Chicago Regional Chicago, Capitol Washington

---

COPY

CORRECTED

IN

THE

UNITED

FOR

THE

NORTHERN

STATES

EASTERN

ANDERSEN

ARTHUR

COURT

DISTRICT OF

DISTRICT

ILLINOIS

DIVISION

CO.,

&

Civil

Action

AND

SECURITIES

No.

EXCHANGE

76

C

2832

Marshall)

(Judge

Plaintiff, COMMISSION,

Defendant.

MEMORANDUM

OF

THE

SECURITIES

SUPPORT

OF

ITS

MOTION

IN

ALTERNATIVELY,

AND FOR

TO

COMMISSION

EXCHANGE

OR,

JUDGMENT

SUMMARY DISMISS

/

Local

GONSON

PAUL WILLIAM

Chicago

M.

Regional

Securities

and

South Room 12104 219

Chicago, (312)

Office

Exchange Street

Dearborn

Illinois

60604

Cor•nission

FELLER

H.

LLOYD

HEGAN

MARVIN

G.

PICKHOLZ

MELVIN

A.

BROSTERMAN

JOHN

P.

SWEENEY for

Attorneys SECURITIES

353-7393

PITT

L.

HARVEY

Counsel:

500

North

Capitol

Washington, (202)

--i

Dated:

D.C.

Washington, October

4,

1976

Defendant

AND

755-1108

D.C.

EXCHANGE

Street

20549

COMMISSION

--1--

INDEX

page PRELIMINARY

STATEMENT

Point

I

-

ooooooeooooooooooooooooooeooooooooeoooo

150 is

ASR

but

is

of and

150 is Commission's

ASR

C.

ASR to

-

So

Instruction

of

Instruction

4.

Point

the

Instruction ate

ao

Act

rules

............

not

law

letter

37

.................

in and 38

.........................

does

be

32

35

...................

adopted

was

the

discrimin-

not

................

dismissed

standing

22

and

any registrants

against

............

neither

of

APA

22

...............

H(f)

does

H(f)

This action should Andersen has no the issues raised

III-

is

H(f) with of

with

capricious

process

Instruction accordance

accounting capricious,

accounting

H(f)

due

a

reasonable Con•nission's

a

H(f) nor

Instruction violate

or

the

adopt

to

is

10-Q

instruction is

H(f) exercise

spirit

authority

Co•ission's

accordance Procedure

of

arbitrary

Be

in

adopted

authority

rulemaking

arbitrary

Administrative

proper

14

Form

adopt

antecedents

2.

to

to

not

The

the

20

authority

A.

of

statement

the

was

7

............................

of

and the

..................

....................................

H(f)

rules,

any

Conmlission's

exercise is

any to

...............................

delegate

not

Instruction

i.

issued

the

policy

150 does the FASB

proper broad

authority

general

a

Co•mission's

constitute

not

properly

was

of background accounting policy

B.

does

Comission

The

A.

II

it

such

rule the

of

statement

a

As

person

substantive

a

merely

policy. delegation

Point

not

1

o

to

39

since pursue 41

..............................

Andersen has not demonstrated that it is will or be injured in fact by the matters and thus fails challenged, to

present

a

case

or

controversy

...............

43

-ii-

l.

is

Andersen

hypothetical sanctions

may in

Here

event,

any

Andersen

has

supposed And,

B.

base

Io

Andersen

basis

behalf

or

as

Ander

the

private public

a

sen'

44 which

upon

litigate profession general to

attorney interest"

47

..................

threatened allegedly attributable legally it pronouncements challenges

inj

s

not

are

Andersen 47

standing accounting

no

of

the

alleged

.............................

has

on

clients.

..........................

standing

"in

CONCLUSION

remote

other

no

may

2.

injuries

highly is

There

to

those

raise

to

its

43

.................

standing

no

injuries

even

are

exist

not

it.

that

even

does

possibility o

injured by a that possibility be on imposed

not

to

ur

ies

the 49

..............

51

..................................................

ATTACHMENTS

Appendix

I

-

Affidavit Attached

Appendix

II

-

III

-

Affidavit

Seidler Exhibit

A

-

Exhibit

B

-

Exhibit

C

-

Exhibit

D

-

John

of

A.

of

Henry

Affidavit Attached

Appendix

of

-

Exhibit

F

-

Exhibit

G

-

Jaenicke

R.

and

(Exhibits

(jointly)

1-5 No.

