Weinberg & Company

Simply Stated Newsletter – July 2020

Diminishing disgorgements-

Supreme Court limits SEC’s Power

While affirming the SEC’s authority to seek disgorgement, the Supreme Court placed limits on the SEC practice of forcing defendants to surrender profits obtained through fraud.

The 8-1 decision limits the scope of what can be sought via disgorgement, with the high court ruling that the disgorgement cannot exceed the net profits of the conduct at issue, and that the disgorgement generally must go to victims.

The case stems from a 2016 SEC civil action against a California couple who had been ordered to disgorge the nearly $27 million they raised from investors for a cancer treatment center that was never built. The couple argued that the SEC lacked Congressional authority to seek disgorgement. Justice Clarence Thomas was the sole dissenter, arguing that disgorgement was not an authorized remedy.

In the most recent full fiscal year the SEC collected $1.5 billion in disgorgements and penalties and paid $1.2 billion to investor victims.

It can stay, but its Director can be fired

Supreme Court Rules on CFPB

The U.S. Supreme Court ruled that the Consumer Financial Protection Bureau (CFPB) may continue operating.

Championed by U.S. Senator and former Democrat presidential candidate Elizabeth Warren (D-Mass.), the CFPB was signed into law by former President Obama during the 2008 recession and mortgage crisis. The CFPB was purposely structured to function with extreme autonomy, and thus specifically allowed only limited reasons for which a president could fire the agency’s director.

Although the high court ruled that the law creating the CFPB unconstitutionally limited the reasons for which a president could fire its director, it held that the agency can continue operating because “the CFPB Director’s removal protection is ‘severable’ from the other statutory provisions bearing on the CFPB’s authority.”

This case (Seila Law LLC v. CFPB) wound up before the high court when the CFPB accused the Seila Law firm of engaging in unlawful marketing practices and demanded that it turn over information. The law firm refused, arguing that the CFPB was illegitimate because it unconstitutionally violated the separation of powers, as evidenced by the agency’s limitations on the removal of its director.

The issue became politically charged in 2017 when the Obama-appointed director of the CFPB, Richard Cordray resigned and then appointed his chief of staff, Leandra English. Acting under authority of the presidency, President Trump designated Mick Mulvaney as the acting director instead.

In the 5-4 decision, Chief Justice John Roberts wrote for the majority: “It has long been settled that one section of a statute may be repugnant to the Constitution without rendering the whole act void.”

The high court’s application of severability in this case may portend how justices may decide another important case. The justices announced that they will determine the fate of the Affordable Care Act (ObamaCare) next term after lower courts found the law’s individual mandate unconstitutional.

Several red states are supporting a lawsuit to invalidate the Act, arguing that because there is no longer a financial penalty for not buying health insurance, the mandate can no longer be read as a “tax” and is unconstitutional. These states further argue that the individual mandate is too closely tied to the intent of the law to be “severable.”

It was Chief Justice Roberts who in 2012 joined the four left-leaning justices in a 5-4 decision to uphold the Affordable Health Care Act. In his opinion, Roberts said the mandate could not be upheld under the Constitution’s Commerce Clause, but it could be upheld under the government’s power to tax.

Will he go, or will he stay?

Jay Clayton To Be Nominated for U.S. Attorney

President Trump intends to nominate SEC Chairman Jay Clayton to serve as U.S. Attorney for the Southern District of New York. The job became available after the abrupt resignation of Geoffrey Berman.

Clayton was nominated by President Trump and sworn in as Chairman of the SEC in May 2017. Prior to joining the SEC, he was a partner at Sullivan & Cromwell LLP, where he co-headed the law firm’s corporate practice.

The nomination to U.S. Attorney requires Senate confirmation and that process has already run into trouble. It is Senate custom that even before the confirmation process begins, home-state senators usually provide a sheet of paper (known as a “blue-slip”) expressing their support for a nominee that involves their state.

Expressing outrage over what they characterized as an ouster of Berman, New York Senators Charles Schumer and Kirsten Gillibrand, both Democrats, have called for Clayton to withdraw his nomination. Senate Judiciary Committee Chairman Lindsey Graham, a Republican, has said he will not move forward with a nomination without getting the “blue slip” sign-offs.

Optimistic Accountants

Accountants Confidence Index Rebounds

The Accountants Confidence Index (ACI) continued its rebound from June, with accountants predicting modest contraction in the short term, and growth again within six months, reports Accounting Today.

The survey noted a large number of respondents were “concerned that attempts to prevent the spread of the coronavirus were causing more damage to the economy than necessary, though many others noted that a resurgence of cases could derail any potential economic recovery.”

The 3-Month ACI hit 45.35, a significant jump up from the previous month’s 36.1 (though still far below the 50 mark that separates expectations of growth from expectations of contraction). The 6-Month ACI, meanwhile, came in at 52.07, up close to 10 points from last month’s 42.35, which is just into expansionary territory.

The ACI, published in partnership with human resources management software and services firm ADP, is a monthly economic indicator that leverages the insights of accountants into the strength and prospects of businesses in the U.S.

Weinberg in the News…

Corey Fischer Featured in Article on Going Concern Amid COVID

Weinberg Managing Partner Corey Fischer was recently featured in the June 9, 2020 Banking & Finance Quarterly Edition of the Los Angeles Business Journal.

In the lead article headlined: “Cause for Concern: Economic Uncertainty Raises the Prospect of an Increase in Going Concern Filings”, Corey discussed a possible increase in public company going concern filings as a result of the COVID-19 pandemic.

In the interview, Corey provided insight into issues currently top of mind in public company C-suites, including liquidity, and the continued availability of debt and equity financing. He also discussed the need for management to create workable mitigation programs, and stressed the importance of maintaining transparency in an environment of intense investor scrutiny.

Corey noted with optimism that “not all companies that make this (going concern) disclosure go out of business.”  Companies with solid fundamentals prior to the pandemic are likely to be less negatively impacted.

To read the full article, please go to the Los Angeles Business Journal:

https://labusinessjournal.com/news/2020/jun/22/going-concern-filings-economic-uncertainty-covid19/

An Audited Legacy of Quality

Weinberg & Company is consistently at the very top when it comes to the quality of our work– just check our legacy of stellar PCAOB inspection reports.

 We thought we were building a leading, international accounting firm by providing Big 4 expertise with personal service at reasonable fees.

Turns out we were also building “An Audited Legacy of Quality.”

“We believe your capital is best deployed for your company’s growth, not for runaway accounting fees.”

DISCLAIMER:
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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