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US Securities and Exchange Commission

Marcum Partner Challenges SEC Proceedings Against Him as Unconstitutional

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Alan Markowitz, a Marcum LLP Partner facing an SEC administrative action related to his work as engagement partner in audits of FTE Network Inc., on May 30, 2023, challenged the proceedings in U.S. district court as unconstitutional.

Markowitz’s complaint, filed in the Southern District of New York (SDNY), comes more than a month after the Supreme Court – in a separate case involving an SEC administrative action against an accountant – concluded that district courts have jurisdiction to hear suits raising constitutional challenges to ongoing in-house SEC proceedings. (See Supreme Court Hands Victory to Accountant Challenging SEC Administrative Proceedings in the April 17, 2023, edition of Accounting & Compliance Alert.)

The SEC in late February launched proceedings against Markowitz (Accounting and Auditing Enforcement Release AAER No. 4380), following 2021 charges by the SEC and federal prosecutors against ex-FTE CEO Michael Palleschi and ex-CFO David Lethem in what the commission framed as a “multi-year, multi-faceted accounting fraud.” Palleschi and Lethem were accused of misappropriating funds, inflating revenue and concealing the nature of “toxic” convertible notes.(See SEC Says Marcum Partner Ignored ‘Red Flags’ During Audits, Violated PCAOB Standards in the March 2, 2023, edition of ACA.)

The SEC, in AAER No. 4380, alleged that Markowitz, “despite contradictory evidence and significant red flags that signaled FTE’s underlying misconduct,” improperly relied on representations by management and didn’t “perform procedures to substantiate or reconcile those representations with contradictory evidence.”

The May 30 complaint against the SEC describes Markowitz as a “highly experienced auditor with an unblemished professional record of over 40 years.”

“In a career spanning more than four decades, and until the Commission initiated its recent Administrative Proceeding against him, Mr. Markowitz has never been accused of any professional misconduct or subject to professional discipline by the Commission, the Public Company Accounting Oversight Board (“PCAOB”), the American Institute of Certified Public Accountants, any state accountancy board or any other regulatory or professional body,” the complaint stated.

Neither Markowitz nor attorneys representing him immediately responded to a request for comment. An SEC spokesperson declined comment.

The complaint is the latest in a series of challenges in recent years to the SEC’s administrative tribunals overseen by administrative law judges (ALJ). In casting the proceedings as unfair, critics have long pointed to the SEC’s lopsided win rate and the denial of key protections to respondents, such as the right to a jury trial.

“During the abbreviated time until the commencement of the scheduled hearing, Mr. Markowitz will be required to process and review the [Division of Enforcement’s] voluminous document production in the Administrative Proceeding – clocking at over 1.1 terabytes and over 2.7 million documents; take and complete his own discovery; consider and make any dispositive motions; and prepare for trial,” the complaint stated.

Markowitz challenged the constitutionality of the proceeding on three basic points: it violates his Seventh Amendment right to a jury trial; the ALJ’s appointment and removal is insulated from control by the president in violation of Article II; and the SEC’s “unfettered discretion” to pick between administrative enforcement and federal courts represents an unconstitutional delegation of legislative power.

Those arguments echo the three holdings in the Fifth Circuit’s 2022 decision in Jarkesy v. SEC. U.S. Solicitor General Elizabeth Prelogar in March sought Supreme Court review of that decision. (See Solicitor General Asks Supreme Court to Review Fifth Circuit Decision Undercutting SEC Administrative Judges in the March 14, 2023, edition of ACA

As part of its enforcement strategy, the SEC has in recent years largely shifted away from litigated administrative proceedings in favor of bringing charges in district court. Markowitz’s complaint stated that SEC staff last year advised him that they were considering recommending an action against him in district court.

“Without explanation, however, the Commission instead chose to bring its enforcement action against Mr. Markowitz as an administrative proceeding,” the complaint stated. “The Commission’s unilateral choice deprives Mr. Markowitz of his constitutional rights.”


This article originally appeared in the June 5, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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