150

Accounting

Series

Release

No.

177

Accounting

Series

Release

No.

4

dated

April to

of

30,

Kenneth

the

P.

Accounting

Series

Securities

Act

Accounting

Series

from 1976, Johnson, Standards

Auditing

Con•nittee

of

the

Release Release Release

AICPA

No

No.

193

5549 No.

Lee

Attached)

Release

Chairman

&

2

1-8

(Exhibits

Sampson

Series

Executive E

Clarence

Accounting

Letter,

1

(Exhibits

Burton

)

Commission

Exhibit

C.

)

180

the

J.

THE

IN

FOR

DISTRICT DIVISION

NOEI•ERN

THE

EASTERN

OF

ILLINOIS

& CO.

ANDERSEN

AI•I•JR

COU•

DISTRICT

STATES

UNITED

Plaintiff, Action

Civil

v.

SECURITIES

)

COMMISSION

EXCHANGE

AND

76-C-2832

No.

Marshall

(Judge

Defendant.

OF

MEMORANDUM

SUPPORT

IN

SECURITIES

THE

OF

ALTE•qATIVELYr Preliminary

in

Release

177

("ASR

sought with

3,

September

1976,

this

and

in

to

150

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order

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was

denied

H(f), on

Andersen's

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H(f)

to

Andersen

&

from motion

Andersen's

August

13,

1976,

motion

for

a

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lite,

pendente but

Form

Release

Series

Arthur

Co•ission,

and

denied

Court

the

two

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--

Accounting

Plaintiff,

enjoin

that

Instruction

Revised

Commission

unlawful.

are

--

restraining

temporary

i_/

accounting

to

dismiss.

to

judgment

declaratory

a

relating

announced

also

compliance

enforcing a

2--/

177")

seeks

alternatively,

or,

memorandum

this

submits

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judgment

150")

("ASR

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action

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sun•nary

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150

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for

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DISMISS.

TO

Exchange

and

this

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of

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defendant,

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SUMMARY

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ITS

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pages of Instruction

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release

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150,

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sector

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spirit

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recognizes

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for

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reaffirmed

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policy

persons. Instruction

of

private

profession.

legal

1973,

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accounting

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issued

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of

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application

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also

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150

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principles

4_/

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memorandum This Instruction H(f) the

complaint.

integrated by what part

of

complaint this

Court

arguments

count

it the

treats

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by

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to

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a

the merit

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in

be judged material any entire the then in which manner

should

merit, of

effect

they

count

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court

without

rate, or

and that

separate subject alleges complaint the complaint Perhaps

count

other

all

a

this

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to

entities

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if

concern

pursuant In

Commission,

substance

of

and

common

the

both

they

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not.

any 150

the

with

was

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distinct

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as

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approaches

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themselves

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by Congress.

are

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manifest

issued

developed

hoped.

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fact

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properly

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no

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if

they regarding

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concerning

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matters

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this

the

link

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alleges. integrated should

upon

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are.

were

on

to

except

they

reliance as

represent

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two.

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well

improved

to

reflection

a

in

as

adopted.

was

denominators

con•on

authority

respects, and

the

in

flaws

H(f)

between

thread

attempts

fatal

the

work

not

complaint

that

suggesting

did

sector

is

H(f)

concern

lead

they

when

only

authority of

policy

historic

the

which

broad

its

of

exercise

Con•nission's

Instruction

Conmission's

The

Instruction

standing.

long

are

made

be

principles

itself

which

treatment.

requirements.

such

of

evolution

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as

literature

in

profession

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in

decree,

found

are

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an

consistency

of

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in

by,

espoused

views

logical

the

bureaucratic

antecedents

its

contrary

requirements

imposed

has

that

principle

alternative

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whimsically-conceived

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and

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to

whether

stating

accountant

must

circumstances.

some

To

argue.

opinion,

his

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not

public

independent

in

was,

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preferable

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registrant

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principles,

accounting

in

change

a

from

letter

a

not

been

to

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This is

motion

for

vehicle

appropriate

an

counsel

for in

fact

Andersen,

this

issues

who

and

case

judgment

sunm•ry for

the

has

conceded

that

the

Ill

N.D.

