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AND AUDITING ENFORCEMENT +Release No. 4285 / February 22, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20783 + +In the Matter of + +SCOTT BOHABOY, + +Respondent. + + +CORRECTED ORDER INSTITUTING +CEASE-AND-DESIST PROCEEDINGS, +PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933 AND +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) against Scott Bohaboy (“Bohaboy” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-and-Desist Proceedings, Pursuant to Section 8A of the +Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, +and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +2 + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. From July 2015 until October 2019, Respondent Scott Bohaboy was Treasurer of +Baxter International Inc. (“Baxter”), a publicly-traded, U.S.-based healthcare product company. +2. Baxter generates the majority of its revenue outside of the U.S. Baxter reports its +consolidated financial results in U.S. dollars, although many of its subsidiaries have a different +functional currency as they manufacture and sell products globally and transact in foreign +currencies. The values of these foreign currencies relative to the U.S. dollar fluctuate frequently. +3. From at least 1995 through July 2019, the foreign exchange rate convention (“FX +Convention”) Baxter used to record foreign currency transactions recognized by subsidiaries in +their functional currencies and to uniformly translate the results of subsidiaries with foreign +functional currencies into U.S. dollars was not in accordance with U.S. generally accepted +accounting principles (“GAAP”). +4. Baxter’s Treasury department was responsible for managing the company’s foreign +exchange risk. Beginning in at least 2009 and continuing through July 2019, Baxter improperly +leveraged its FX Convention by engaging in intra-company transactions for the purpose of +generating foreign exchange accounting gains or avoiding foreign exchange accounting losses (the +“FX Transactions”). These FX Transactions had the effect of materially misstating Baxter’s net +income as reported in its public filings. +5. Beginning in at least 2009, the Treasury department regularly engaged in the FX +Transactions, which generated consistent annual foreign exchange gains. During his time as +Treasurer, which commenced in July 2015, Bohaboy was aware of the consistent gains, but never +considered how the Treasury department was able to consistently generate gains, or whether the +transactions that generated the gains were permissible. +6. In October 2019, Baxter announced that it was conducting an internal investigation +concerning the FX Transactions. In March 2020, Baxter restated its financial statements, which +reduced its previously reported net income for 2017 through June 30, 2019 and retained earnings as +of January 1, 2017 by $582 million, collectively. Of this amount, $517 million was related to +foreign exchange gains and losses dating back to 2010, which was in part attributable to FX + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + +3 + +Transactions. Misstatements of foreign exchange gains and losses during Bohaboy’s time as +Treasurer were at least $245 million. +7. Based on his conduct, and as described in further detail below, Bohaboy violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act and caused Baxter’s violations of Sections 13(a) +and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder. +Respondent +8. Scott Bohaboy, age 51, is a resident of Elmhurst, Illinois. Bohaboy started at +Baxter in 2006 and became Baxter’s Treasurer in July 2015. He was both Baxter’s Treasurer and +Head of Financial Planning & Analysis starting in March 2016. Prior to becoming Treasurer, +Bohaboy had no treasury experience and he was not a certified public accountant. He resigned +from his role as Treasurer in October 2019 and ultimately was terminated in March 2020. Bohaboy +has no prior enforcement or disciplinary history with the Commission. +Other Relevant Entity +9. Baxter International Inc. is a Delaware corporation with its principal place of +business in Deerfield, Illinois. Its common stock is registered pursuant to Section 12(b) of the +Exchange Act and trades on the New York Stock Exchange. Baxter files periodic reports, including +annual reports on Form 10-K and quarterly reports on Form 10-Q, with the Commission pursuant to +Section 13(a) of the Exchange Act and related rules thereunder. During the relevant period, Baxter +sold securities to the public pursuant to registration statements filed with the Commission. +Facts +Baxter’s Foreign Exchange Rate Convention +10. FASB Accounting Standards Codification Topic 830, “Foreign Currency Matters” +(ASC 830), provides guidance concerning foreign exchange rate conventions. ASC 830-20-30-1 +requires that foreign currency transactions initially be measured and recorded in an entity’s +functional currency using the exchange rate on the date of the transaction. ASC 830-20-35-2 +requires that foreign currency denominated assets and liabilities be remeasured at the end of each +reporting period using the exchange rate at that date. + +11. Before July 2019, Baxter’s FX Convention was not in accordance with GAAP +because foreign currency transactions in a given month were initially measured using exchange +rates from a specified date near the middle of the previous month as opposed to the exchange rate +on the date of the transaction. Additionally, foreign currency denominated assets and liabilities +were subsequently remeasured at the end of each month using exchange rates from a specified date +near the middle of the then current month, called “T Day,” and not at the end of the reporting +period. + + +4 + +12. Because of Baxter’s FX Convention, Baxter employees knew the exchange rates that +would apply to intra-company transactions from the T Day in a given month through month-end. + +Treasury Employees Leveraged Baxter’s Foreign Exchange Rate to Record Gains +13. Baxter’s Treasury department was responsible for managing Baxter’s exposure to +fluctuations in foreign exchange rates, which Baxter managed on a consolidated basis. +14. Beginning in about 2007, Baxter’s Treasury department began focusing on +managing Baxter’s foreign exchange rate exposure more efficiently and at a lower cost. Baxter +wanted to reduce its use of third-party derivative contracts and instead manage its foreign currency +exposures on a consolidated basis through offsetting cash positions. Baxter developed the FX +Transactions as a way to better control reported foreign exchange gains and losses. +15. Each FX Transaction comprised a series of transactions designed to create a foreign +exchange gain or avoid a loss at a Baxter subsidiary. For example, when the dollar was +strengthening in comparison to the Euro, Baxter would generate a foreign exchange gain by +moving U.S. dollars to a Euro-functional Baxter entity. Specifically, a U.S. dollar Baxter entity +would make a capital distribution in U.S. dollars to its Baxter Euro-functional parent (“Euro +Parent”). Euro Parent would then enter into simultaneous transactions with Baxter’s Euro- +functional cash pooling entity (“Euro Cash Pooling Entity”) to (i) trade the dollars for Euros and +(ii) loan Euros in the same amount it just traded. The Euro Cash Pooling Entity would record a +foreign exchange gain on the U.S. dollars that it held at month end. The gain was the difference +between exchange rates for the prior month’s T Day and current month’s T Day. After month-end, +the Treasury group would typically unwind the currency trade and the loan. +16. Initially, the Treasury department used the FX Transactions to avoid losses caused +by foreign exchange rate fluctuations. Over time, this practice evolved to proactively generating +gains from foreign exchange rate fluctuations. Baxter used the FX Transactions to generate non- +operating foreign exchange accounting gains or avoid accounting losses since at least 2009. +17. Because of Baxter’s FX Convention, Treasury personnel knew the foreign +exchange rates that would apply to month-end transactions before they happened. With this +knowledge, certain Treasury personnel executed FX Transactions to generate specific amounts of +accounting gains or avoid specific amounts of accounting losses. +Bohaboy Negligently Failed to Investigate the FX Transactions and Take Corrective Action +18. Bohaboy became Baxter’s Treasurer in July 2015. By 2016, Bohaboy was also +serving as the head of Baxter’s global Financial Planning & Analysis group. Although Bohaboy +was not involved in the development of the FX Transactions, in his dual roles, he became aware +that there were consistent gains generated by the Treasury department in the “other (income) +expense, net” line. He also knew that the Treasury department sometimes entered into intra- +company transactions after T Day that resulted in gains. + +5 + +19. Beginning in the fourth quarter of 2017, as part of a company-wide initiative to +improve Baxter’s forecast accuracy and as a result of the consistent gains being generated by the +Treasury department, Bohaboy decided to more accurately forecast the “other (income) expense, +net” line of Baxter’s financial statements. The foreign exchange component of the other (income) +expense line forecast was based on the average actual foreign exchange gains reported by Baxter +over the previous several quarters, discounted slightly for volatility. Bohaboy did not take any +steps to investigate whether the month-end transactions generating the gains were permissible. +Because the transactions had been occurring prior to his role as Treasurer, he believed that the +transactions had been previously vetted and approved. +Baxter’s Inaccurate Financial Reporting +20. The accounting gains generated (or losses avoided) from the FX Transactions were +reported on the “other (income) expense, net” line of Baxter’s financial statements and were +reflected in Baxter’s net income and earnings per share (“EPS”). +21. During Bohaboy’s tenure as Treasurer, Baxter reported foreign exchange gains of +$36 million in the last two quarters of 2015, $28 million in 2016, $50 million in 2017, $73 million +in 2018, and $22 million for the first two quarters of 2019. The improper FX Transactions had the +effect of inflating Baxter’s net income and EPS. +22. In late July 2019, Baxter’s tax department asked certain Treasury personnel about +the details of the FX Transactions. The Treasury personnel explained the FX Transactions to the +Tax personnel including that the FX Transactions were used to generate foreign exchange gains or +avoid losses. Shortly thereafter, a team within Baxter, including Bohaboy, undertook to change its +FX Convention. +23. In October 2019, Baxter announced that it was conducting an internal investigation +concerning the FX Transactions and Baxter put Bohaboy on administrative leave. +24. On February 13, 2020, Baxter announced that its consolidated financial statements +for the years ended December 31, 2016, 2017, and 2018 and its quarterly financial statements for +the quarters ended March 31, 2017 through June 30, 2019, should no longer be relied upon because +of misstatements to Baxter’s previously reported foreign exchange gains and losses. +25. On March 17, 2020, Baxter filed its Form 10-K for the period ending December 31, +2019. In that filing, Baxter announced it had completed the investigation concerning the FX +Transactions and restated its financial statements and financial information for 2017, 2018, and the +first half of 2019, including each of the quarterly and year-to-date periods from 2018 through 2019, +to correct material misstatements related to the FX Transactions as well as other immaterial +misstatements. The 10-K also included restatements of selected unaudited financial information +for the years ended December 31, 2015 and 2016. Baxter terminated Bohaboy when it completed +the investigation. + +6 + +26. In quantifying the misstatements, Baxter identified all legal entities that had foreign +exchange gains or losses on intra-company transactions above an immaterial threshold and +remeasured the foreign exchange gains and losses for those transactions by applying a new +exchange rate convention in accordance with GAAP. No distinction was made on whether the +foreign exchange gain or loss resulted from FX Transactions. Baxter also remeasured the gains +and losses on foreign currency derivative contracts in these same entities using the new exchange +rate convention. +27. As a result of the restatement, Baxter reduced its total reported foreign exchange +gains and losses from 2010 through the second quarter of 2019 by $517 million. Misstatements of +foreign exchange gains and losses during Bohaboy’s time as Treasurer were at least $245 million. +28. The bonus compensation of Baxter senior management, including Bohaboy, was +based, in part, on Baxter meeting performance metrics tied to EPS, which had been inflated by +Baxter’s FX Convention and the related FX Transactions. In March 2020, after conclusion of its +internal investigation, Baxter recouped bonuses from certain of its officers, including $191,981 +from Bohaboy via reductions in 2019 bonuses. The amount that Baxter recouped from Bohaboy is +an approximation of the amount by which his bonus payments were inflated due to Baxter’s +inflated EPS. +Violations +29. As a result of the conduct described above, Respondent violated Sections 17(a)(2) +and 17(a)(3) of the Securities Act, which prohibit any person from directly or indirectly obtaining +money or property by means of any untrue statement of a material fact or any omission to state a +material fact necessary in order to make the statements made, in light of the circumstance under +which they are made, not misleading, or engaging in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser, in the offer or +sale of securities. A violation of these provisions does not require scienter and may rest on a +finding of negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-02 (1980). +30. As a result of the conduct described above, Respondent caused Baxter’s violations +of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder, which +require issuers with securities registered under Section 12 of the Exchange Act to file annual, +current, and quarterly reports with the Commission containing such information as the +Commission’s rules may require. A violation of these reporting provisions does not require +scienter and may rest on a finding of negligence. See SEC v. Wills, 472 F. Supp. 1250, 1268 +(D.D.C. 1978). A finding of negligence is sufficient to establish causing under Exchange Act +Section 21C(a) where the primary violation does not require scienter. See KPMG, LLP v. SEC, +289 F.3d 109, 120 (D.C. Cir. 2002). +31. As a result of the conduct described above, Respondent caused Baxter’s violations +of Section 13(b)(2)(A) of the Exchange Act, which requires issuers with securities registered under +Section 12 of the Exchange Act to make and keep books, records and accounts which, in + +7 + +reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the +issuer. Scienter is not an element of the books and records provision. See Ponce v. SEC, 345 F.3d +722, 737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also does +not impose a scienter requirement”). +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent cease and desist from committing or causing any violations and any future violations of +Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a) and 13(b)(2)(A) of the +Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder. +B. Respondents shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $125,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying Scott +Bohaboy as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Jeffrey A. Shank, Division of +Enforcement, Securities and Exchange Commission, 175 W. Jackson Blvd., Ste. 1450, Chicago, +Illinois 60604. + +8 + +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph IV.B. above (the “Bohaboy Fair Fund”) and the +Bohaboy Fair Fund shall be added to the Fair Fund established in the Commission’s related +proceeding, In the Matter of Baxter International Inc., Admin. Proc. No. 3-20781 (instituted +February 22, 2022) (the “Baxter Fair Fund”). The Baxter Fair Fund will be distributed to affected +investors in accordance with a Commission-approved plan of distribution in that proceeding. +Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, he shall +not argue that he is entitled to, nor shall he benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4287.txt b/raw/aaer/2022/AAER-4287.txt new file mode 100644 index 0000000000000000000000000000000000000000..b406461c1a2573dbd40013bce28391fd59c65037 --- /dev/null +++ b/raw/aaer/2022/AAER-4287.txt @@ -0,0 +1,110 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94318 / February 25, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4287 / February 25, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-17112 + +In the Matter of +Susan Woo, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION + +On June 7, 2016, the Commission issued an Order Making Findings and Imposing +Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act +of 1933 and Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice (the “Suspension Order”) as to Respondent Susan Woo, CPA +(“Woo”).1 The Suspension Order suspended Woo from appearing or practicing before the +Commission as an accountant but permitted Woo, after three years from the date of the +Suspension Order and if certain conditions were met, to request that the Commission consider +her reinstatement to resume appearing or practicing before the Commission as: (1) a preparer or +reviewer, or a person responsible for the preparation or review, of any public company’s +financial statements that are filed with the Commission; or (2) an independent accountant. +This order is issued in response to Woo’s application for reinstatement to appear and +practice before the Commission as an accountant responsible for the preparation or review of +financial statements required to be filed with the Commission. +In the Suspension Order, the Commission found that Woo served as the engagement +partner during Frazer Frost LLP’s third quarter 2010 review and 2011 year-end audit of China +Valves Technology, Inc. (“CVVT”). In 2010, CVVT misled investors about its acquisition of +Watts Valve (Changsha) Co., Ltd and, in 2011, materially overstated income and understated +liabilities incurred by another subsidiary, Shanghai Pudong Hanwei Valve Co., Ltd., in its + +1 See Accounting and Auditing Enforcement Release No. 3781, dated June 7, 2016. + + 2 +financial statements. During the time in which these misstatements occurred, Woo, and others, +failed to conduct the review and audit of CVVT’s financial statements, in accordance with Public +Company Accounting Oversight Board auditing standards and the firm failed to comply with the +documentation requirements of Rule 2-06 of Regulation S-X. As a result, Woo engaged in +improper professional conduct and was also a cause of Frazer Frost LLP’s violations of Rule 2- +02(b)(1) and Rule 2-06 of Regulation S-X. