The SEC’s reply memorandum in the Deloitte case in now available online. It was filed with the U.S. District Court for D.C. on December 3. This is the court case seeking to compel Deloitte to produce the Longtop working papers.
It is mostly dry legal arguments, about half of which deal with the enforceability of the subpoena. Deloitte’s former attorney accepted service of the subpoena, and from the government’s arguments that appears to have been a grave mistake. I guess that is why the attorney is referred to as the “former” attorney. Sadly, he is not named.
The most interesting reading to me is the declaration of Alberto Arevalo. Arevalo is an Assistant Director in the Office of International Affairs (OIA) of the SEC. He appears to have been the point person in negotiations with the Chinese over access to audit working papers. He details the whole sordid story of how the SEC made 21 requests for assistance from the CSRC in 16 ongoing investigations, including three requests for audit working papers. They got none of the working papers and did not receive any meaningful assistance from the CSRC.
In April of 2012, the CSRC indicated it was willing to cooperate, under certain conditions. First, the CSRC would not let the SEC use the information in any legal action without written permission from the SEC. Second, the CSRC would make its own judgment on what documents to provide. Unsurprisingly, the SEC rejected those conditions.
The SEC came to the view that the CSRC is not a viable gateway for the production of audit work papers.
In October 2012, the CSRC informed SEC staff that the CSRC had come to the view that audit work papers could be shared with the SEC. But they still insisted on their conditions of retaining veto power over their use. If the SEC did not agree to their conditions, then the request might take an indeterminate amount of time as the CSRC consulted with other government bureaus.
The CSRC came to Washington on November 26 to meet with the SEC. The SEC told them they would meet, but unless the CSRC had clarity about providing the documents, they should spend the time talking about other regulatory things. Arevalo did not attend the meeting because the working papers would not be on the agenda, but reports that he was informed that the SEC gave the CSRC notice that they had no choice but to go forward with the Longtop subpoena case.
I continue to believe that the CSRC has its hands tied and, absent an intervention at a much higher level, perhaps even Li Keqiang, this is unsolvable. Has this gone too far for China to back down without losing face? Is the new Chinese administration willing to back down in their first confrontation with the United States? I don’t see an easy solution.