C-76-2832,

No.

resolution

issues

(se__•e,Arthur Andersen

alternatively,

or

& Co.

transcript

of

that

there

raised

by

v.

Securities

of

proceedings

for

this

dismissal, We

case.

are

genuine

no

its

complaint

and

with

agree issues

of

legal

are

Exchange Con•nission,

dated

August

which

Andersen

12,

1976,

L

4.

p.

("Tr. The

principal is

engender duties

or

a

for

cerning

this

requirements,

for

the

legal

to

raise

to

prescribe

--

of

Accounting

Instruction

violates

H(f) due

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the

a

are

no

of

Rule

whether

issues

unless

Andersen's

not

a

arguments

con-

premised

are

creates

on

an

obligations

new

binding

a

Con•nission's the

the

norm

of

"[a]n it

20

has

and,

supposed

material issue

28,

and

fact of

legal

fact

founded

arbitrary as

will

the

seeks

authority is

incorporation

Con•nission a

which

is and

Andersen broad

rule,

policies,

opinions

which

H(f)

impermissible

from

motion,

merely

or

policy,

establishes

make-weights,

by creating

genuine

56(c)

the

and

Board

law

of

which

obligations

rule

arguments

which

within and

letter

a

of

judgment

sunm•ry

meaning

by

process

is

allegedly

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of

Instruction

to

essentially

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concern

statement

rule

principles

N

a

to

statements.

methods,

accounting issues

simply

seeks

new

any

substantive

imperative

rule

create

a

remaining

financial

that

not

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substantive

a

relating

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H(f)

of

whether

are

specious

of

inquiries

recognized

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of

review

does

remainder

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is

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conditional

a

is

then

fall. 150

which

150

ASR

150

ASR

registrants,

concurs,

ASR

staff's

The

But

must

that

and

well

policy.

150

concerning

release, or

Court

ASR

assumption

that

accountants

of

If

issue

legal

whether

statement

rule.

").

p.

__

capricious.

or

be

seen,

by

Instruction

asserted

whether

the

rule

class

in

For

is

probative

not

case.

'genuine' force

as

entirely

"amendment"

impermissible this

upon

of the

persons. purposes

within to

controlling

issues."

O'Brien

E.D.,

1970);

E.D.,

1971).

that,

while

of

And

existence

F.

of 2d

F.

2d

final it

is

We

when

C.

he

of

facts

additional

•

>

the

well

policies

knowledge,

Mintz

before

this

do

to

strain

Kirk

(N.D.

has

remarked

Ill.,

existence deem

it

neces-

find

to

the

Indemnity

Home

Mathers

v.

181

not

v.

Fund,

Company, 463

Inc.,

mission's

Co,

circumstances

the

development will

based

his

upon

other

5/

Attached

as

Appendix

I

6/

Attached

as

Appendix

II

7_/

Attached

as

Appendix

III

which

be

will

be

to

Finance

this

of

Professors

Henry

R.

15,

1976,

September of As

a

the

City

such,

he

to

the

issuance

number

of

the

accounting

in

this

discussed of

the

in

this

memorandum.

this

to

for

led

memorandum. memorandum.

action,

this

affidavits

Accountant.

of

review

(3) until

which

discussed

this

to

and

1972,

Mayor Chief

and

which

June,

Deputy

attached

6-/

should

here.

presented

the

to

the

believes

Court

maintain

to

in

result

Con•nission this

event,

any

standing

Sampson

of

The

Court.

is

will

necessarily

In

lacks

7_/ From

still

matters

also

issues

Clarence

A.

the

as

we

Ill.,

(N.D.

the

ignore

hand,

exist."

legal

memorandum

position

was

other

Circuit

to

way

177,

Supp.

Seventh

none

controversey

(jointly). the

the

See

Andersen

this

5--/ (2)

F.

the

judgment.

sumaary

or

in

Burton

and

action

case

Seidler

as

above

since

refer

177

practices

kr

to

assumed

knowledge

the

this

of

1970).

337

374,

370,

1972).

of

Burton,

Dr.

ASR

7,

(C.A.

action,

will

J.