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +Woo has shown good cause for reinstatements and has met all of the conditions set forth +in the Suspension Order to be reinstated to appear and practice before the Commission as a +preparer or reviewer, or as a person responsible for the preparation or review, of financial +statements of a public company to be filed with the Commission and in this capacity has attested +that she will undertake to have her work reviewed by the independent audit committee of any +company for which she works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Woo is not, at this time, seeking to appear or +practice before the Commission as an independent accountant. If, in the future, she should wish +to resume appearing and practicing in such a capacity, she will be required to submit an +application to the Commission showing, among other things, that she has complied and will +comply with the terms of the Suspension Order. + + +On the basis of information supplied, representations made, and undertakings agreed to +by Woo it appears that she has complied with the terms of the Suspension Order suspending her +from appearing or practicing before the Commission as an accountant. No information has come +to the attention of the Commission relating to her character, integrity, professional conduct, or +qualifications to practice before the Commission that would be a basis for adverse action against +her pursuant to Rule 102(e) of the Commission’s Rules of Practice. In addition, Woo has +undertaken to have her work reviewed by the independent audit committee of any company for +which she works, or in some other manner acceptable to the Commission. As a result, Woo has +shown good cause for reinstatement. Therefore, it is accordingly, + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be affor ded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Susan Woo, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4288.txt b/raw/aaer/2022/AAER-4288.txt new file mode 100644 index 0000000000000000000000000000000000000000..c0feaf6b21e8fd4be532ca45cb92787df988415d --- /dev/null +++ b/raw/aaer/2022/AAER-4288.txt @@ -0,0 +1,354 @@ +1 + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94410 / March 14, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4288 / March 14, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20794 + + +In the Matter of + +Halpern & Associates LLC +and Barbara Halpern, CPA, + +Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE AND NOTICE OF +HEARING + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Halpern & Associates LLC and +Barbara Halpern (collectively, “Respondents”) pursuant to Section 4C1 of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part: +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others . . . +(2) to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + + 2 +II. + +After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: + +SUMMARY + +1. These proceedings arise out of Respondents’ improper professional conduct in their +2015 and 2016 audits of private equity fund ACP X, LLP (“ACP X”), an entity controlled by +Laurence Allen (“Allen”). Halpern & Associates, LLC was the auditor for several entities owned +and controlled by Allen. In 2019, the Office of the New York Attorney General (“NYAG”) +charged Allen with defrauding investors in his $17 million private equity fund, ACP X.3 Allen +invested at least 20% of ACP X’s funds in securities issued by NYPPEX Holdings, LLC +(“Holdings”), the owner of a registered broker dealer that Allen also controlled. Halpern was the +engagement partner for the audits of ACP X. Halpern approved the issuance of 2015 and 2016 +audit reports for ACP X, which were issued in 2017 and 2018 despite having strong indications +that Allen's valuations of Holdings’ securities were speculative, based on inflated revenue +projections, and used inconsistent inputs. + +RESPONDENTS + +2. Halpern & Associates LLC (“H&A”) is an accounting and auditing firm based in +Wilton, Connecticut. H&A was founded in 1982, and became a limited liability company in 2000. +It has been registered with the PCAOB since 2004. In addition to serving as an independent +auditor to at least one investment company and other entities, H&A provides tax advice and, on a +consulting basis, provides financial and operations principal (“FinOp”) services to at least four +broker-dealers. + + +3 On February 26, 2021, after a bench trial, the Court in NYAG v. Allen, et al., +452378/201913 (N.Y. Sup. Ct.) held defendant Allen liable for, among other things, violating New +York State’s Martin Act—by defrauding investors in ACP X, by investing at least $6 million of +ACP X’s funds in NYPPEX Holdings, LLC securities, contrary to the terms of ACP X’s private +placement memorandum (“PPM”). In its written opinion, the Court also found that Allen +misappropriated an additional $3.4 million from ACP X by making impermissible distributions to +himself from ACP X , characterized as carried interest. According to the terms of the PPM, +those funds should first have been distributed to the limited partners towards the return of +capital and next, their preferred return. On October 21, 2021, the Appellate Divison of the First +Judicial Department of New York affirmed the lower court’s judgment. NYAG v. Allen, et al., 198 +A.D.3d 531 (1st Dep’t 2021). + + + + + 3 +3. Barbara Halpern (“Halpern”), age 68, of Weston, Connecticut, was the engagement +partner, and/or functioned as the engagement partner on ACP X’s 2014, 2015, and 2016 audits. She +is currently the managing member and 90% owner of H&A. During the relevant period, Barbara +Halpern was a certified public accountant licensed to practice in Connecticut. She has held a Series +27 license since 1998 and a Series 54 license since 1980. In February 2016, she was suspended +from appearing in front of the SEC for one year for failing to gather sufficient audit evidence and +improperly staffing an audit in Halpern & Associates LLC and Barbara Halpern, CPA, Admin. +Proc. File No. 3-16399. + +OTHER RELEVANT PERSONS AND ENTITIES + +4. Laurence Allen (“Allen”), 63 years old, resides in Greenwich, Connecticut. Allen +is the managing principal of ACP Investment Group, the investment adviser to ACP X. He is the +founder, CEO and managing member of NYPPEX, LLC (“NYPPEX”), a broker-dealer +registered with the Commission since 1999. Allen holds Series 3, 5, 7, 24, 63, 65 and SIE +licenses. + +5. ACP Investment Group, LLC is a Connecticut Limited Liability Company with its +principal place of business in Rye Brook, New York. It was registered as an investment adviser +with the Commission from June 2018 and terminated its registration in May 2021. It is the +investment adviser to, among other private equity funds, ACP X. + +6. NYPPEX Holdings, LLC (“Holdings”) owns NYPPEX and is a Delaware Limited +Liability Company. + +7. ACP X, LP (“ACP X”) is a Delaware limited partnership with its principal place of +business in Rye Brook, New York. In 2004, Allen launched ACP X, a private equity fund which +was scheduled to wind down by December 31, 2018. Allen represented that ACP X would invest +primarily in discounted private equity interests, including interests sourced through NYPPEX. +ACP X’s offering documents limited transactions between the affiliated entities, providing that +Allen could not “actively participate in the day to day operations” of any of ACP X’s portfolio +investments. + +FACTUAL ALLEGATIONS + +Background + +8. From at least 2011 though 2018, H&A provided audit services to Allen and his +entities, including ACP X, Holdings, NYPPEX LLC, and ACP Investment Group, LLC. As the +principal of H&A and the engagement partner on the audits of Allen’s entities, Halpern oversaw +the work conducted on the audits. This order concerns the following audits for ACP X: ACP X +ACP X 2015 audited financials completed in March 2017, and ACP X 2016 audited financials +completed in May 2018. Halpern was either the designated the engagement partner, or functioned +as the engagement partner, for ACP X’s 2015 and 2016 audits. The ACP X audits were conducted + + 4 +pursuant to AICPA Generally Accepted Auditing Standards (“GAAS”). ACP X’s private +placement memorandum, given to investors, represented that investors would receive audited +financial statements annually. + +9. As part of each of the audits at issue, H&A and its staff, including Halpern, among +other things, conducted testing, sought confirmations from investors, and interviewed stakeholders +in the company. + +The Audit Procedures Concerning Holdings’ Valuation + +10. For the 2014, 2015, and 2016 audit years, Halpern and other H&A accountants +expressed concern to Allen regarding the grossly inflated estimated revenue projections Allen was +using to arrive at his valuation of Holdings. Halpern’s and H&A’s concern in fact began as early +as 2011 when Halpern began telling Allen to get an independent valuation of Holdings because of +the lack of recent sales of Holdings shares to independent third parties. To value Holdings +securities, Allen used his own internal analysis of Holdings securities reflected on a one page +document entitled “Fair Valuation Analysis” (“FVA”). The FVA referenced Holdings’s past +revenues, expenses, and earnings as well as projected future revenues and profits. It lacked an +objective basis, ignored material information (including two decades of Holdings’s operating +history), and was based on unachievable future revenue and corporate growth. Allen’s projected +revenue growth routinely doubled or tripled year-over-year. + +11. In communications with Allen, H&A accountants raised concerns about the +Holdings revenue projections Allen was providing in support of the valuation. For example, for +the 2010 audit, Allen’s projected revenue for 2011 was $26 million when Holdings’s revenues for +the first three quarters of 2011 had only reached approximately $2.3 million. Allen resisted +H&A’s efforts to obtain more audit evidence for the revenue projections and suggested that H&A’s +request could lead to a termination of the relationship. That year, Halpern, on behalf of H&A, +approved the issuance of the 2010 audit without receiving any additional information. + +12. Similarly, for the 2014 audit, Allen’s FVA had projected revenues for Holdings of +$10.5 million for 2015 and $19.5 million for 2016, even though, as of September 2015, Holdings’s +revenues were just under $1 million. The original 2014 FVA valued Holding securities at $.76 per +share. Allen ultimately agreed to adjust 2015 revenue to $2.1 million and 2016 revenue to $7.5 +million. He also, however, revised the FVA to include two additional years of projected revenue, +$14.5 million for 2017 and $24.3 million for 2018. The revised 2014 FVA also valued Holdings +securities at $.76 per share. That year, Halpern, on behalf of H&A, approved the issuance of the +2014 audit despite knowing that the client’s adjustments to the 2015 and 2016 revenue projections +had no meaningful impact on the valuation and had simply altered the metrics. + +13. Despite knowing that the estimated revenue being used in the FVA had not come +close to being met in prior years or would likely not be met, Halpern nevertheless approved the +issuance of the audits for years 2015 (which was issued in March 2017), and 2016 (which was + + 5 +issued in May 2018). Each year, Halpern and H&A raised getting an independent valuation with +Allen who refused each year. + +14. Halpern was also aware of inconsistencies in the formula Allen was using in the +FVA provided to H&A for each audit year. + +15. In communications with Allen, H&A accountants raised concerns about +inconsistencies in the formula in the FVA noting differences in the holding period, the +price/revenue multipliers, and the implied investor discounts in the 2011, 2012, and 2013 audits. + +16. For the 2014, 2015, and 2016 audit years, there were similar inconsistencies in the +formulas used in the FVA. Despite knowing that the formula used in the FVA used inconsistent +metrics, Halpern nevertheless approved the issuance of the audits for years 2014, 2015 and 2016. + +VIOLATIONS + +Respondents Engaged in Improper Professional Conduct + +17. As a result of the conduct described above, Respondents engaged in improper +professional conduct. Rule 102(e) of the Commission's Rules of Practice allows the Commission +to censure a person or deny the privilege of appearing or practicing before it to any person if it +finds that such person has engaged in “improper professional conduct.” Exchange Act § 4C(a)(2); +Rule 102(e)(1)(ii). In addition, regarding accountants, Rule 102(e)(1)(iv)(B) and Section 4C(b) +provide that the following two types of negligent conduct may constitute “improper professional +conduct”: +(1) A single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which an accountant knows, or should know, +that heightened scrutiny is warranted, or +(2) Repeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards, that indicate a lack of competence to practice before the +Commission. + +18. The applicable professional standards for the ACP X audits were Generally +Accepted Accounting Standards (“GAAS”). In the audit planning documents, H&A identified the +valuations of Holdings as an area of significant risk of material misstatement. H&A and Halpern +failed to adhere to a fundamental auditing standard: the standard that requires an auditor to comply +with all relevant ethical requirements relating to financial statement audits, which includes due care +(Codification of Statements on Auditing Standards (“AU-C”) 200.16). The auditor must also +exercise professional judgment in planning and performing an audit (AU-C 200.18), by properly +staffing and supervising the audit, (AU-C 220.16 and .17 and AU-C 300.08 and .11), by obtaining +sufficient appropriate audit evidence, (AU-C 500A.06), and by maintaining an attitude of +professional skepticism, which includes “a questioning mind and a critical assessment of audit +evidence[,]” (AU-C 200.14 and 17). In conducting the 2015 and 2016 audits of ACP X, H&A and +Halpern failed to perform adequate procedures to determine whether the valuations of Holdings + + 6 +were correct. H&A and Halpern failed to perform additional audit procedures necessary to resolve +their doubts about the reliability of the ACP X valuation analysis, including the accuracy of the +revenue projections and the calculations used. As a result, and absent additional procedures +performed, H&A and Halpern failed to obtain sufficient appropriate audit evidence to support an +unqualified opinion. + +19. H&A and Halpern also failed to adhere to auditing standards concerning the +reliability of audit evidence (AU-C 500A.07), and the need to obtain audit evidence about the +completeness and accuracy of client-produced information used to perform audit procedures (AU- +C 500A.09). In conducting the 2015 and 2016 audits for ACP X, H&A and Halpern knew that the +valuation provided by the client was not in line with the actual revenues of the company, other +trends in the market, or H&A’s own analysis. Despite this knowledge, H&A and Halpern failed to +maintain an attitude of professional skepticism by failing to make a critical assessment of the audit +evidence + +20. As a result of the conduct alleged above, H&A and Halpern failed to adhere to +GAAS in planning and performing the audits of ACP X’s 2015 and 2016 financial statements and +preparing the audit reports on those statements. Moreover, those failures occurred in the most +critical areas of the audit – the valuation of portfolio assets. + +21. Accordingly, H&A and Halpern engaged in improper professional conduct by +engaging in at least a single instance of highly unreasonable or, at a minimum, repeated instances +of unreasonable conduct within the meaning of of Rule 102(e)(1)(iv)(B). + +22. Halpern’s improper professional conduct may be attributed to H&A. + +III. + +In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it necessary and appropriate that public administrative +proceedings be instituted to determine: + +Whether the allegations set forth in Section II hereof are true and, in connection therewith, +to afford Respondents an opportunity to establish any defenses to such allegations; and + +What, if any, remedial action is necessary and appropriate against Respondents pursuant to +Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice. + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purpose of taking +evidence on the questions set forth in Section III hereof shall be convened at a time and place to be +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.110. + + 7 + +IT IS FURTHER ORDERED that Respondents shall file Answers to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondents shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If Respondents fail to file the directed Answers, or fail to appear at a hearing or conference +after being duly notified, the Respondents may be deemed in default and the proceedings may be +determined against them upon consideration of this Order, the allegations of which may be deemed +to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondents by any means permitted by the +Commission’s Rules of Practice. + +Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.151(b) and (c), providing that when, as here, a proceeding is set before the Commission, all +papers (including those listed in the following paragraph) shall be filed with the Office of the +Secretary and all motions, objections, or applications will be decided by the Commission. The +Commission requests that an electronic courtesy copy of each filing should be emailed to +APFilings@sec.gov in PDF text-searchable format. Any exhibits should be sent as separate +attachments, not a combined PDF. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, +232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of + + 8 +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public hearing +has been completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a +motion for summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.250, where the Commission has determined that no public hearing is necessary; or +(C) The determination that a party is deemed to be in default under Rule 155 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4289.txt b/raw/aaer/2022/AAER-4289.txt new file mode 100644 index 0000000000000000000000000000000000000000..44f46ed42a48cd8b6de0ce6db45027d179bce439 --- /dev/null +++ b/raw/aaer/2022/AAER-4289.txt @@ -0,0 +1,511 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94426 / March 16, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4289 / March 16, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20800 + + + + +In the Matter of + +SHELBY L. LACKEY, CPA, + +Respondent. + + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Shelby L. Lackey, CPA +(“Lackey” or “Respondent”) pursuant to Sections 4C1 of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; o r (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over her and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +1. In 2017, Crosby Independent School District and its then-CFO engaged in a +fraudulent scheme to overstate the District’s General Fund reserves and understate payroll and +construction liabilities totaling $11.7 million. In January 2018, Crosby issued $20 million of +municipal bonds. The Official Statement attached Crosby’s fiscal year 2017 audited financial +statements that misstated the payroll and construction liabilities. When this misconduct was +discovered, Crosby declared financial exigency and the bonds were downgraded. + +2. Lackey was the audit partner responsible for the audit of Crosby for the fiscal year +2017. In that capacity, Lackey failed to comply with Generally Accepted Auditing Standards +(“GAAS”) during the planning and performance of Crosby’s fiscal year 2017 audit. Specifically, +Lackey failed to perform critical audit procedures necessary to verify the accuracy of Crosby’s +payroll and construction liability. She (1) failed to obtain sufficient appropriate audit evidence to +support the audit opinion; (2) failed to properly supervise the audit; and (3) failed to exercise +professional judgment and maintain professional skepticism. These numerous audit failures +significantly reduced the audit team’s ability to detect Crosby’s fraud. + +3. Notwithstanding these audit failures, Lackey approved and issued an audit report +for fiscal year 2017 stating that the audit was performed in accordance with generally accepted + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + + + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 +auditing standards4 (“GAAS”). This statement was false as the audit was not performed in +accordance with GAAS. + +4. As a result of this conduct, Lackey engaged in improper professional conduct +within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice (“Rule 102(e)”). + +B. RESPONDENT + +5. Shelby L. Lackey, age 48, of Conroe, Texas, is a Certified Public Accountant +(“CPA”) licensed to practice in Texas. Lackey became a partner in a national audit firm (“Outside +Audit Firm”) in 2017. Lackey served as the engagement partner on, and had final audit +responsibility over, Crosby’s fiscal year 2017 audit engagement. In spring 2020, Lackey left the +Outside Audit Firm to become CFO for another school district. + +C. OTHER RELEVANT ENTITY AND INDIVIDUAL + +6. Outside Audit Firm is a certified public accounting firm registered with the Public +Company Accounting Oversight Board. Outside Audit Firm was the auditor for Crosby’s fiscal +year 2017 and 2018 financial statements. + +7. Crosby Independent School District is a public school district based in Crosby, +Texas, a suburb located northeast of Houston, Texas. Crosby operates seven schools and serves +approximately 6,400 students. Crosby operates on a July 1 to June 30 fiscal year. + +D. FACTS + +Crosby’s Deteriorating Financial Condition and Change to Fiscal Year End + +8. In 2013, Crosby issued $86.5 million in municipal bonds (“2013 Bond”) to fund +several capital projects. Various project enhancements beyond the original scope of work, +however, inflated the total cost of the projects. Consequently, the 2013 Bond proceeds were +prematurely exhausted in fiscal year 2016 leaving the General Fund as the only source of funding +for approximately $12 million of remaining construction commitments. + +9. As of August 31, 2016 (Crosby’s then fiscal year-end) the District’s General Fund +lacked sufficient funds to cover the $12 million of unanticipated construction expenses required to +complete its capital projects. As a result, Crosby pursued two options to pay for the remaining +construction costs: (1) Crosby changed its fiscal year-end date from August 31 to June 30, and (2) +Crosby issued new municipal bonds. + +10. Lackey, who had participated in the Crosby audits since fiscal year 2014, was the +engagement partner for Crosby’s fiscal year 2017 audit. She knew that the General Fund was + +4 Generally accepted auditing standards for audits of entities not subject to the oversight authority of the +Public Company Accounting Oversight Board (PCAOB) are promulgated by the AICPA. +4 +liable for $12 million of remaining construction commitments, that Crosby had changed its fiscal +year-end date, and had planned to issue new municipal bonds to pay for the additional expenses. +The District’s inability to pay for its outstanding construction commitments and proposed remedies +were unique issues during Crosby’s fiscal year 2017 audit and, therefore, merited an elevated level +of scrutiny, professional judgment, and professional skepticism. However, Lackey failed to +perform appropriate audit procedures during the fiscal year 2017 to form a basis for the auditor’s +opinion that the financial statements were presented fairly, in all material respects, in accordance +with Generally Accepted Accounting Principles (“GAAP”). + +Audit of Crosby’s Fiscal Year 2017 Financial Statements + +11. Crosby’s fiscal year 2017 financial statements materially understated liabilities and +overstated the General Fund balance due to two significant failures: (1) failure to record +construction expenses for completed capital projects, and (2) failure to record payroll expenses for +unpaid teachers’ salaries. During Crosby’s fiscal year 2017 audit, Lackey failed to properly verify +and corroborate Crosby’s construction and payroll liability. Notwithstanding these audit +deficiencies, Lackey approved the issuance of Crosby’s fiscal year 2017 audit report which +contained an unmodified opinion. + +Construction Expenses Understated by $7.9 Million + +12. During Crosby’s fiscal year 2017 audit, Lackey knew or should have known that +the 2013 Bond proceeds had been completely consumed and Crosby would have to pay the +remaining construction commitments from its General Fund. Lackey also knew or should have +known that Crosby’s capital projects had been substantially completed and that Crosby’s General +Fund lacked sufficient funds to pay the estimated $8-$10 million in unpaid construction invoices. +On June 26, 2017, Lackey attended a call with Crosby and Crosby’s bond counsel and financial +advisor. On that call, Crosby and its financial advisor confirmed that the District could not pay for +its unpaid construction liabilities without issuing new bonds. + +13. Lackey’s audit procedures on Crosby’s fiscal year 2017 construction expenses were +deficient. First, Lackey only obtained from Crosby one invoice indicating that Crosby owed +$727,000 to its construction vendor. Lackey, however, knew or should have known that Crosby’s +unpaid construction liabilities were significantly higher. Lackey also misinterpreted a critical line +on the invoice titled “Previous Certificates for Payment” to mean total amounts paid. Consistent +with its description, however, that line did not represent total amounts paid but rather the aggregate +amount of previously submitted invoices (representing actual work completed) regardless of +Crosby’s payment history. + +14. Additionally, Lackey’s search for unrecorded liabilities was deficient and did not +follow the Outside Audit Firm’s firm-wide guidance. Lackey only reviewed a list of checks +written, not a list of all disbursement types, such as wires and ACH payments. If the audit team +had searched all disbursement types for unrecorded liabilities, Lackey would have discovered $1.5 +million of progress payments toward Crosby’s outstanding construction payables in September +2017 alone. This amount exceeded the $727,000 recorded in the fiscal year financial statements, +5 +which should have alerted Lackey that the construction liability was recorded incorrectly. Lackey +failed to corroborate and obtain an appropriate understanding of Crosby’s outstanding construction +liabilities. Finally, Lackey failed to verify any payments from Crosby to its construction +contractors prior to the conclusion of fiscal year 2017. As a result, Lackey inaccurately concluded +that Crosby only owed $727,000 to its construction vendors as of June 30, 2017. + +Payroll Expenses Understated by $3.8 million + +15. Crosby’s teacher salaries represent a majority of the District’s expenses. Teachers +earn their salaries over a 10-month contract period corresponding with the start and end of the +school year, though they are paid evenly over a 12-month period ending in mid-August. Crosby +was not required to record a payroll liability for teacher salaries when its fiscal year-end was +August 31 because all teacher contracts had been paid in full as of that date. When Crosby moved +its fiscal year-end date from August 31 to June 30, however, Crosby concluded fiscal year 2017 +with unpaid payroll liabilities related to the 2017 contract year (amounts paid in July 2017 and +August 2017). Crosby failed to include these unpaid payroll liabilities in its fiscal year 2017 +financial statements. + +16. Lackey’s audit procedures on Crosby’s fiscal year 2017 payroll expenses were +deficient. Crosby’s change in fiscal year-end date merited a heightened sense of scrutiny, +professional judgment and professional skepticism. However, Lackey failed to perform +appropriate audit procedures over Crosby’s outstanding payroll liabilities. First, Lackey failed to +corroborate Crosby’s then-CFO’s alleged representation that a payroll liability for teachers’ +salaries was unnecessary because all teachers had been paid in full as of June 30, 2017. Second, +Lackey failed to recognize that the CFO’s alleged representation regarding teachers’ salaries +contradicted other audit evidence. For example, Crosby’s payroll policies and procedures state that +all employees’ (10-month, 11-month, and 12-month) salaries are evenly spread over 12 months (a +common practice in the Texas public school system and well-known to Lackey). Third, Lackey +failed to detect the payroll liability error because of poorly designed subsequent disbursement +testing that did not include all payment types. + +Crosby’s Declaration of Financial Exigency, Rating Downgrades, and Restatement + +17. During spring 2018, Crosby continued to face cash flow shortages because of the +additional construction expenses described above. In June 2018, Crosby’s new CFO discovered +the payroll liability and construction liability errors and confronted Lackey, who was overseeing +the audit of Crosby’s 2018 fiscal year. Lackey admitted to the new CFO that she missed the +payroll liabilityduring the fiscal year 2017 audit. + +18. In August 2018, Crosby’s leadership disclosed the financial issues to its Board and +the public and began crafting a financial recovery plan with its financial advisor. Beginning in +September 2018, ratings agencies downgraded Crosby’s bonds. + +19. On October 8, 2018, Crosby declared a financial exigency and implemented a mid- +year reduction in force. In February 2019, the Outside Audit Firm issued its audit report for +6 +Crosby’s fiscal year 2018 financial statements, which included material restatements of the fiscal +year 2017 ending balances. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +20. GAAS require the auditor to design and perform audit procedures that are +appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence +(AU-C §500). Lackey failed to obtain sufficient appropriate audit evidence during Crosby’s fiscal +year 2017 audit in multiple areas. + +21. First, Lackey failed to obtain sufficient appropriate audit evidence to confirm the +completeness and accuracy of Crosby’s fiscal year 2017 construction liabilities. Lackey only +reviewed one pay application from Crosby’s construction vendor and incorrectly interpreted a +critical line item to represent the total amount due to that vendor. Lackey also failed to adequately +perform a search for unrecorded liabilities by only reviewing checks written rather than all +disbursement types such as wire and ACH payments. Finally, Lackey failed to corroborate and +obtain an appropriate understanding of Crosby’s outstanding construction liabilities. + +22. Second, Lackey failed to obtain sufficient appropriate audit evidence to confirm the +completeness and accuracy of Crosby’s fiscal year 2017 payroll accrual. Crosby’s payroll +expenses represent a majority of its annual budget and, therefore, should have been a primary area +of focus during the fiscal year 2017 audit. However, Lackey failed to corroborate Crosby’s CFO’s +representations that contractual employees had been paid in full as of June 30, 2017. Lackey also +failed to detect the payroll liability error because of poorly designed subsequent disbursement +testing that did not include all payment types. Finally, Lackey failed to recognize and further +investigate contradicting audit evidence between Crosby’s documented payroll procedures +affirming annualized pay for contractual employees and the CFO’s representations that contractual +employees had been paid in full. + +Failure to Properly Supervise the Audit + +23. GAAS require the engagement partner to take responsibility for the overall quality +of each audit. To comply with this requirement, the engagement partner is responsible for, among +other things, directing, supervising and performing the audit in compliance with professional +standards and ensuring that the auditor’s report is appropriate in the circumstances (AU-C §220). + +24. Lackey, in her role as engagement partner, failed to properly supervise Crosby’s +fiscal year 2017 audit. Lackey failed to ensure that the procedures performed by the audit team +complied with GAAS. For example, Lackey failed to corroborate representations by Crosby’s +then-CFO related to Crosby’s payroll and construction liabilities. Lackey also failed to ensure that +the audit team properly tested Crosby’s cash disbursements subsequent to year-end to confirm the +completeness and accuracy of Crosby’s payroll and construction liabilities. + +Failure to Exercise Professional Judgment and Maintain Professional Skepticism + +7 +25. GAAS require the auditor to exercise professional judgment and maintain +professional skepticism during the planning and performance of an audit (AU-C §200). +Professional skepticism is an attitude that includes a questioning mind, being alert to conditions +that may indicate possible misstatement due to fraud or error, and a critical assessment of audit +evidence. + +26. Lackey failed to exercise professional judgment and maintain professional +skepticism during the planning and performance of Crosby’s fiscal year 2017 audit. As previously +discussed, Lackey failed to exercise professional judgment and maintain professional skepticism +with respect to Crosby’s change in fiscal year-end date and deteriorating financial condition. All +of these issues merited a heightened sense of due professional care and professional skepticism. +However, Lackey failed to acknowledge these areas in need of additional oversight, and she also +failed to sufficiently perform required audit procedures. Additionally, Lackey failed to exercise +professional judgment and maintain professional skepticism by failing to address contradictions +between the District’s documented payroll procedures and representations from its then-CFO that +all contractual employees had been paid in full. + +E. VIOLATIONS + +27. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Section 4C(b)(2) +and Rule 102(e)(1)(iv)(B) define improper professional conduct to include the following two types +of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation +of applicable professional standards in circumstances in which an accountant, a registered public +accounting firm, or associated person knows, or should know, that heightened scrutiny is +warranted; or (2) repeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards, that indicate a lack of competence to practice before the +Commission. + +28. Based on the foregoing, the Commission finds that Lackey engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. + +F. UNDERTAKING + +29. Lackey undertakes that she shall not serve as the engagement manager, engagement +partner, or engagement quality control reviewer in connection with any audit expected to be posted +in the MSRB’s Electronic Municipal Market Access system (“EMMA”) until reinstated to appear +before the Commission as an independent accountant. + +30. In determining whether to accept the Offer, the Commission has considered +Lackey’s undertaking. + +8 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Lackey’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Lackey is denied the privilege of appearing or practicing before the Commission as +an accountant. + +B. After three years from the date of the Order, Lackey may request that the +Commission consider her reinstatement by submitting an application to the attention of the Office +of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Lackey +shall submit a written statement attesting to an undertaking to have Lackey’s work reviewed by the +independent audit committee of any public company for which Lackey works or in some other +manner acceptable to the Commission, as long as Lackey practices before the Commission in this +capacity and will comply with any Commission or other requirements related to the appearance +and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Lackey shall +submit a statement prepared by the audit committee(s) with which Lackey will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Lackey will be associated; + +2. A description of Lackey’s role on the specific audit committee(s) with which +Lackey will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Lackey’s service on the specific audit +committee; and + +5. A statement noting whether Lackey will be able to act unilaterally on behalf of +the Audit Committee as a whole. +9 + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Lackey must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Lackey shall submit the following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which Lackey is +associated, stating that the firm is registered with the PCAOB in accordance +with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Lackey is associated that the Firm +has been inspected by the PCAOB and that the PCAOB did not identify any +criticisms of or potential defects in the Firm’s quality control system that would +indicate that Lackey will not receive appropriate supervision; and + +3. A statement from Lackey indicating that the PCAOB has taken no disciplinary +actions against Lackey since seven (7) years prior to the date of the Order other +than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Lackey shall provide documentation +showing that Lackey is currently licensed as a certified public accountant (“CPA”) and that Lackey +has resolved all other disciplinary issues with any applicable state boards of accountancy. If +Lackey is not currently licensed as a CPA, Lackey shall provide documentation showing that +Lackey’s licensure is dependent upon