KPMG Executives’ Appeal Leads to Harsher Penalty


KPMG2In a classic case of “careful what you wish for,” two KPMG executives have been handed a harsher penalty after appealing a ruling from a Securities and Exchange Commission in-house judge.

The agency alleged that the two failed to properly audit TierOne Bank related to financial crisis losses.  In June 2014, Administrative Law Judge Carol Fox Foelak suspended the engagement partner, John J. Aesoph, for one year, and the manager, Darren M. Bennett, for a period of six months.

When the accountants appealed the sanction, the SEC’s Enforcement Division did likewise, seeking longer suspensions.

The SEC, in a 2-1 decision, with Commissioner Michael Piwowar partially dissenting, barred Aesoph and Bennett from accounting practice before the agency with the ability to apply for reinstatement. Aesoph can apply in three years, Bennett in two.

The decision should come as no surprise to those that follow SEC enforcement proceedings.  What’s more surprising is the fact that the accountants sought to appeal at all.

The last three years have seen a steady decline in the percentage of ALJ decisions appealed to the full commission.   Respondents appealed approximately 30 percent of ALJ decisions in 2013. That number dipped to 23.8 percent in 2014 and 21.6 percent last year. The trend continues this year—2016 is on pace to have the lowest percentage of appeals in three years.

SEC ALJ Appeals

Why the precipitous decline?

There are a number of factors, but the two most important are likely the incredibly high percentage of cases in which SEC ALJs find for the Enforcement Division and the SEC’s power to increase penalties imposed by ALJs.

By appealing, respondents are taking their cases before the very body that voted to bring the action against them, and face a difficult challenge in convincing the commission that the decision to initiate the proceedings was improper or that the in-house judge somehow mishandled the case.

See this story for more on the KPMG ruling.

For more information on Administrative Law Judge actions, see Bloomberg Law’s SEC ALJ Enforcement Analytics and SEC ALJ Enforcement Tracker.