Lee

York,

and

where

7,

F.R.D.

administration

issues

(C.A.

48

other

on

genuine

justiciable

no

fact,

judicial

entitled

this

the

of

resolution

dismiss

and

498

look

not

interest

560

disposition

that

John

such

554,

495, The

and

best

the

for

Appeals

material

of

Schulman,

v.

of

Court

"should

issues

in

431

the

courts

Corporation,

Andersen

also,

see

genuine

sarily

McDonald's

v.

memorandum.

has

Mr.

Jaenicke

New

personal ASR

150

principles, he

literature,

Dr.

of

of

memorandum;

relevant

(i)

has of

Sampson

-6has

been

Chief he Mr.

has

been

of

serving has

Sampson in

this

the

Con•ission the

as

Acting knowledge

memorandum.

public of

staff

personal

this

certified

development in

Conmission's

Accountant

discussed and

the

on

certain

memorandum.

1959,

since

1969.

Chief of

Professors

accountants, of

since

the

have

accounting

and

he

Since of

Accountant certain

of

the

Jaenicke studied

concepts

and

has

been

Dr.

Burton's

the

Con•nission.

matters

and

Seidler,

are

familiar

which

will

Associate

departure,

which

will

be

academians with be

discussed

the

-7ARGUMENT

Point 150

ASR IS

IS

MERELY

NOT A

POLICY.

A

TO

AS

ANY

SUBSTANTIVE

STATEMENT SUCH

DELEGATION

ANY

I

IT

OF

PERSON

OF DOES

AND

WAS

The

Back@round

The its of to

keystone

of

substitution caveat

PROPERLY

securities"

with

the

had

federal

sion,

however, 10___/

the

independent

Act)

public.

the

statements

Federal

with

define

that

accounting

8-/

15

U.S.C.

9_/

H.

Rep.

85,

io__/ Hearings

on

and

11___/

77a

875"

S.

15

U.S.C.

and

et

S.

to

in

other

the

testimony

.

such

which the

the

policy

conm•rce

character

of filed

disclosure

alternatives,

from on

.

a

statement

which

companies

reliance

a

sought

of

corps

obtain

to

accounting

profes-

certification

of

an

ii__/ (the

audits

of

first

the

prescribe

administrator

corporations

nonetheless,

was,

of

.

was

given form

and

of

which

filed

broad

authority

details

by

the

Securities

financial

which

to

financial

seq.

73d

Currency,

on

it

agency, terms

of

of

registration

a

among

Commission

conduct

to

"channels

manner

accountant,

Trade

the

of

the

for

opted

for

disclosure

disclosure

form

to

response

certified

or

required

not

was

In

fair

full

examinations

Congress

public

While

the

and

full

a

considered,

conduct

to

for

in

made

Congress

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legislators were publication irrespective

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150

ASR

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150

utilize

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1974).

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150

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33,

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240.i0b-5. 2126

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28/Hence,

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1969);

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1975);

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1974);

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1962).

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478

rules

Chapman,

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300

v.

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507

pronouncement

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Power

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506

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ment.

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of

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Andersen

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29/

The

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.

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412

supra,

740,

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compound the regulation

interest

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of

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amendments"

Finch,

v.

regulations

Seaboard had the

1964). revenues

as

and

under

307

858,

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F.

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859

standards

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Similarly, United

of

Inc.

Gronouski,

v.

carrier

F.

Supp.

plaintiff in effect, plaintiffs

by requiring,

turbine-powered

230

depriving

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aircraft

469

supra,

administrative

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permanent the

regulation notice

administrative

268

in

in

F.

that

which

right

action

2d

478,

Motor

Frei@ht

D.C.,

1967),

Con•aerce under

a

newly

also

which

submission of before aliens United States.

the

National Supp. 90 (D. the Interstate of

F.

regulation

the by requiring been previously required,

States, gave

Airlines,

airmail

an

the

not

Secretary

v.

World effect

mails.

the

carry

to

new

provide but

the

criteria" deciparole

sale.

planes,

which

(1968),

agency

companies

gas

requirements

involved by Andersen, and rights obligations

a

1107,

ultimate

on

provi-

affiliates.

applications

their

Lewis-Mota

v.