reinstatement by the Commission. + +G. In support of any application for reinstatement, Lackey shall also submit a signed +affidavit truthfully stating, under penalty of perjury: + +1. That Lackey has complied with the Commission suspension Order, and with +any related orders and undertakings, including any orders in this proceeding, or +any related Commission proceedings, including any orders requiring payment +of disgorgement or penalties; + +2. That Lackey undertakes to notify the Commission immediately in writing if any +information submitted in support of the application for reinstatement becomes +materially false or misleading or otherwise changes in any material way while +the application is pending; + +3. That Lackey, since the entry of the Order, has not been convicted of a felony or +a misdemeanor involving moral turpitude that would constitute a basis for a +forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); + +4. That Lackey, since the entry of the Order: + +10 +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +5. That Lackey’s conduct is not at issue in any pending investigation of the +Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Lackey has complied with any and all orders, undertakings, or other +remedial, disciplinary, or punitive sanctions resulting from any action taken +by any State Board of Accountancy, or other regulatory body. + +H. Lackey shall also provide a detailed description of: + +1. Lackey’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +11 +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Lackey reported for such work; and + +2. Lackey’s plans for any future appearance or practice before the Commission. + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Lackey provides the documentation and attestations required in this Order and +the Commission (1) discovers no contrary information therein, and (2) determines that Lackey +truthfully and accurately attested to each of the items required in Lackey’s affidavit, and the +Commission discovers no information, including under Paragraph I, indicating that Lackey has +violated a federal securities law, rule or regulation or rule of professional conduct applicable to +Lackey since entry of the Order (other than by conduct underlying Lackey’s original Rule 102(e) +suspension), then, unless the Commission determines that reinstatement would not be in the public +interest, the Commission shall reinstate Lackey for cause shown. + +K. If Lackey is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on Lackey to provide an explanation as to the facts +and circumstances pertaining to the matter setting forth why Lackey believes cause for +reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Lackey for cause shown. + +L. If the Commission declines to reinstate Lackey pursuant to Paragraphs J and K, it +may, at Lackey’s request, hold a hearing to determine whether cause has been shown to permit +Lackey to resume appearing and practicing before the Commission as an accountant. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4291.txt b/raw/aaer/2022/AAER-4291.txt new file mode 100644 index 0000000000000000000000000000000000000000..c30fe637db1c705905dda59036c61b232652aa33 --- /dev/null +++ b/raw/aaer/2022/AAER-4291.txt @@ -0,0 +1,670 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94570 / March 31, 2022 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5989 / March 31, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4291 / March 31, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20395 + + +In the Matter of + +Stockman Kast Ryan & Co. LLP; +Ellen S. Fisher, CPA; and +David H. Kast, CPA + +Respondents. + +ORDER MAKING FINDINGS, +IMPOSING REMEDIAL +SANCTIONS, AND A CEASE- +AND-DESIST ORDER +PURSUANT TO SECTION 4C OF +THE SECURITIES EXCHANGE +ACT OF 1934, SECTION 203(k) +OF THE INVESTMENT +ADVISERS ACT OF 1940, AND +RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE + +I. + +On July 13, 2021, the Securities and Exchange Commission (“Commission”) instituted +public administrative and cease-and-desist proceedings pursuant to Section 4C1 of the Securities +Exchange Act of 1934 (“Exchange Act”), Section 203(k) of the Investment Advisers Act of 1940 +(“Advisers Act”), and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice2 against Stockman +Kast Ryan & Co. LLP. (“SKR”), Ellen S. Fisher (“Fisher”), and David H. Kast (“Kast”) +(collectively, “Respondents”) (Rel. No. 34-92382). + + +1 Section 4C provides, in relevant part, that: “The Commission may censure any person, or deny, temporarily or +permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person +is found . . . to be lacking in character or integrity, or to have engaged in unethical or improper professional +conduct.” +2 Rule 102(e)(1)(ii) provides, in pertinent part, that the “Commission may censure a person or deny, temporarily or +permanently, the privilege of appearing or practicing before it in any way to a person who is found. . . to have +engaged in unethical or improper professional conduct . . . .” + 2 +II. + +In connection with these proceedings, Respondents have submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which +are admitted, and except as provided herein in Section V, Respondent consents to the entry of +this Order Making Findings, Imposing Remedial Sanctions, and a Cease-and-Desist Order +Pursuant to Section 4C of the Securities Exchange Act of 1934, Section 203(k) of the Investment +Advisers Act of 1940, and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice (“Order”), as +set forth below. + +III. + +On the basis of this Order and Respondents’ Offer, the Commission finds that: + +A. SUMMARY +This proceeding arises out of audits of six private funds (collectively, the “Funds” or +Funds 1-6) by audit firm SKR and audit partners Fisher and Kast. Although SKR’s audit reports +stated that the audits were conducted in accordance with Public Company Accounting Oversight +Board (“PCAOB”) auditing standards, Respondents engaged in improper professional conduct +under Rule 102(e) by failing to conduct the audits in accordance with those standards. These +audit failures were in connection with SKR’s engagement by an SEC-registered investment +adviser (the “Adviser”), to audit private funds so that the Adviser could comply with Section +206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”). +Specifically, Fisher, the engagement partner, and SKR failed to obtain sufficient +appropriate audit evidence regarding the valuation and existence of certain hard-to-value assets +described herein as Level 3 assets.3 Fisher and SKR knew that these assets were hard to value +and acknowledged that they were high risk areas of the audit, but they failed to properly assess +the risks associated with these complex assets and design and execute an audit response +sufficient to address the risks. As such, Fisher and SKR failed to meet PCAOB auditing +standards related to audit planning, obtaining sufficient appropriate audit evidence, evaluating +audit results, audit documentation, exercising due professional care, and supervision and review. +The engagement quality review conducted by Kast, who was required under PCAOB +standards to evaluate significant judgments made by the engagement team and assess the +engagement team’s response to significant risks, was deficient because Kast reviewed and +approved work papers that failed to obtain sufficient appropriate audit evidence regarding the + +3 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification “ASC” 8 20 sets forth three +categories of inputs for use in determining an asset’s fair value. Assets valued using Level 3 inputs are the most +difficult to value because they have no readily available market information and are valued using unobservable +inputs. + 3 +valuation and existence of Level 3 assets and failed to review other required work papers on +independence and completion. +The Custody Rule under the Advisers Act, among other things, requires that advisory +client assets be maintained with a qualified custodian, and requires client assets to be verified +through an annual surprise examination by an independent public accountant. The Adviser, which +had custody of investor assets, sought to use the audit exception to the Custody Rule, which required +that the funds’ financial statements be audited in accordance with U.S. Generally Accepted Auditing +Standards (“GAAS”) by an independent public accountant that is registered with and subject to +regular inspection by the PCAOB (the “audit exception”). See 17 C.F.R. § 275.206(4)-2(b)(4). As a +result of the above conduct, SKR caused the Adviser’s violations of the Custody Rule. +SKR was not independent under the Commission’s independence rules set forth in +Regulation S-X because a tax partner at SKR served as the trustee or general partner for a number +of trusts that invested in eight private funds audited by SKR (Funds 7-14). SKR also lacked +independence because it provided bookkeeping services to one fund (Fund 2) for which it also +audited the fund’s financial statements. Both of these relationships violated the Commission’s +independence rules for accountants and, because SKR was not independent and did not conduct the +audits of the funds in accordance with GAAS, the Adviser could not meet the audit exception and +violated the Custody Rule. +B. RESPONDENTS + +1. Stockman Kast Ryan & Co., LLP is a Colorado limited liability partnership and +accounting firm registered with the PCAOB. SKR has one office headquartered in Colorado +Springs, Colorado. +2. Ellen S. Fisher, CPA, age 52, is a resident of Elbert, Colorado. She began +working at SKR in 1999 as a senior auditor and became a partner in 2012. She first served on +audits of the Adviser’s funds in 2011 as senior manager, then as the audit engagement partner +from 2014 through at least 2019. She has been a licensed CPA in Colorado since 1998. +3. David H. Kast, CPA, age 69, is a resident of Colorado Springs, Colorado. He was +one of the founding partners of SKR in 1995. Kast served as the audit engagement partner on +audits of the Adviser’s funds from at least 2010 through 2013 and then as the audit engagement +quality review (“EQR”) partner from 2014 through at least 2017. He has been a licensed CPA in +Colorado since 1977. +C. OTHER RELEVANT ENTITIES AND INDIVIDUALS + +4. Adviser is an SEC-registered investment adviser incorporated in Colorado that +provides investment advisory, financial planning, and estate planning services to high-net-worth +clients. +5. Individual 1, age 66, is a resident of Colorado Springs, Colorado. Individual 1 is +a tax partner at SKR and was a trustee and general partner for seven trusts or partnerships that +invested in eight private funds managed by the adviser and also audited by SKR in 2015. + 4 +D. FACTS +Background + +6. Between at least January 1, 2015 and December 31, 2016, the Adviser had custody +of investor assets invested in the Funds and, as such, was required to comply with the Custody +Rule. +7. Among other things, the Custody Rule requires that advisory client assets be +maintained with a qualified custodian, and requires client assets to be verified through an annual +surprise examination by an independent public accountant. See Advisers Act Rule 206(4)-2(a)(1) +and (4). An adviser to a limited liability company or pooled investment vehicle, such as the +Adviser, is deemed to have complied with the annual surprise examination requirement if it +distributes annual audited financial statements to each member or beneficial owner within 120 +days of the end of each fund’s fiscal year. See Rule 206(4)-2(b)(4) under the Advisers Act. The +audit exception requires that the Funds’ financial statements be prepared in accordance with +generally accepted accounting principles (“GAAP”) and that they be audited in accordance with +GAAS for the purpose of expressing an opinion therein. +8. To comply with the audit exception, the Adviser engaged SKR to perform annual +audits for the funds for the years ended December 31, 2015 and December 31, 2016, and then +distributed audited financial statements to each investor in the funds. According to SKR’s audit +reports, the audits were performed in accordance with PCAOB auditing standards. +9. In 2015, SKR audited a total of 20 Adviser funds, 11 of which were funds holding +Level 3 assets. In 2016, SKR audited a total of nine Adviser funds, seven of which held Level 3 +assets. For each year, six of the funds that held Level 3 assets involved audit failures that are the +subject of this proceeding. The 12 audits with audit failures at issue in this proceeding are +referred to as the “Audits.” +10. Fisher worked on the Adviser’s audits beginning in 2011 as senior manager, and +then as engagement partner beginning in 2014. Kast worked on the Adviser’s audits as +engagement partner from at least 2010 through 2013 and then as EQR beginning in 2014. +11. In 2015 and 2016, Fisher was the SKR engagement partner on all Fund audits for +the Adviser and was ultimately responsible for the Funds’ audit engagements and for SKR’s audit +reports. +12. In 2015 and 2016, Kast was the EQR partner on all Fund audits for the Adviser. As +the EQR partner, Kast was responsible for reviewing the audit file and the Fund financial +statements. Under the applicable PCAOB standards and GAAS, Kast was responsible for +evaluating the significant judgments made by the engagement team, the conclusions reached by +the engagement team, and approving the issuance of the audit report. + + 5 +Failures complying with PCAOB Standards and GAAS + +I. General Audit Failures +13. Fisher and SKR failed to conduct the Audits in accordance with PCAOB auditing +standards and GAAS in five ways. +(i) SKR and Fisher failed to plan and obtain sufficient audit evidence +14. In each of the Audits, SKR did not perform audit procedures to obtain sufficient +appropriate audit evidence regarding the valuation and existence of Level 3 assets at year end. +Fisher reviewed and approved audit work papers showing that SKR did not obtain sufficient +appropriate audit evidence. + a. Insufficient audit response +15. Fisher and SKR failed to adequately assess the risks of the Audits and +appropriately plan the Audits in response to the high risks of these Audits. +16. The valuation of Level 3 assets in the Audits were high risk. Level 3 assets can be +difficult to value because they have no readily available market information and are estimated +using unobservable inputs. +17. In 2015, SKR identified and assessed the risk of material misstatement and +planned audit responses for all Adviser funds collectively. In 2016, SKR identified and assessed +the risk of material misstatement and planned audit responses for all funds holding Level 3 assets +collectively (and separately from funds holding Level 1 and 2 assets). In 2015, SKR did not +perform separate risk identification, assessment, and response procedures for each individual +fund and SKR failed to document that the funds with Level 3 assets generally had a risk level +above those that did not have Level 3 assets. +18. SKR’s work papers for the 2015 Audit failed to identify these Level 3 assets as +having a significant risk, including a fraud risk, despite Fisher’s knowledge that valuation of +Level 3 assets were a significant audit risk and a fraud risk. Kast similarly knew that valuation +of Level 3 assets was “high risk in the audit” and was both a significant risk and a fraud risk. +19. SKR’s work papers for the 2015 and 2016 Audits also failed to identify that the +inherent risk of the Level 3 assets was high, despite Fisher’s knowledge that inherent risk related +to the valuation of Level 3 assets was high. +20. Accordingly, in both 2015 and 2016, the audit work papers incorrectly +documented the risk of material misstatement as moderate, instead of high. Fisher and SKR +failed to design audit approaches and procedures to address the high risks they knew were +associated with valuation of these Level 3 assets. +21. SKR’s audit program also contained no specific procedures to be performed +regarding evaluating the appropriateness of valuation models, testing Level 3 inputs, or obtaining +and evaluating investment committee minutes and related documentation that included + 6 +contemporaneous information regarding the valuation of Level 3 assets. +22. Because SKR and Fisher failed to properly plan and perform audit procedures for +the risk of material misstatement associated with the valuation and existence of these Level 3 +assets, they also failed to obtain sufficient appropriate audit evidence to provide a reasonable +basis for SKR’s audit reports. + b. Insufficient audit evidence +23. In each of the Audits, SKR did not perform audit procedures to obtain sufficient +appropriate audit evidence regarding the existence of Level 3 assets at year end. SKR’s audit +program provided that the existence of Level 3 assets should be confirmed, i.e. that SKR should +obtain sufficient appropriate evidence that those assets exist at the time of the audit. However, +Fisher and SKR took no steps to confirm the existence of Level 3 assets or obtain other sufficient +appropriate evidence. +24. SKR did not confirm the existence of the Level 3 assets held by any of the Funds +or perform sufficient alternative procedures; instead, SKR relied predominantly on the Adviser’s +representations (in valuation write ups, management representation letters, and made orally). +Fisher reviewed and approved the audit work papers showing these failures and Kast signed off +on the work papers. +25. SKR’s valuation procedures excessively relied on representations from the +Adviser without obtaining sufficient corroborating audit evidence and sometimes ignored +contradictory evidence inconsistent with the Adviser’s valuation determinations. +26. For example, SKR failed to identify that the valuation estimates were not +prepared in accordance with GAAP and failed to obtain sufficient audit evidence corroborating +management’s supporting valuation inputs and assumptions (e.g., at times the Adviser and SKR +relied on stale appraisals, consulting reports that were up to nine years old, and unsigned sales +agreements). +27. These audit deficiencies contributed to Fisher’s and SKR’s failure to identify +potential misstatements in financial statements for three funds in 2015 (pertaining to 9 separate +Level 3 assets), and for two funds in 2016 (pertaining to four Level 3 assets). +(ii) Fisher and SKR failed to properly evaluate audit results +28. In several Audits, SKR did not evaluate management for possible bias and +properly identify and evaluate misstatements in the financial statements. +29. Fisher reviewed and approved the SKR audit work papers that failed to perform a +retrospective review of accounting estimates and properly evaluate and document whether +identified misstatements in Fund 2 in 2016 were material to fund financial statements. +30. During the Audits, SKR identified valuation discrepancies and concluded without +adequate evaluation or documentation that these discrepancies were not errors and/or were +immaterial to the financial statements. + 7 +(iii) SKR’s audit documentation was not in accordance with applicable audit +standards +31. In each of the Audits, SKR’s audit work papers are replete with documentation +deficiencies. +32. SKR’s work papers contain various documentation deficiencies that would +prevent an experienced auditor from understanding the extent and results of the procedures +performed, evidence obtained, and conclusions reached, and whether certain work was reviewed. +33. For example, Fisher and Kast both reviewed and approved the 2015 audit work +papers that did not identify the valuation of Level 3 assets as a significant risk, including a fraud risk. +Fisher and Kast also both reviewed and approved the 2015 and 2016 audit work papers that +incorrectly documented inherent risk and the risk of material misstatement as moderate instead +of high. The 2015 audit work papers also did not identify that SKR provided bookkeeping services +to a fund that it audited or evaluate whether the services impacted SKR’s independence. +(iv) Fisher’s supervision and review of the audit engagements was inadequate +34. In each of the Audits, Fisher’s supervision and review was inadequate because +she reviewed and approved the audit work papers that did not meet PCAOB auditing standards +or GAAS and did not support SKR’s audit reports. This pervasive failure applies to all of the +identified existence and valuation audit failures in this Order. +35. Fisher reviewed and approved the Audits that did not properly evaluate SKR’s +independence, document the risks of Level 3 assets, adequately respond to the identified risks of +Level 3 assets, and obtain sufficient appropriate audit evidence. She also did not perform a +retrospective review. +(v) Fisher did not exercise due professional care, including professional +skepticism. +36. In each of the Audits, Fisher did not act with due professional care, including +professional skepticism, because she did not plan and perform the audits in accordance with +PCAOB auditing standards or GAAS, including not corroborating management representations, +not obtaining sufficient appropriate audit evidence, and ignoring contradictory information. +Again, this applies to all of the existence and valuation audit deficiencies identified in this Order. +37. In each of the Audits, Fisher’s deficient conduct caused SKR to issue unqualified +audit opinions on the Funds’ financial statements for 2015 and 2016 when SKR was not +independent and the SKR’s audits were not performed in accordance with PCAOB auditing +standards and GAAS. +II. Kast’s EQR Failures +38. For each of the Audits, Kast failed to conduct his engagement quality reviews in +accordance with PCAOB auditing standards and GAAS. + 8 +39. Kast approved the 2015 audit risk work papers that did not document valuation of +Level 3 assets as a significant risk, including a fraud risk, contrary to his knowledge about the +risk level of the valuation of these assets. +40. In both 2015 and 2016, Kast also reviewed and approved the work papers that +incorrectly documented the valuation of Level 3 assets as having only moderate inherent risk and +risk of material misstatement, contrary to his testimony about the risk level. +41. In both 2015 and 2016, Kast reviewed and approved every investment valuation +audit work paper and failed to recognize that SKR did not respond appropriately to the identified +risks and did not obtain sufficient appropriate audit evidence supporting its conclusion that Level +3 assets existed and were properly valued. +42. Kast did not review the 2015 and 2016 work papers that contain the auditor +independence assessment. +43. Kast also did not review the 2015 and 2016 investment audit programs, which list +the procedures that will be performed to obtain sufficient evidence in response to the identified +risks. +44. For each of the Audits, Kast’s EQR audit failures demonstrate that he did not act +with the required due professional care, including professional skepticism. +III. Audit Failures With Respect to Specific Funds and Assets +45. In addition, Respondents failed to comply with PCAOB standards and GAAS in +the audit of specific funds. These failures are summarized as follows: (i) the failure to obtain +sufficient evidence about the existence of Level 3 Assets, including failing to identify the non- +existence of a Level 3 Asset; (ii) the failure to obtain sufficient evidence about the valuation of +Level 3 Assets, including evidence related to appraisals, valuation models, contracts, +representations and transactions with a related party; (iii) the failure to perform retrospective +reviews; and (iv) the failure to properly evaluate misstatements. +SKR was not independent + +46. The Adviser relied upon the audit exception to the Custody Rule requiring that +financial statements for the Funds be audited by an independent public accountant in accordance +with GAAS. +47. For purposes of assessing compliance with the Custody Rule, the Commission looks +to whether an accountant is independent under the Commission’s independence rules set forth in +Regulation S-X, Rule 2-01(b) and (c). See 17 C.F.R. § 275.206(4)-2(d)(3). SKR was not +independent under these rules for the reasons described below and thus the Adviser violated and +was caused to violate the Custody Rule. +48. Respondents failed to communicate to the Adviser relationships and services that +may reasonably be thought to bear on independence as required by PCAOB Rule 3526. These +failures constitute improper professional conduct. + 9 +I. Trustee Relationship +49. Rule 2-01(c) sets forth non-exclusive circumstances where accountants are not +considered independent. Rule 2-01(c)(1) provides that: +An accountant is not independent if, at any point during the audit and professional +engagement period, the accountant has a direct financial interest or a material indirect +financial interest in the accountant’s audit client such as (i) Investments in audit clients. An +accountant is not independent when: … (C) The accounting firm, any covered person in +the firm, or any of his or her immediate family members, serves as voting trustee of a +trust, or executor of an estate, containing the securities of an audit client, unless the +accounting firm, covered person in the firm, or immediate family member has no +authority to make investment decisions for the trust or estate. (Emphasis added.) + +50. Rule 2-01(f)(11)(iv) defines a covered person in the firm to mean “the following +principals, shareholders, and employees of an accounting firm: . . . (iv) any other partner, principal, +or shareholder from an ‘office’ of the accounting firm in which the lead audit engagement +partner primarily practices in connection with the audit.” +51. Individual 1 also was a “covered person” because he was a partner in the same +office as Fisher, the lead engagement partner in charge of the audits for the Adviser funds. +Individual 1 did not serve on the audit engagement team. +52. In 2015, Individual 1, an SKR partner, was a trustee and/or a member of the +management committee for seven trusts or partnerships that had invested in eight Adviser funds +audited by SKR and had authority to make investment decisions for the trusts/partnerships. The +management committees met quarterly beginning in 2015. Individual 1’s role as trustee for entities +that invested in some of the Adviser funds impacted SKR’s independence for the 2015 audits. +53. As the engagement partner, it was Fisher’s responsibility to ensure that all such +potential conflicts were identified and resolved for independence purposes. +54. The audit team performed no specific audit procedures to capture relevant +relationships to analyze and confirm SKR’s independence. +55. As a result, SKR was not independent under Regulation S-X, Rule 2-01(c). +II. Bookkeeping Services +56. Rule 2-01(c)(4) provides that an accountant is not independent, if, at any point +during the audit and professional engagement period, the accountant provides the following non- +audit services to an audit client: +(i) Bookkeeping or Other Services Related to the Accounting Records or Financial +Statements of the Audit Client. Any service, unless it is reasonable to conclude that the +results of these services will not be subject to audit procedures during an audit of the audit +client’s financial statements, including: (A) Maintaining or preparing the audit client’s +accounting records; … (C) Preparing or originating source data underlying the audit + 10 +client’s financial statements. +57. SKR provided bookkeeping services to Adviser’s Fund 2 in 2015 and 2016 when +Fund 2 was also audited by SKR in those years. +58. SKR’s accounting services department created and maintained the accounting +records underlying the financial statements audited by SKR. +59. Specifically, SKR’s accounting services department entered transactions into +QuickBooks; performed bank reconciliations; and sent the Adviser the year-end QuickBooks file +and/or the general ledger exported from QuickBooks that the Adviser used to prepare the fund +financial statements. +60. After receiving the QuickBooks file and/or the general ledger from SKR, the +Adviser made journal entries to record the Level 3 assets at fair value. The Adviser then used +that general ledger to prepare the fund financial statements, including the final balance sheet and +income statements. The audit engagement team then audited the final Fund 2 financial statements +based in part on the general ledger prepared by SKR. The Adviser paid SKR monthly for +“bookkeeping services.” +61. It was Fisher’s responsibility to ensure that all such potential conflicts were +identified and resolved for independence purposes. +62. The audit team performed no specific audit procedures to capture relevant +relationships and services and to evaluate and confirm SKR’s independence. +63. Fisher was aware of SKR’s bookkeeping relationship in 2015. +64. In 2016, Fisher reviewed and approved a memo in the work papers concerning the +bookkeeping that incorrectly concluded the bookkeeping relationship did not impair SKR’s +independence. +65. Under Rule 2-01(c)(4), SKR’s bookkeeping services provided to Fund 2 impaired +SKR’s independence. +66. PCAOB Rule 3526 required SKR to communicate to the Adviser all relationships +and services that may reasonably be thought to bear on SKR’s independence. However, SKR told +the Adviser there were none for the 2015 and 2016 audits. +Violations + +67. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, +temporarily or permanently, the privilege of appearing or practicing before the Commission to +any person who is found by the Commission to have engaged in improper professional conduct. +Exchange Act 4C(b) and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice define + 11 +improper professional conduct with respect to persons licensed to practice as accountants. +68. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional +conduct” means one of two types of negligent conduct: (1) a single instance of highly +unreasonable conduct in circumstances for which heightened scrutiny is warranted; or (2) +repeated instances of unreasonable conduct that indicate a lack of competence. +69. The audit failures of SKR, Fisher, and Kast constitute repeated instances of +unreasonable conduct throughout the audits discussed above and also satisfy the single instance +of highly unreasonable conduct standard as there were multiple single instances of highly +unreasonable conduct since the audit of Level 3 assets warranted heightened scrutiny. +70. Further, questions regarding an auditor’s independence always warrant +heightened scrutiny. See Final Rule: Amendment to Rule 102(e) of the Commission’s Rules of +Practice, Release Nos. 33-7593; 34-40567; 35-26929; 39-2369; IA-1771; IC-23489; File No. S7- +16-98) (“Because of the importance of an accountant’s independence to the integrity of the +financial reporting system, the Commission has concluded that circumstances that raise questions +about an accountant’s independence always merit heightened scrutiny.”). +71. As detailed above, the Adviser was required to comply with the Custody Rule or +to satisfy its provisions by meeting an exception to it. During 2015 and 2016, the Adviser +attempted to comply with this rule by relying on the audit exception. The Adviser failed to +qualify for the Audit Exception because SKR did not conduct the Audits in accordance with +GAAS and was not independent. As a consequence, the Adviser violated the Custody Rule and +the Respondents caused the Adviser’s violations of the Custody Rule. +Findings + +72. Based on the foregoing, the Commission finds that Fisher, Kast, and SKR +engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +73. Based on the foregoing, the Commission finds that Fisher, Kast, and SKR caused +Adviser’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Fisher, Kast, and SKR shall cease and desist from committing or causing any +violations and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 +thereunder. + 12 +B. SKR is hereby censured. +C. Ellen Fisher and David Kast are denied the privilege of appearing or practicing +before the Commission as accountants. +D. After two years from the date of the Order, Fisher may request that the +Commission consider Fisher’s reinstatement by submitting an application to the attention of the +Office of the Chief Accountant. +E. After one year from the date of the Order, Kast may request that the Commission +consider Kast’s reinstatement by submitting an application to the attention of the Office of the +Chief Accountant. +F. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, +Respondent shall submit a written statement attesting to an undertaking to have Respondent’s +work reviewed by the independent audit committee of any public company for which +Respondent works or in some other manner acceptable to the Commission, as long as +Respondent practices before the Commission in this capacity and will comply with any +Commission or other requirements related to the appearance and practice before the Commission +as an accountant. +G. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of +the Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are +filed with the Commission, Respondent shall submit a statement prepared by the audit +committee(s) with which Respondent will be associated, including the following information: +1. A summary of the responsibilities and duties of the specific audit +committee(s) with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on +behalf of the Audit Committee as a whole. + +H. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + 13 +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date +of the Order other than for the conduct that was the basis for the Order. + +I. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall +provide documentation showing that Respondent’s licensure is dependent upon reinstatement by +the Commission. +J. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That Respondent undertakes to notify the Commission immediately in writing +if any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal + 14 +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, +or possession, civilly or criminally, with having committed an +act of moral turpitude, except for any charge concerning the +conduct that was the basis for the Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any +action taken by any State Board of Accountancy, or other regulatory body. + + +K. Respondent shall also provide a detailed description of: +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + +L. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + 15 +M. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph J, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent +for cause shown. +N. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph J, the burden shall be on the Respondent to provide an explanation as +to the facts and circumstances pertaining to the matter setting forth why Respondent believes +cause for reinstatement nonetheless exists and reinstatement would not be contrary to the public +interest. The Commission may then, in its discretion, reinstate the Respondent for cause shown. +O. If the Commission declines to reinstate Respondent pursuant to Paragraphs K and +L, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. +P. SKR shall, within 30 days of the entry of this Order, pay a civil money penalty in +the amount of $96,384.00 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +Q. Fisher shall, within 30 days of the entry of this Order, pay a civil money penalty +in the amount of $25,000.00 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +R. Kast shall, within 30 days of the entry of this Order, pay a civil money penalty in +the amount of $10,000.00 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: +(1) Respondents may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard + 16 +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying SKR, +Ellen Fisher, or David Kast as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Jason Burt, Associate +Regional Director, Denver Regional Office, 1961 Stout St., Suite 1700, Denver, CO 80294. +Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated +as penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award +of compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in +this action ("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty +Offset, Respondents agree that they shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondents of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4292.txt b/raw/aaer/2022/AAER-4292.txt new file mode 100644 index 0000000000000000000000000000000000000000..a27f2b799bdff19a77f857e6408f9e48d0af149d --- /dev/null +++ b/raw/aaer/2022/AAER-4292.txt @@ -0,0 +1,106 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94714 / April 13, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4292 / April 13, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20821 + + +In the Matter of + +MARK LOMAN, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Mark +Loman (“Loman” or “Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, … suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or +her misconduct in an action brought by the Commission, from violating or aiding and abetting the +violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and the findings contained in +Section III.2. below, and consents to the entry of this Order Instituting Public Administrative +Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and +Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Loman was a certified public accountant licensed to practice in the State of +California although his license is inactive. Loman was Controller and VP of Finance of OSI +Systems, Inc. (“OSIS”). OSIS has been a public company since 1997, and its securities are listed +on the NYSE. + +2. On April 11, 2022, a final judgment was entered by consent against Loman, +permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, in the civil action entitled Securities and +Exchange Commission v. Mark Loman., Civil Action Number 2:19-CV-06187, in the United +States District Court for the Central District of California. + +3. The Commission’s complaint alleged that Loman used confidential information he +gained in his position at OSIS to unlawfully trade securities on the basis of material, non-public +information in or around December 2015, realizing profits of more than $300,000. Two months +later, in February 2016, Loman learned that OSIS was in negotiations to acquire another, publicly- +traded company at a premium over the market price for its securities, and Loman purchased the +target company’s shares, realizing over $100,000 in profits. