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Judge Dismisses Ernst & Young Case

July 2, 2002

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WASHINGTON (AP) _ An administrative law judge handed a setback to the Securities and Exchange Commission, dismissing its case against Ernst & Young LLP, for alleged violations of auditor independence rules.

In a ruling Tuesday, Brenda Murray, the chief administrative law judge at the SEC, granted Ernst & Young’s motion for summary judgment and dismissed the case without prejudice. Murray agreed with Ernst & Young that more than one SEC commissioner needed to approve the action for it to be valid.

The SEC brought the case in May, alleging the accounting firm wasn’t independent when it audited PeopleSoft Inc. from 1993 to 2000, because the two firms had a joint deal to market software.

Only one of the three SEC commissioners, Isaac Hunt, voted to bring the action. SEC Chairman Harvey Pitt, who represented accounting industry clients in his private law practice, recused himself, as did commissioner Cynthia Glassman, an economist formerly employed at Ernst & Young.

The SEC contended Hunt was acting as the commission’s ``duty officer″ in casting the sole vote on the independence case, ducking the question of whether one commissioner constitutes a quorum. At full strength, the SEC has five members, although it has operated at times with as few as two.

``We are pleased that the administrative law judge agreed with our position that the proceeding was not properly authorized and dismissed the complaint,″ said Ernst & Young spokesman Les Zuke.

The case was dismissed without prejudice, allowing the SEC to consider it again if it is able to obtain a quorum. SEC spokeswoman Christi Harlan said the agency wouldn’t comment until it studies the judge’s order.

If the case were reinstated, ``our position remains the same,″ Zuke added. ``Our conduct was entirely appropriate and permissible under the rules. It did not affect our client, its shareholders or the investing public, nor did the SEC claim any error in our audits or our client’s financial statements as a result.″

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