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SEC v. ERNST & YOUNG

October 9, 1991

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ERNST & YOUNG, Defendant



The opinion of the court was delivered by: FLANNERY

 THOMAS A. FLANNERY, UNITED STATES DISTRICT JUDGE

 This case comes before the Court upon the defendant's motion to dismiss for improper venue or, alternatively, to transfer to the Northern District of Texas.

 I. Background

 The Securities and Exchange Commission ("SEC") brought this civil enforcement action against Ernst & Young ("E & Y") seeking a permanent injunction that would prohibit alleged future violations by E & Y of the Securities and Exchange Act of 1934 and SEC Rules promulgated pursuant to that statute. E & Y moves that this action be dismissed because venue is not proper in the District of Columbia under Rule 12 (b)(3) of the Federal Rules of Civil Procedure, or, alternatively, that this Court use its discretion pursuant to 28 U.S.C. § 1404(a) to transfer this action to the Northern District of Texas.

 E & Y is the nation's largest public accounting firm, a general partnership of certified public accountants with over 2,000 partners nationwide. E & Y, which has its headquarters in New York City, has offices in more than 130 cities throughout the country; it has two offices in the District of Columbia. This suit is based on actions of one of E & Y's predecessor partnerships, Arthur Young. E & Y resulted from the merger of Arthur Young and a second firm, Ernst & Whinney. *fn1"

 Federal securities law requires certain corporations to file financial reports and proxy statements with the SEC in Washington, D.C. The filings must be signed by a certified public accounting firm attesting that the firm has performed certain procedures in accordance with SEC Rules and that, based on the results of their analysis, the accounting firm is of the opinion that the filings have been prepared in accordance with standard rules of accounting and accurately represent the corporation's financial status. The SEC Rules require that the accounting firm be "independent" of the corporation making the filing.

 The SEC alleges that "from 1983 through at least 1990" E & Y aided and abetted repeated violations of federal securities laws *fn2" in conjunction with audits performed by the Dallas, Texas office of E & Y. Plaintiff SEC's Memorandum in Opposition to Defendant E & Y's Motion to Dismiss for Improper Venue, or Alternatively, to Transfer at 4. The audits were of two Texas-based companies, RepublicBank Corporation ("Republic") and Cullum Companies, Inc. ("Cullum"), a supermarket retailer. E & Y signed audit opinions for inclusion in SEC filings for both companies certifying, amongst other things, that E & Y was "independent" of those companies. The SEC alleges that the filings for both companies were "materially false and misleading" in that E & Y was not "independent" of Republic due to over $ 20 million in loans made by Republic to E & Y partners and in that E & Y was not "independent" of Cullum because Cullum leased property from two partnerships in which more than 50 E & Y partners participated. Id. at 5-6.

 E & Y argues that venue is improper in the District of Columbia because the dispute has "absolutely no legally or practically significant connection to the District of Columbia." Defendant's Motion to Dismiss for Improper Venue or, Alternatively, to Transfer at 2. In the alternative, E & Y argues that the case should be transferred to the Northern District of Texas, "the factual center of gravity in this lawsuit." Id. at 3.

 II. Motion to Dismiss for Improper Venue

 E & Y moves this Court to dismiss, based on the SEC's failure to plead venue adequately. For the reasons set forth below, the Court denies this motion. The plaintiff need not plead venue; rather, lack of venue is an affirmative defense. Further, the Court finds that E & Y cannot successfully assert lack of venue in this case. The SEC's pleadings establish that venue is appropriate in the District of Columbia.

 Venue need not be alleged in the complaint. Klepper Krop, Inc. v. Hanford, 411 F. Supp. 276, 280 (D. Neb. 1976); Fed. R. Civ. P. Form 2, advisory comm. note 3. Thus, the SEC's failure to assert venue explicitly in its complaint is not a basis to dismiss this action.

 Nor can E & Y prevail with an affirmative defense of lack of venue. Section 27 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78aa, is a special venue provision which makes venue appropriate in SEC civil enforcement actions such as this one in any district where an "act or transaction constituting the violation occurred" or in the district "wherein the defendant is found or is an inhabitant or transacts business." While only one of these criterion needs to be met in order for venue to be appropriate, in this case, both criteria are met.

  The alleged violation is aiding and abetting the filing of "false and misleading" reports with the SEC. E & Y certified its "independence" in the reports at issue with the knowledge and with the intent that they were to be filed in Washington, D.C. "The place where a document is to be filed may be regarded as the place where any asserted non-filing or misfiling occurred" within the meaning of § 78aa. Securities and Exchange Com'n v. Savoy Industries, 190 App. D.C. 252, 587 F.2d 1149, 1155 (D.C. Cir. 1978), cert. denied, 440 U.S. 913, 99 S. Ct. 1227, 59 L. Ed. 2d 462 (1979). Thus, the filing of "proxy materials" and "annual reports" in the District of Columbia leads to the conclusion that "venue is properly laid in the District of Columbia." Comptroller of the Currency v. Calhoun First Nat. Bank, 626 F. Supp. 137, 139 n. 8 (D.D.C. 1985). See also, Investors Funding Corp. of New York v. Jones, 161 App. D.C. 420, 495 F.2d 1000, 1003 (D.C. Cir. 1974) (venue for civil enforcement action by SEC involving late filing lies where filing was required to be made, i.e., "the locus for the act of late filing.") Contrary to Defendant's assertion otherwise, the act of filing in the District of Columbia constitutes the basis of the wrongdoing alleged in the complaint. The second ground for venue under § 78aa is also ...


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