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Loman’s Offer. + + + 3 +Accordingly, it is hereby ORDERED, effective immediately, that: + + Loman is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4298.pdf b/raw/aaer/2022/AAER-4298.pdf new file mode 100644 index 0000000000000000000000000000000000000000..31ee602706627a748dfffd647a001594f78182b6 Binary files /dev/null and b/raw/aaer/2022/AAER-4298.pdf differ diff --git a/raw/aaer/2022/AAER-4298.txt b/raw/aaer/2022/AAER-4298.txt new file mode 100644 index 0000000000000000000000000000000000000000..71b2c88f5d09ead342d62e70b4db6153e338fe5e --- /dev/null +++ b/raw/aaer/2022/AAER-4298.txt @@ -0,0 +1,39 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94854 / May 5, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4298 / May 5, 2022 + +Admin. Proc. File No. 3-18292 + + +In the Matter of + +GREGORY A. WAHL, CPA MICHAEL DEUTCHMAN, +CPA, and GEORGIA CHUNG, CPA + + + + + + + +ORDER EXTENDING TIME TO ISSUE DECISION + + The Commission has determined, in its discretion, that it is appropriate to extend by 90 +days the period within which the decision in this matter may be issued. Accordingly, IT IS +ORDERED that such period be, and hereby is, extended to August 3, 2022. + + By the Commission. + + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4299.txt b/raw/aaer/2022/AAER-4299.txt new file mode 100644 index 0000000000000000000000000000000000000000..2e6bacd5779348d035533619da0df407e1e5c637 --- /dev/null +++ b/raw/aaer/2022/AAER-4299.txt @@ -0,0 +1,262 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94858 / May 5, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4299 / May 5, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20842 + +In the Matter of + +ERIC A. ALEXANDER, +CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Eric A. +Alexander (“Respondent” or “Alexander”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Alexander, age 42, resides in Miami Beach, Florida and is and has been a certified +public accountant licensed to practice in the state of Wisconsin. He served as Chief Financial +Officer of 1 Global Capital, LLC (“1 Global”) from October 2016 through August 2017. 1 +Global was a Hallandale Beach, Florida-based company not registered with the Commission in any +capacity with no publicly traded stock. 1 Global engaged in the business of advancing money to +businesses. + +2. On May 4, 2022, a final judgment was entered against Alexander, permanently +enjoining him from future violations of Section 17(a) of the Securities Act and Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder, in the civil action entitled Securities and Exchange +Commission v. Eric A. Alexander, No. 22-civ-60700-RS (S.D. Fla. 2022). Alexander was also +ordered to pay a $100,000 civil money penalty. + +3. The Commission’s Complaint alleged, among other things, that Alexander signed 1 +Global’s false and misleading investor account statements that misstated investors’ rate of return +and falsely claimed 1 Global’s independent audit firm endorsed and agreed with 1 Global’s rate of +return formula. In reality, Alexander knew no auditor endorsed or agreed with 1 Global’s rate of +return formula. Alexander knew 1 Global’s sales agents used the false investor account statements +to solicit prospective investors. According to the Complaint, Alexander also manipulated 1 +Global’s contractually-based management fee to artificially raise or lower investors’ rate of return +reflected on the investor account statements. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Alexander’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Alexander is suspended from appearing or practicing before the Commission as an +accountant. + 3 + +B. After five years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + + 4 +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in Securities +and Exchange Commission v. Eric A. Alexander, No. 22-civ-60700-RS +(S.D. Fla. 2022), or any related Commission proceedings, including any +orders requiring payment of disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + 5 + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + 6 + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4302.txt b/raw/aaer/2022/AAER-4302.txt new file mode 100644 index 0000000000000000000000000000000000000000..cde9689ff6d1e62f17983ed6e8783909c99af974 --- /dev/null +++ b/raw/aaer/2022/AAER-4302.txt @@ -0,0 +1,607 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95049 / June 7, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4302 / June 7, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20883 + + +In the Matter of + +SYNCHRONOSS +TECHNOLOGIES, INC. + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against Synchronoss Technologies, Inc. (“SNCR” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease and Desist Order (“Order”), as set forth below. + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary + +1. Synchronoss Technologies, Inc. (“SNCR”), a New Jersey-based technology +company that primarily provides products, software, and services to telecommunications +companies, engaged in improper accounting from at least 2013 through 2017. + + 2. In July 2018, SNCR announced a restatement of its audited financial statements for +the fiscal years ended December 31, 2016 and 2015 and restated selected financial data for the fiscal +years ended 2014 and 2013 totaling approximately $190 million in cumulative revenues. As part of +this announcement, SNCR restated revenues related to certain transactions for which SNCR had +recognized revenue improperly and in a manner inconsistent with generally accepted accounting +principles (“GAAP”). The restatement primarily related to three categories of transactions, for +which SNCR improperly recognized revenue: (1) transactions for which there was not persuasive +evidence of an arrangement; (2) acquisitions/divestitures in which SNCR recognized revenue on +license agreement(s) instead of combining those purported amounts with the purchase or sales +prices; and (3) license/hosting transactions, in which SNCR converted prior multi-term software- +as-a-service (“SaaS”) agreements into perpetual license agreements, and improperly recognized the +revenue upfront, instead of recognizing it ratably over the term of the arrangements. In its +restatement, SNCR also acknowledged “pervasive material weaknesses” in its internal control over +financial reporting for the restatement period. + + 3. Certain instances of SNCR’s improper accounting were the result of misconduct by +certain of SNCR’s senior executives and other employees. As a result of this misconduct, SNCR +filed with the Commission materially misstated financial statements in its annual, quarterly and +current reports during the restatement period. + +Respondent + + 4. SNCR is a Delaware corporation with its principal place of business in New Jersey. +Its securities are registered pursuant to Section 12(b) of the Exchange Act. Its securities are +currently listed on NASDAQ, although SNCR’s common stock was suspended from trading on +NASDAQ from May 2018 to October 2018 because it had become delinquent in its required filings. + + + + + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 +Facts + +A. Background + 5. In May 2017, SNCR announced that it would not be able to file its Form 10-Q on +time. On June 8, 2017, SNCR’s audit committee announced that it concluded that the financial +statements for the fiscal years (“FY”) ending December 31, 2015 and 2016 and their respective +quarterly periods should not be relied on. On October 5, 2017, SNCR’s audit committee announced +that it concluded that the financial statements for FY 2014 and its quarterly periods should not be +relied on. + + 6. On July 2, 2018, SNCR filed a Form 10-K with the Commission that restated its FY +2015 and 2016 financial statements and certain financial data for FY 2013 and 2014. The +restatements applied to approximately $190 million in cumulative revenues for the four year period. +In its restatement, SNCR also acknowledged “pervasive material weaknesses” in its internal control +over financial reporting for the restatement period. + + 7. SNCR restated revenue primarily related to three categories of transactions as +mentioned above: (1) transactions for which there was not persuasive evidence of an arrangement; +(2) acquisitions or divestitures in which SNCR recognized revenue on license agreements rather +than combining those purported amounts with the purchase or sales prices; and (3) license/hosting +transactions, in which the company improperly recognized revenue upfront, instead of ratably over +the term of the multi-year arrangements. + +B. Lack of Persuasive Evidence of an Arrangement + 8. During the restatement period, Financial Accounting Standards Board (“FASB”) +Accounting Standards Codification (“ASC”) 985-605-25-3 provided that revenue from the sale of +software that does not require significant production, modification or customization shall be +recognized only when all of the following criteria are met: (1) persuasive evidence of an +arrangement exists; (2) delivery has occurred; (3) the vendor’s fee is fixed or determinable; and (4) +collectability is probable. + + 9. With respect to its filings for Q3 2015, Q4 2015, and Q1 2016—specifically, its +Forms 8-K, 10-Q, and 10-K covering these periods—SNCR recognized revenue for multiple +transactions for which it lacked persuasive evidence of arrangements. Specifically, it recognized +$4.35 million in Q3 2015 (Transaction 1), $3 million in Q4 2015 (Transaction 2), and $5 million in +Q1 2016 (Transaction 3). The amounts were improperly recorded as unbilled receivables. + + + + + + + + +4 +Transaction 1 + +10. In Q3 2015, SNCR’s sales team unsuccessfully sought to finalize an agreement +for the sale of a license to Customer A, one of its largest telecommunications customers. Despite +that, it booked $4.35 million in revenue related to the transaction. + 11. In February 2016, senior Customer A personnel attended a meeting with a SNCR +salesperson at which the Customer A personnel conveyed it was unhappy with SNCR’s efforts to +go outside normal procurement channels. Customer A personnel further told the SNCR +salespersons that the email on which SNCR had relied in booking the $4.35 million of revenue for +Transaction 1 did not reflect a “commitment by [Customer A] to acquire the software,” and that +SNCR “certainly should not have booked revenue on the basis of an email exchange.” + 12. Senior personnel from Customer A then followed up the meeting with two letters: +one to SNCR’s COO that warned SNCR that Customer A needed a written agreement to consider a +deal complete, and another to SNCR sales personnel stating that Customer A had not committed to +purchase the software and noting that the software was still undergoing a proof-of-concept trial. + 13. In June 2016, Customer A emailed a senior SNCR salesperson that it was not +moving forward with SNCR related to Transaction 1 for which SNCR had previously recorded +$4.35 million in revenue. The SNCR salesperson forwarded that email internally, including to +senior SNCR officials. +14. SNCR nonetheless continued to carry the $4.35 million unbilled receivable from +Transaction 1 on its books through the end of 2016 despite Customer A ultimately refusing to +purchase the license at all. +15. No one at SNCR shared the fact or substance of the above communications from +Customer A with its auditor, despite Karen Rosenberger, the CFO, sharing the status of unbilled +receivables at audit committee meetings. The auditor would have found these communications +important in evaluating whether there was persuasive evidence of an arrangement at the time +revenue was recognized and whether the receivable was collectible. +16. As Rosenberger knew or recklessly disregarded, SNCR’s inclusion of revenue for +Transaction 1 in its filings for Q3 2015—specifically, its Forms 8-K and 10-Q covering these +periods—was improper and inconsistent with GAAP because, among other things, there was no +persuasive evidence of an arrangement with Customer A, and collection was not probable. SNCR +reversed the revenue for Transaction 1 in connection with its restatement. +Transaction 2 +17. In Q4 2015, SNCR’s sales team unsuccessfully sought to finalize an agreement +for the sale of a different license to Customer A. Customer A ultimately did not agree to +5 +purchase the other license until Q4 2016, and then only for a lower amount than the $3 million +SNCR had recognized for the transaction in Q4 2015. +18. As of December 31, 2015, no agreement had been reached between Customer A +and SNCR regarding the license. +19. As several senior SNCR officials, including Rosenberger, knew, negotiations over +material terms such as the scope of the license and the price were still being negotiated in early +January 2016. +20. On January 8, 2016—while Transaction 2 was still being negotiated—the SNCR +salesperson responsible for negotiating it sent Rosenberger a one-page document purporting to be +the license agreement for the transaction. The purported agreement was backdated to December +31, 2015. +21. Despite not having persuasive evidence of an agreement in Q4 2015, SNCR +recognized $3 million in revenue in Q4 2015 based on the purported agreement. +22. Through 2016, SNCR and Customer A continued negotiations related to the +software in Transaction 2. Customer A ultimately bought the software from SNCR in Q4 2016 for +$2.5 million—less than the amount recognized a year earlier. SNCR recognized no revenue from +the transaction when it restated because it transferred the receivable as part of the Divesture +discussed below. +23. No one at SNCR shared the fact of negotiations ongoing into 2016 or the +backdating of the agreement with its auditor. The auditor would have found this information +important in evaluating whether there was persuasive evidence of an arrangement at the time +revenue was recognized. +24. As with Transaction 1, Rosenberger knew or recklessly disregarded that SNCR’s +inclusion of revenue for Transaction 2 in its filings for Q4 2015—specifically, its Forms 8-K and +10-K covering these periods—was improper and inconsistent with GAAP because, among other +things, there was no persuasive evidence of an arrangement with Customer A, and collection was +not probable. SNCR reversed the revenue for Transaction 2 in connection with its restatement. +Transaction 3 +25. In January 2016, SNCR prepared a one-page quote for Customer B. In April 2016, +an SNCR salesperson emailed Customer B and requested approval of the January quote. Customer +B approved the quote that same day. The April approval was forwarded to Rosenberger, who then +directed revenue be recognized for Q1 2016. +26. Regardless of whether the approved quote was a sufficient basis on which to +recognize revenue, SNCR improperly recognized $5 million of revenue in Q1 2016 for this +6 +transaction, despite the fact that Customer B had not provided SNCR with its approval for the +quote until Q2 2016, well after the close of the first quarter. +27. Recognition of revenue for Transaction 3 occurred in the incorrect period as noted +above. SNCR reversed the revenue for Transaction 3 in connection with its restatement. +C. Acquisition and Divestiture + 28. ASC 805-10-25-20 provides that if a separate transaction, is entered into +concurrently with an acquisition of a business, it should be accounted for in accordance with the +relevant GAAP for that type of transaction. In determining whether it is a separate transaction, ASC +805-10-55-18 states that a company should consider certain factors including the reason for the +transaction, who initiated the transaction, and the timing of the transaction. If the transaction is not +a separate transaction, GAAP requires that the transaction be considered as part of the consideration +for the acquisition, rather than accounted for separately. A similar assessment would also be +required to determine whether a transaction entered into concurrently with a divestiture should be +considered a separate transaction or part of the divestiture + + 29. With respect to its filings for Q1 and Q4 2016—specifically its Forms 8-K, 10-Q +and 10-K covering these periods—SNCR improperly recognized revenue for license sales entered +into in connection with an acquisition and divestiture, respectively. Specifically, it recognized $10 +million in Q1 2016 related to an acquisition and $9.2 million in Q4 2016 related to a divestiture. + +Acquisition + +30. In March 2016, SNCR entered into an agreement to acquire certain business from a +private equity firm (the “Acquisition”). On the same day, SNCR entered into a transaction to sell a +license for $10 million to both the business unit it was acquiring, as well as a related business unit +still owned by the private equity firm. + +31. As Rosenberger knew, the Acquisition and license were negotiated together, and +the Acquisition was contingent upon the sale of the license. Indeed, SNCR executives expressly +told the private equity firm that the Acquisition would not occur unless it entered into the license +agreement. In addition, SNCR added a second business unit as a licensee late in the process—days +before signing—so that there would be a surviving entity to hold the licenses. It did so for no +additional consideration. + +32. As Rosenberger knew or recklessly disregarded, SNCR’s inclusion of $10 million +revenue for the license sale adjacent to the Acquisition in SNCR’s filings for Q1 2016 was +improper and inconsistent with GAAP because, among other things, the license fee should have +been considered part of the consideration for the transaction instead of separately. In its +restatement, SNCR reversed the license revenue in connection with its restatement and instead +considered the license fee as a reduction of the Acquisition price. + + + +7 +Divestiture + +33. In December 2016, SNCR divested its call center business and simultaneously sold +a license for $10 million (the “Divestiture”). The Divestiture and license were negotiated together, +and should have been accounted for as one transaction. + + 34. In the restatement, SNCR reversed the license revenue and instead considered the +license fee as part of the consideration received for the Divestiture. + +D. License/Hosting Transactions +35. Historically, certain of SNCR’s relationships with customers