Federal Judge Rejects Prager Metis Discovery Stay Motion in SEC-Filed Auditor Independence Lawsuit

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Photo Credit: Sarah Elizabeth

A federal judge has rejected a request from Prager Metis to delay discovery in an auditor independence lawsuit filed against it by the Securities and Exchange Commission (SEC).

This development in the courtroom confrontation, which dates back to September of 2023 but has largely flown under the industry radar, emerged in a recent order as well as a subsequent scheduling update.

For background, the SEC in its original complaint against the well-known accounting firm (which counts as clients a number of musicians, publishers, and labels) pointed to alleged violations of its “auditor independence rule” between December of 2017 and October of 2020.

In the interest of relative brevity – outlets including Reuters have already summed up the action, spanning a whopping 66 pages – said alleged violations stemmed specifically from the inclusion of indemnification provisions in client engagement letters.

All told, the relevant government agency identified 87 such engagement letters during the period, involving 62 audits, 11 exams, 144 reviews, and driving a cumulative $3 million or so in fees for Prager, according to the legal text.

“Once an auditor includes indemnification provisions in an engagement letter for an audit, review, or exam, the auditor is no longer independent,” the complaint reads in part, maintaining also that “the auditor’s incentive to conduct a thorough audit and question management regarding management’s representations is diminished because the auditor knows that he will be indemnified for” any misrepresentations.

Moving beyond this overview of the case and returning to its newest updates, Prager Metis had sought to delay discovery while its dismissal motion played out.

In rejecting the request, though, Judge Robert N. Scola Jr. determined based on Prager’s dismissal arguments that the complaint doesn’t appear guaranteed to be tossed at once. The Goldsmith Molis & Gray-allied firm “has not convinced the Court (at least upon a cursory review) that the Commission’s allegations here fail to state a claim,” per the order.

Additionally, the defendant “has not shown with sufficient specificity the type of extraordinary burden and expense it will suffer should discovery proceed,” the presiding judge found. And on the scheduling front, Judge Scola Jr. “largely” denied adjustment requests from Prager (which had sought a general extension amid its aforementioned motion to dismiss) as well as the SEC (which had pushed to delay fact discovery by two months given its plans to depose at least 10 witnesses).

As it stands, the cutoff for “all fact discovery” is September 12th, mediation needs to be completed before October 10th, and the expert discovery deadline is November 14th. The case is expected to head to trial in late January of 2025, according to this second order.