F.2d at selection

parole

of

its

742.

at

The regulations 44 (D. D.C., of all of its

used,

the

broadcast

types with

merely function,

which

cancella-

broadcasting terms, provided a

the

Inc.

to demonstrate the effectiveness of drug necessary products." the standards were newly pronounced applied retroactively, the continued sale jeopardized of thousands of for drug products the Food and Administration had Drug previously approved

permitting

that

grant

"

effect did not

Federal

v.

Pharmaceutical Manufacturers (D. Del., involved 1970), of

in

wholesale

507

Parole, s_•, deflne[d]

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1113.

at

Similarly,

Texaco,

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System,

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regulations

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11

in

reviewable

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The

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agency refunds

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contracts

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Columbia concluded business by

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Co•nission of

States

"calculated to at 1112-1113. __Id-

were

sions." for the over

United

v.

board

parole

plaintiff's plaintiffs

motion

release

in

court

which

its

assurance

(1942),

characteristic

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any

which

In

the

of

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regulations,

Federal

license

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contracts

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in

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directives 316 States,

agency United

v.

only

registrants

to

29__/ The

previously

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Traffic

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relied

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Association 393 U.S. 18 had created statute.

-20-

generally of

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150

ASR

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30__/ Andersen's

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wages Andersen

(C.A. other decision it. As

the

tion. Certified

not

all

majority unwilling minority on

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improperly

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would

bind

relies

544

U.S.

a

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in

delegation

Memorandum

.

."

.

Con•aission

a

id.

at

238

U.S.

preliminary delegation where

all.

at

federal miners

statute

a

and

311,

(1936)

injunction

"to

regulate

by setting

minimum

minority--?-

the

States

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for

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487

Mazurie, having

v.

cites when in

been

Court

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2d

F.

14

reversed of

on

Appeals

Andersen

cites

(1975)

demonstrates

AICPA

of

United

on

298

Co., for

involves no like Carter, coal producers

case

at

which it I0, 1973), erroneously grounds bythe Supreme Court was reversed on the precise

419

constituted

hours

is

case

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30__/

Carter Coal its motion

v.

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Points

Accountants

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brief, would

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permissible

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American

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pp.

even

35-41.

if

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150

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H(f)

INSTRUCTION OF

RULES,

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(3)

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in

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the

of

the

register

securities

31__/ See

n.

17

with

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of

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to

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notice

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1976, violation

of

publication its of

the

(4)

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(a)

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Commission's

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Act

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its

Commission,

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28

and

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Administrative

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a challenge statute which runs to other than persons must plaintiff demonstrate: a direct first, and substantial injury £o itself; and, secondly, that the statute challenged impinges some upon fundamental of the right third to whom it party runs. See, Barrows v. 346 249 Jackson, U.S. (1953) (racial p1e---•'rce discrimination); v. 268 U.S. Society of Sisters, 510 (1925) (freedom of and religion); 239 U.S. 33 (1915) Trua__•sv. Raich, (discrimination against aliens).

the

Andersen

the

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relationships noted,

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physician/patient which relationship, was as a rejected basis for standing in Tileston, enjoys a greater of degree legal from protection interference than that of independent accountant and client. See Baylor e.•, v. Mading-Du@an Dru@ Co., 57 F.R.D. 509, 512 (N.D-•--III. E.D, 1972),

where the

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at

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(1976), and

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states U.S.

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727,

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litigate or

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as

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669, case

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CONCLUSION the

For

judgment Dated:

or,

foregoing in

the

Washington, 4,

October

reasons,

alternative, D.C. 1976

this

Court

dismiss

should this

the

grant

Con•nission

sunmmry

action.

Respectfully

submitted,

HARVEY

L. PITt GONSON

PAUL

LLOYD

H.

MARVIN

FELLER

G.

PICKHOLZ MELVIN A. BROSTERMAN JOHN P. SWEENEY

Local

Counsel:

WILLIAM

M.

Chicago Securities South Room 1204

Chicago, (312)

Regional and

219

Attorneys

HEGAN

Dearborn

Illinois 353-7393

SECURITIES Office

Exchange Street

Corsnission

500

Defendant

ANDEXCHANGE

Capitol

Washington, (202)

60604

North

for

755-1108

D.C.

Street 20549

COMMISSION