable to Rigas
Entities were each more than $1 billion, but Adelphia’s
balance sheet showed only a “Related Party Receivable” of
about $3 million. Dearlove, 2008 SEC LEXIS 223, at *25.
Dearlove explained his approval of Adelphia’s netting by
pointing out that prior Deloitte engagement partners had done
the same. The SEC (at p.14) held reliance upon prior audits
was unreasonable, particularly in light of changed
circumstances
because this audit generally called for
heightened skepticism and because this
account, in particular, involved related party
transactions and a precipitous drop in the
amount of net receivables that Adelphia

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reported compared to prior years. Moreover,
Dearlove’s unquestioning reliance on prior
audit conclusions is precisely the result that
audit partner rotation was designed to remedy.
Having determined Dearlove’s conduct was
unreasonable, the SEC turned to the applicable professional
standards. The GAAS required that when an audit posed
greater than normal risk — as Dearlove had determined the
Adelphia audit did — there must be “more extensive
supervision by the auditor with final responsibility for the
engagement during both the planning and conduct of the
engagement.” AICPA Clarification § 312.17. The SEC
found “no evidence, in the audit workpapers or elsewhere in
the record, that Dearlove gave any consideration to the
propriety of Adelphia’s netting during the 2000 audit or that
the audit team conducted any analysis” of the accounting
requirement at issue. Dearlove, 2008 SEC LEXIS 223, at
*32. As a consequence, the SEC held Dearlove violated the
GAAS.
Turning to the GAAP, Interpretation No. 39 of the FASB
provides a party may use a credit to offset a debt on its
balance sheet only when (1) each of two parties owes the
other a determinable amount; (2) the reporting party has the
right to set off the amount owed against the amount owed by
the other party; (3) the reporting party intends to set off; and
(4) the right to set off is enforceable at law. FIN 39 ¶5. The
SEC held Adelphia violated the GAAP because its netting
involved more than two parties: “Adelphia netted the
accounts payable and receivable of its various subsidiaries
against the accounts payable and receivable of various Rigas
Entities on a global basis ... [and] netting is appropriate only
when two parties are involved.” Dearlove, 2008 SEC LEXIS
223, at *27.

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The two-party rule makes the reporting party’s balance
sheet a more accurate depiction of its financial heath by
preventing the reporting party from using the amount it owes
one entity to hide the amount it is owed by another that may
be less than creditworthy. Netting a receivable unlikely to be
paid against a debt owed to another party is simply a way to
make the debt and the dubious receivable disappear from the
reporting party’s balance sheet — and that is just what
Adelphia did in 2000. In his defense, Dearlove asserts that
“variations in the ownership structures of the Rigas Entities
did not alter the fact that the Rigas family controlled those
entities.” This rather innocuous observation addresses neither
the letter nor the purpose of the two-party rule.
It is therefore clear the SEC analyzed the record as
required by Rule 102(e)(1)(iv)(B)(2): It determined first that
Dearlove’s conduct was unreasonable in the circumstances
and second that it resulted in a violation of professional
standards — both the GAAS and the GAAP. Because the
GAAS focus upon an auditor’s performance and require him
to exercise due professional care, we reject Dearlove’s
attempt to fault the SEC for marshaling the same evidence to
show his conduct was unreasonable and that he failed to
exercise due professional care in performing the audit.∗
∗ In addition to holding Dearlove violated Rule 102(e) by netting
Adelphia’s accounts receivable from and accounts payable to
various Rigas Entities, the SEC held he violated the Rule in the
way he (1) accounted for debt co-borrowed by Adelphia and the
Rigas Entities, (2) accounted for debt owed by Adelphia to a third
party as debt owed by a Rigas Entity to a third party, and (3)
classified certain debt transactions between Adelphia and Rigas
Entities as stock sales. Dearlove argues this conduct did not violate
the GAAS or lead to a violation of the GAAP but his arguments are

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B. Due Process of Law
Dearlove asked the ALJ and then the SEC to postpone
his hearing for 60 days lest he have only four months in
which to review a massive record — compiled by the SEC
over several years of investigation — and to prepare for the
hearing. Dearlove now argues the Commission denied him
due process by forcing him to prepare for the hearing in too
short a period of time.
“The SEC, like a trial judge, enjoys broad discretion in
deciding whether to grant a continuance.” Falcon Trading
Group v. SEC, 102 F.3d 579, 581 (D.C. Cir. 1996); cf. Ungar
v. Sarafite, 376 U.S. 575, 589 (1964) (“The matter of
continuance is traditionally within the discretion of the trial
judge”). And the Commission has a “policy of strongly
disfavoring ... requests” for postponement. 17 C.F.R. §
201.161(b)(1).
That policy operates within the framework of a rule
requiring the Commission or an ALJ, in evaluating a request
for postponement, to consider and weigh five factors:
(i) The length of the proceeding to date; (ii)
The number of postponements ... already
granted; (iii) The stage of the proceedings at
the time of the request; (iv) The impact of the
request on the hearing officer’s ability to
complete the proceeding in the time specified
unconvincing for much the same reasons as those discussed above
and do not warrant separate treatment in this opinion.

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by the Commission; and (v) Any other such
matters as justice may require.
Id.
Dearlove argues the ALJ erred by treating the time
specified by the Commission to complete the proceeding as
mandatory, when in fact he could have extended the deadline.
The SEC rejected this argument because it found the ALJ
considered the time limit as but one of the required five
factors. Our review of the ALJ’s Order confirms the SEC’s
decision: The ALJ considered each of the five factors
specified in the rules and treated none as dispositive.
Considering the broad discretion the agency has in ordering
the conduct of its proceedings, see Falcon Trading Group,
supra, we reject Dearlove’s due process argument.
III. Conclusion
In sum, we reject Dearlove’s contention that Rule
102(e)(1)(iv)(B)(2) required the SEC to evaluate his conduct
of the 2000 Adelphia audit against the common law
negligence standard; the GAAS supplied the applicable
standard and did not require the SEC to elicit expert
testimony that an accountant’s conduct was unreasonable
under the circumstances. Here the record evidence supports
the SEC’s conclusions that Dearlove’s conduct was
unreasonable and that he was not denied due process. The
petition for review is therefore
Denied.

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