were governed by +SaaS agreements, which included the use of SNCR-owned software and ancillary elements like +maintenance, hosting, and other support services. In these arrangements, the customer was +billed, and revenue recognized, ratably over the term of the agreement. +36. In 2016, SNCR sought to accelerate the recognition of revenue on a number of +existing customer relationships. One way it sought to do so was by breaking a number of its +SaaS arrangements with customers into their component parts and selling perpetual licenses to its +software separately from the other elements (e.g., hosting, maintenance) of the previous SaaS +agreements. SNCR would then negotiate purportedly separate agreements to provide the +ancillary services to the customer that it had previously provided under the SaaS agreements, and +prematurely recognized revenue from the entirety of the license fee upfront, instead of ratably +over the term of the agreement, as required under GAAP. +37. Where, as in these transactions, a software license is sold with other products or +services, GAAP during the relevant period required that the sales be accounted for as multiple- +element arrangements (“MLEs”),2 and also included guidance on determining whether a series of +transactions is a single MLE.3 If a series of contracts is determined to be an MLE, each +component of an MLE must be assessed for revenue recognition purposes based on its fair value +as determined by vendor-specific objective evidence (“VSOE”), and the fees received under each +must be allocated to the various elements based on such VSOE. See ASC 985-605-25-6.4 If +certain components of MLEs have yet to be delivered (such as services that will be performed + +2 See ASC 985-605-25-5. + +3 GAAP requires a company to look at certain factors in determining whether a group of +contracts should be accounted for as a single MLE, including: the timing of the contracts; +whether the negotiations were conducted jointly; the relationship between the different elements +of the arrangement; whether there are any concessions in one contract if another contract is not +completed satisfactorily; and whether payment terms of one contract coincide with performance +criteria of another. (ASC 985-605-55-4.) + +4 VSOE is, for example, the price established by the vendor for the separate sale of each +element. + +8 +over the life of the agreement), GAAP requires that recognition of revenue from such elements +be deferred until they have been performed. If an MLE has undelivered elements that do not +have VSOE of fair value, GAAP requires that the revenue from the entire arrangement, including +for delivered elements, be deferred until either VSOE exists or all elements are delivered, or in +certain cases, be deferred and recognized over time, such as ratably over the term of the +agreement or as remaining services are expected to be performed.5 +38. SNCR lacked VSOE of fair value for the hosting service it often provided for +customers who utilized its software. Accordingly, the addition of hosting to a perpetual license +transaction would require that the revenue from the entire arrangement, including for delivered +elements, be deferred and recognized over time, i.e. that revenue be recognized ratably over the +term of the agreement. +39. With respect to its filings for Q2, Q3 and Q4 2016—specifically its Forms 8-K, 10- +Q and 10-K covering these periods—SNCR improperly recognized revenue from the sale of +licenses and hosting services where the licenses and hosting were purportedly separate +transactions, but should have been treated as a single arrangement under GAAP for revenue +recognition purposes. +40. Specifically, there were at least five such arrangements where revenue was +improperly recognized in this manner: (1) a Q2 2016 transaction of $1 million (Transaction 4); +(2) a Q2 2016 transaction of $5.3 million (Transaction 5); (3) a Q3 2016 transaction of $7 +million (Transaction 6); (4) a Q3 2016 transaction of $430,000 (Transaction 7); and (5) a Q4 +2016 transaction of $1.3 million (Transaction 8). In each instance, the license and hosting were +negotiated together, and the contracts were entered into close in time. +41. SNCR reversed the revenue for these transactions in connection with its restatement +and instead recognized the revenue ratably over the life of the ancillary agreements, consistent with +GAAP. + + + + + + + + + + + + + + + +5 ASC 985-605-25-9 through 25-10. + +9 +E. The Above Transactions Resulted in a Material Overstatement of SNCR’s +Financial Performance +42. As reflected in the chart below, the transactions described above were material to +SNCR’s financial statements included in its quarterly or annual reports: + +Period Transactions Revenue +Overstatement +(in 000s) +Quarterly +Income +(Loss) +Before Tax +As Reported +Quarterly +Income +(Loss) +Before Tax, +As +Adjusted +Percentage of +Quarterly +Income +Overstated or +Loss +Understated +Percentage +Full Year +Income +Overstated or +Loss +Understated6 +Q3 +2015 +Transaction 1 $4,350 $20,362 $16,099 26.5% 5.9% +Q4 +2015 +Transaction 2 $3,0007 $15,403 $12,523 23.6% 4.0% +Q1 +2016 +Acquisition; +Transaction 3 +$10,0007 +$5,0007 +$(6,495) +$(6,495) +$(16,495) +$(11,395) +60.6% +43.0% +11.8% +6.2% +Q2 +2016 +Transaction 4; +Transaction 5 +$1,000 +$5,2527 +$(3,922) +$(3,922) +$ (4,902) +$(9,050) +20.0% +56.7% +1.2% +5.9% +Q3 +2016 +Transaction 6; +Transaction 7 +$7,0007 +$430 +$11,717 +$11,717 +$5,159 +$11,304 +127.1% +3.7% +7.9% +0.5% +Q4 +2016 +Divestiture; +Transaction 8 +$9,2007 +$1,300 +$(29,310) +$(29,310) +$(38,510) +$(30,584) +23.9% +4.2% +11.0% +1.7% + + +6 Percentages are based on income (loss) before taxes except for Q4 and Full Year 2016 +percentages, which are based on income (loss) before taxes from continuing operations. + +7 SNCR met or exceeded analysts’ revenue estimate for the quarter, but would have been +below the estimate if the transaction was properly recorded. Regarding the Divestiture, SNCR +revised its guidance towards the end of the quarter and exceeded the low end and mid-point of +the guidance. If the transaction had been properly recorded revenue would have failed to meet +the low end of the guidance. + +10 +F. Material Weaknesses in Internal Control Over Financial Reporting + 43. In preparing its restatement, SNCR evaluated the effectiveness of its internal control +over financial reporting as of December 31, 2017 and identified pervasive material weaknesses in its +internal control processes. SNCR identified multiple weaknesses in its internal control over +financial reporting. These weaknesses included: + +• failure to ensure that the four basic elements of revenue recognition were always +met prior to revenue recognition and all elements within MLEs identified and +accounted for appropriately; +• failure to maintain adequate oversight to guide individuals in applying internal +control over financial reporting in preventing or detecting material accounting +errors, or omissions, due to inadequate information and, in certain instances, +compliance with SNCR’s revenue recognition policies; +• failure to design and maintain adequate review and approval controls, including +the use of appropriate technical accounting expertise, when recording complex or +non-routine transactions such as those involving revenue recognition, acquisitions +and divestitures, including ensuring transactions are appropriately accounted for +from a substance over form perspective; +• failure to maintain sufficient personnel with an appropriate level of accounting +knowledge, experience, and training in the application of US GAAP +commensurate with the size of the entity and nature and complexity of financial +reporting requirements; and +• failure to consistently maintain a corporate culture that prevented the occurrence +of certain deviations from SNCR’s policy. + 44. These material weaknesses were a cause of SNCR’s restatement. + +VIOLATIONS + +45. As a result of conduct related to certain of the transactions described above, SNCR +violated Section 10(b) of the Exchange Act and Rules 10b-5(a) and 10b-5(c) thereunder, which +prohibit fraudulent conduct in connection with the purchase or sale of securities. + +46. As a result of the conduct described above, SNCR violated Sections 13(a) of the +Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder, which require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission +accurate information, documents, and annual and quarterly reports as the Commission may require, +and mandate that periodic reports contain such further material information as may be necessary to +make the required statements not misleading. + +47. As a result of the conduct described above, SNCR violated Section 13(b)(2)(A) of +the Exchange Act, which requires issuers with securities registered under Section 12 of the +11 +Exchange Act or which are required to file reports pursuant to Section 15(d) of the Exchange Act to +make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of assets of the issuer. + +48. As a result of the conduct described above, SNCR violated Section 13(b)(2)(B) of +the Exchange Act, which requires issuers with securities registered under Section 12 of the +Exchange Act or which is required to file reports pursuant to Section 15(d) of the Exchange Act to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurance that, among other things, transactions are recorded as necessary to permit preparation of +financial statements in conformity with GAAP. + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + Respondent cease and desist from committing or causing any violations and any +future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13b(2)(B) of the Exchange Act and Rules +10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + Respondent shall pay a civil money penalty in the amount of $12,500,000 to the +Securities and Exchange Commission. Payments shall be applied first to post order interest, which +accrues pursuant to pursuant to 31 U.S.C. § 3717. Prior to making the final payment set forth +herein, Respondent shall contact the staff of the Commission for the amount due. If Respondent +fails to make any payment by the date agreed and/or in the amount agreed according to the schedule +set forth below, all outstanding payments under this Order, including post-order interest, minus any +payments made, shall become due and payable immediately at the discretion of the staff of the +Commission without further application to the Commission. Payment shall be made in the +following installments: + +• Due within 14 days of the entry of this Order: $1,562,500; +• Due 105 days after the entry of this Order: $1,562,500; +• Due 196 days after the entry of this Order: $1,562,500; +• Due 287 days after the entry of this Order: $1,562,500; +• Due 378 days after the entry of this Order: $1,562,500; +• Due 470 days after the entry of this Order: $1,562,500; +• Due 561 days after the entry of this Order: $1,562,500; and +• Due 652 days after the entry of this Order: $1,562,500; plus all remaining unpaid principal +and accrued interest. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; +12 + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and hand-delivered +or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Synchronoss Technologies, Inc. as Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Lara S. Mehraban, +Division of Enforcement, Securities and Exchange Commission, New York Regional Office, 100 +Pearl Suite, Suite 20-100, New York, New York 10004. + + + + + + + + + + + + + + + + + + + + + + + + + +13 + Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for any penalties referenced in paragraph IV(B) above. The Fair Fund may be +added to or combined with any other fair fund created in a related district court action or +administrative proceeding arising out of the same violations. The Fair Fund will be distributed to +harmed investors in accordance with a Commission-approved plan of distribution. Amounts +ordered to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid +to the government for all purposes, including all tax purposes. To preserve the deterrent effect of +the civil penalty, Respondent agrees that in any Related Investor Action, it shall not argue that it is +entitled to, nor shall it benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If +the court in any Related Investor Action grants such a Penalty Offset, Respondent agrees that it +shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission’s counsel in this action and pay the amount of the Penalty Offset to the Securities and +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall +not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes +of this paragraph, a “Related Investor Action” means a private damages action brought against +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4304.txt b/raw/aaer/2022/AAER-4304.txt new file mode 100644 index 0000000000000000000000000000000000000000..e04a682d2231586f2c9fabfa71b11ad761a9b34f --- /dev/null +++ b/raw/aaer/2022/AAER-4304.txt @@ -0,0 +1,534 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95051 / June 7, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4304 / June 7, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20885 + + +In the Matter of + +MARC BANDINI, + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against Marc Bandini (“Bandini” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the +Securities Exchange Act of 1934, Making Findings, and Imposing a Cease and Desist Order +(“Order”), as set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary + + These proceedings arise out of improper accounting at Synchronoss Technologies, Inc. +(“SNCR” or the “Company”), a New Jersey-based technology company that primarily provides +products, software, and services to telecommunications companies. In July 2018, SNCR announced +a restatement of its 2013, 2014, 2015, and 2016 financial statements of approximately $190 million +in cumulative revenues. As part of this announcement, SNCR restated revenues related to a series +of transactions for which SNCR had recognized revenue improperly and in a manner inconsistent +with generally accepted accounting principles (“GAAP”). These included (1) transactions for +which SNCR, through “side letter” agreements, concealed that the revenue the Company recognized +upfront was in fact contingent on future events and (2) transactions in which the Company sold +software licenses together with multi-year related supporting services, and the Company improperly +recognized the revenue for the licenses immediately, rather than recognizing it ratably over the term +of the arrangements. + + Bandini, the former Senior Director of Communications and Media at SNCR, was involved, +along with other company officials, in negotiating and reviewing three of these problematic +transactions, for which SNCR improperly recognized a combined total of approximately $10 +million in revenue. As a result, Bandini violated Sections 10(b) and 13(b)(5) of the Exchange Act +and Rules 10b-5(a) and (c) and 13b2-1 thereunder, and caused SNCR’s violations of Sections 13(a) +and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder. + +Respondent + +1. Bandini, age 52, resides in Frederick, Maryland. Bandini was the Chief Operating +Officer of Razorsight, a private cloud analytics company that was acquired by SNCR in August +2015. Bandini served as Senior Director of Communications and Media at SNCR until September +2017, when he was terminated. In his role at SNCR, Bandini operated as a senior salesperson and +interacted frequently with SNCR’s senior management and finance department, including on the +three transactions that are the subject of this order. + +Other Relevant Entity + +2. SNCR is a Delaware corporation based in New Jersey whose securities are +registered pursuant to Section 12(b) of the Exchange Act. Its securities are currently listed on +NASDAQ and have been since its initial public offering in June 2006, although SNCR’s common + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 +stock was suspended from trading on NASDAQ from May 2018 to October 2018 because SNCR +had become delinquent in its required filings. + +FACTS + +A. Background +3. In 2015 and 2016 (the “relevant period”), SNCR’s software products and services +included software-based activation, messaging, analytics, and cloud services for its +telecommunications customers. + +4. Under GAAP, companies are required to take into account all material terms of an +arrangement between two parties in recognizing revenue. If, for example, companies enter into +“side letter” agreements that alter the material terms of other transactional documents (such as by +providing that payments under the agreement are contingent on future events), companies must take +such terms into account in determining whether it is appropriate to recognize revenue. + +5. Similarly, when software companies such as SNCR sell software licenses to their +customers together with related, ancillary services (such as hosting and maintenance), GAAP +required that the sales be accounted for as “multiple-element arrangements” (“MLEs”). Under +GAAP during the relevant period, if a contract or series of contracts was determined to be an MLE, +the fee should be allocated to the various elements based on vendor-specific objective evidence +(“VSOE”) of fair value.2 + +6. If certain components of MLEs have yet to be delivered (such as services that will +be performed over the life of the agreement), GAAP required that companies defer revenue +recognition of such elements until they have been performed. And if an MLE has undelivered +components for which the company lacks VSOE of fair value, GAAP generally required that the +revenue from the entire arrangement, including for delivered elements, be deferred until either all +elements lacking VSOE have been delivered or VSOE is established for all undelivered elements, +or in certain cases, be deferred and recognized over time, such as ratably over the term of the +agreement or as remaining services are expected to be performed.3 + +7. While SNCR did have VSOE of fair value for certain components of MLEs such as +professional services, critically, SNCR lacked VSOE of fair value for the hosting service it often +provided for customers who utilized its software. Accordingly, the addition of hosting to an MLE +would require that the revenue from the entire arrangement, including for delivered elements, be +deferred and recognized over time, i.e. that revenue be recognized ratably over the term of the +agreement. + +2 VSOE is, for example, the price established by the vendor for the separate sale of each +element. + +3 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +(“ASC”) 985-605-25-9 through 25-10. + + 4 + +8. As a result, Bandini and other employees at SNCR undertook efforts to make it +appear as if the hosting services in the agreements described below were not part of the MLEs, so +that SNCR could improperly recognize the license fees in these transactions as revenue upfront, +rather than ratably over the term of the agreement. + +B. Customer A Transaction +9. Before the relevant period, SNCR’s software business was premised largely on a +“software as a service” (“SaaS”) model, in which SNCR agreed to provide customers with the use +of its software, together with related support services such as hosting and maintenance, primarily +through multi-year agreements. For SaaS arrangements, SNCR was required to recognize revenue +ratably over the life of the agreements, as the services were provided. + +10. In the second quarter of 2016, SNCR sought to accelerate the recognition of revenue +on a number of existing customer relationships in order to generate the appearance of an improved +financial performance in its publicly-filed financial reports. One way it sought to do so was by +breaking a number of its SaaS arrangements with those customers into their component parts and +selling “perpetual license agreements” (“PLA”s)4 to SNCR’s software purportedly separately from, +or without, the other ancillary elements of the previous SaaS agreements, such as hosting. SNCR +then improperly recognized revenue from the entirety of the PLA fee upfront, instead of only +ratably over the term of the agreement. + +11. In connection with this effort, SNCR sought to convert its pre-existing SaaS +arrangement with Customer A for its payment processing software5 into a PLA. SNCR +simultaneously negotiated separate agreements for the related, ancillary hosting and support +services for the software that it had already been providing to Customer A under its SaaS +arrangement. + +12. The PLA with Customer A was signed on June 30, 2016. Negotiations for the +three-year, related hosting and support services agreements were conducted contemporaneously +with the PLA negotiations; however, SNCR postponed execution of them to January 2017 and +made them retroactive to July 1, 2016. SNCR continued to provide hosting and support services to +Customer A throughout the period, without interruption, just as SNCR had under its SaaS +arrangement with Customer A. + +13. At the same time it was conducting these negotiations, the same SNCR employees +also negotiated an amendment to an existing audit services agreement with Customer A. The “audit +services” in question consisted of the review of Customer A’s invoices by SNCR and its + +4 A customer purchasing a PLA pays for the license upfront and has the right to use the +software indefinitely. + +5 The software processed invoices, automated payments, and sought to improve margins by +optimizing cost and revenue. + + 5 +subcontractor to determine if Customer A had been overcharged by various vendors. Customer A +would authorize SNCR and its subcontractor to seek reimbursement from the vendors on its behalf +and, if successful, Customer A would pay SNCR and its subcontractor a percentage of the +reimbursed payments as audit fees. No fee was payable to SNCR until Customer A had realized the +savings identified by SNCR. At the time of these negotiations, SNCR had already identified +potential overcharges, but had not yet negotiated reimbursement from Customer A’s vendors. The +amendment substituted an upfront fee applicable to a set amount of identified potential overcharges +instead of the contingency fees. + +14. Throughout June, as an inducement for Customer A to purchase the PLA, SNCR +proposed an upfront fee that was significantly less than the amount SNCR estimated it would +receive in contingency fees if SNCR achieved its historical success rate. + +15. During the negotiations, SNCR attributed more than $6 million in value to the audit +services and a significantly smaller amount ($750,000 in SNCR’s final proposal) to the PLA. +However, shortly before the agreements were finalized, a SNCR employee switched the dollar value +between the two agreements. Although the total price to Customer A was the same, the amount +allocated to the PLA was now $6.15 million and the amount allocated to the audit services was now +$600,000. + +16. The price in the final contract for the license was $4.3 million, almost 6 times the +price agreed to in the “final” proposal. SNCR added another license for software not even +negotiated with Customer A, nominally for $1.85 million, to reach the $6.15 million total in the +executed PLA. + +17. Bandini was copied on the concurrent negotiations over the PLA, the hosting +agreement, and the audit services agreement. Bandini received proposals showing the values SNCR +originally attributed to the PLA and audit services and redlines showing the last-minute switch of +those amounts that significantly and arbitrarily inflated the purported value of the PLA. He +reviewed the PLA, the hosting agreement, the support services agreement, and audit services +agreement, and included the purported revenue figures for each in an internally circulated revenue +report. + +18. Bandini knew or should have known that there was no factual basis for switching the +price of the PLA and audit services (or for including the additional software license in the PLA). In +fact, he and others negotiated an agreement to pay SNCR’s subcontractor approximately $4 million +for its audit services to Customer A, a figure that was almost seven times the $600,000 attributed to +those services in the contracts, but which was consistent with the amount originally contemplated +for those services.6 + +19. Bandini knew that that the objective of the transaction was to record monies +otherwise payable for the audit services agreement as revenue from sale of the PLA. He provided + +6 Because SNCR provided the audit services primarily through its subcontractor, the +subcontractor was entitled to approximately 2/3 of the $6.15 million audit services fee. + 6 +advice on structuring and negotiating the transaction. In addition, he drafted an agreement that +required SNCR to pay Subcontractor A approximately the same fee as would be required if the +$6.15 million had been properly classified as the audit service fee, so that Subcontractor A would +not suffer a loss from SNCR’s erroneously recording the $6.15 million audit services fee as the +price of the PLA. + +20. Switching these two amounts in the agreements provided the appearance that SNCR +was entitled to recognize significantly more revenue upfront than it would have been entitled to had +the prices in the contracts not been altered. Under GAAP, revenue for the audit services could not +be recognized upfront in its entirety because the audit service fee had not been earned. SNCR, +through its subcontractor, was still required to perform by negotiating the disputes with the vendors. +Furthermore, if SNCR did not successfully negotiate and obtain a set amount of reimbursement +from the covered claims by a given date, SNCR would be required to discount its audit services +going forward until Customer A had realized the promised amount. In contrast, in certain +circumstances, revenue from a PLA could properly be recognized upfront in its entirety. + +21. In its Form 10-Q for the quarter ended June 30, 2016, SNCR recognized $5.25 +million in revenue for the PLA sold to Customer A, with approximately $900,000 being allocated to +maintenance. SNCR’s recognition of $5.25 million in revenue for the PLA was improper under +GAAP because the PLA and the ancillary hosting and audit services agreements comprised an +MLE, and SNCR had no VSOE for the fair value of hosting or audit services. According to GAAP, +the fees from these agreements should therefore have been recognized ratably over the life of the +agreement. + +22. The improperly recorded revenue appeared in a press release announcing net +revenues and net income for the second quarter 2016, which was included in a Form 8-K issued on +August 3, 2016, and in SNCR’s Form 10-K issued on February 27, 2017, which included net +revenues and net income for 2016. The improperly recorded revenue from the Customer A +transaction materially inflated SNCR’s revenue in these periods. + +23. SNCR reversed the PLA revenue for the Customer A transaction when it restated its +2016 financial results, reducing revenue by $5,252,000 in the quarter ended June 30, 2016 and +$4,660,000 for the year ended December 31, 2016. + +C. Reseller Transaction with Subcontractor A +24. In late 2016, sales and finance personnel at SNCR forecasted internally that SNCR +would close on the sale of PLA for several types of software7 to Customer A, for an estimated $4 +million in revenue. + +25. As the close of the fourth quarter approached, however, Customer A informed the +sales and finance personnel at SNCR that it would not close the deal until 2017. + +7 The software assisted telecommunications companies with managing invoices, including +paying vendors, auditing invoice charges, managing invoice disputes, and analyzing billing data. + + 7 + +26. In response, Bandini, Clayton Thomas, then the General Manager of +Communications and Media at SNCR, and Daniel Ives, then the Executive Vice President of +Investor Relations at SNCR, with the approval of senior SNCR executives, embarked on an effort to +persuade one of SNCR’s subcontractors (“Subcontractor A”) to agree to acquire the software PLA +originally intended for Customer A before the end of the year for $3.6 million, and then resell it to +Customer A in 2017 (the “Reseller Agreement”). Subcontractor A had never previously been a +customer of SNCR, had never purchased any of its software, and had never been a reseller of +software. Rather, Subcontractor A was a party to a consulting agreement with SNCR under which +it performed services for licensees of SNCR’s software products in exchange for consulting fees. + +27. In addition, Subcontractor A was not financially capable of paying SNCR $3.6 +million, a fact its president told Bandini, Thomas, and Ives before the end of the year. + +28. To get around that obstacle, on December 28, 2016, Bandini and Thomas prepared, +signed, and sent a side letter (“first side letter”) to Subcontractor A stipulating that (1) Subcontractor +A did not need to pay SNCR under the Reseller Agreement until it had resold the software, and +(2) SNCR would make Subcontractor A whole for any losses incurred in the resale by adjusting the +sale price and awarding Subcontractor A additional consulting services. + +29. Bandini was entitled to a bonus tied to certain revenue earned by SNCR, including +for the Subcontractor A transaction and a transaction with Customer B.8 Bandini told Subcontractor +A’s president over email that Bandini needed the sale so that he could earn a bonus on the +underlying software agreement. + +30. By the morning of December 31, 2016, Subcontractor A had not yet agreed to sign +the Reseller Agreement. In a last-ditch effort to close the deal in time for SNCR to include the $3.6 +million as revenue for the fourth quarter of 2016, that morning, Thomas met with a representative of +Subcontractor A and proposed that SNCR pre-pay the fees it expected to owe Subcontractor A on +the long-standing consulting agreement between them, so that Subcontractor A could use those +funds to pay the $3.6 million it would ostensibly owe SNCR under the Reseller Agreement. +Subcontractor A agreed to that proposal. + +31. Following the meeting on that same day, Subcontractor A emailed Bandini, Thomas, +and Ives to confirm that they were working on memorializing the terms of the proposal in a draft +agreement (“second side letter”). This second side letter, which was drafted with the assistance of +others at SNCR, amended a previously signed agreement between Subcontractor A and SNCR9 and +provided that SNCR would prepay $4.05 million in fees to Subcontractor A by February 28, 2017. + +8 The Customer B transaction is discussed supra at Section III.D, para. 38 – 45. Bandini +ultimately did not receive his bonus for the Subcontractor A or Customer B transactions. + +9 The previously signed Auditing and Consulting Services Agreement was executed +between Subcontractor A and a company which SNCR acquired prior to the relevant period. + 8 +Bandini, Thomas, and Ives negotiated the second side letter with Subcontractor A throughout the +day on December 31, 2016, and the parties agreed to formally sign the document in early 2017. + +32. In the meantime, on the afternoon of December 31, 2016, SNCR and Subcontractor +A signed the Reseller Agreement, which ostensibly provided that Subcontractor A would pay +SNCR $3.6 million for a PLA for three types of SNCR software that it could then resell to other +companies. The Reseller Agreement on its face did not contain any contingencies, made no +mention of the first or second side letter, and purported to require Subcontractor A to pay for the +software PLA by March 31, 2017. + +33. In February 2017, Bandini removed the draft line from the second side letter and +sent it to Subcontractor A for signature. Bandini instructed Subcontractor A to sign, but not to date, +the document. Subcontractor A did as directed. + +34. In early 2017, SNCR’s auditor asked Bandini whether he was aware of SNCR +entering into any side letter agreements in connection with fiscal year 2016, and he replied that he +was not. + +35. SNCR included the $3.6 million fee under the Reseller Agreement as revenue for the +quarter and year ended December 31, 2016, in a press release and Form 8-K issued on February 8, +2017 and in its Form 10-K for the year ended December 31, 2016, filed on February 27, 2017. + +36. SNCR’s inclusion of this revenue was improper under GAAP because, as reflected +in the first and second side letter and as Bandini knew or recklessly disregarded, the fee was +contingent on Subcontractor A reselling the software. Because of this contingency, the Reseller +Agreement was in substance a consignment agreement, revenue which, according to GAAP, can be +recognized only when the sale to an end customer is complete (provided all other revenue +recognition criteria have been met). + +37. The improperly recorded revenue from the Subcontractor A transaction materially +inflated SNCR’s revenue for the quarter and year ended December 31, 2016 and was reversed when +SNCR restated its 2016 financial results. + +D. Customer B Transaction +38. In the fourth quarter of 2016, Bandini and others at SNCR also sought to convert a +pre-existing SaaS agreement with Customer B into a PLA and other component parts, in order to +accelerate the recognition of revenue for financial reporting purposes. To obscure that these +separate agreements were in fact component parts of an MLE arrangement (and, indeed, that they +were merely a repackaging of an existing customer arrangement), Bandini arranged to have the +agreements for the ancillary elements, such as hosting, be executed separately at a later date. + +39. On December 12, 2016, Bandini informed Customer B that SNCR needed to +recognize license revenue for the software that Customer B was using in the fourth quarter of 2016 +and that to do so, it needed to exclude the hosting and service elements from the PLA. + + 9 +40. Customer B refused to sign the PLA without knowing the cost and terms for the +ancillary services that had, to that point, been provided under the SaaS agreement. In response, +Bandini provided two draft statements of work (“SOWs”) to Customer B, one for hosting and one +for services. + +41. Customer B preferred to sign all three agreements together and objected to signing +the PLA without a guarantee that the price and terms for hosting and services would not deviate +from those presented in the draft SOWs. To assuage Customer B, Bandini sent Customer B by +email, a side letter stating that the hosting and services SOWs that were negotiated +contemporaneously with the PLA would remain unchanged until they were signed in the subsequent +quarter. Bandini and Thomas both signed the side letter. The draft SOWs referenced in the side +letter specified hosting and all the other services to be performed and the fees to be paid. + +42. Customer B signed the PLA on December 29, 2016, which provided for payment of +a fee for the PLA alone to SNCR in the amount of $1.3 million. Several months later, the hosting +and other services SOWs were executed and were unchanged from the previously agreed to drafts. +SNCR continued to provide its hosting services to Customer B during this entire period, including +from the time the software PLA was signed to the time the hosting SOW was executed. + +43. SNCR included the $1.3 million PLA fee as part of its net revenue and income for +the quarter and year ended December 31, 2016, in a Form 8-K and press release issued on February +8, 2017 and in its Form 10-K for the year ended December 31, 2016, filed on February 27, 2017. + +44. SNCR’s inclusion of this fee as revenue was improper under GAAP because the +PLA and the ancillary hosting and services agreements comprised an MLE, and SNCR had no +VSOE of fair value for hosting. According to GAAP, the fees from these agreements should +therefore have been recognized ratably over the life of the agreement; however, as Bandini knew or +recklessly disregarded, neither the side letter nor the ancillary hosting and services agreements were +provided to SNCR’s accounting department at the time revenue was recognized. The improperly +recorded revenue from the Customer B transaction materially inflated SNCR’s revenue in these +periods. + +45. SNCR reversed the revenue for the Customer B transaction when it restated its 2016 +financial results. + +E. The Above Transactions Resulted in a Material Overstatement of SNCR’s Financial +Performance + +46. The revenue from the foregoing transactions that SNCR improperly recorded for the +quarters ended June 30, 2016 and December 31, 2016 materially inflated SNCR’s revenue for these +periods. SNCR also understated its pre-tax loss for the quarter ended June 30, 2016 by +approximately 57% by improperly including revenue from the Customer A transaction. SNCR +understated its pre-tax loss from continuing operations for the quarter ended December 31, 2016 by +approximately 14% by improperly including revenue from the Subcontractor A and Customer B +transactions. Based on its improper inclusion of revenue from all of these transactions, SNCR + 10 +understated its 2016 pre-tax loss from continuing operations by approximately 11% in its Form +10-K for the year ended December 31, 2016. + +VIOLATIONS + +47. As a result of the conduct described above, Bandini violated Section 10(b) of the +Exchange Act and Rules 10b-5(a) and 10b-5(c) thereunder, which prohibit fraudulent conduct in +connection with the purchase or sale of securities. + +48. As a result of the conduct described above, Bandini violated Section 13(b)(5) of the +Exchange Act and Rule 13b2-1 thereunder, which prohibit any person from knowingly +circumventing or failing to implement a system of internal accounting controls; knowingly +falsifying any book, record, or account, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer; and directly or indirectly, falsifying or +causing to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the Exchange +Act. + +49. As a result of the conduct described above, Bandini caused SNCR to violate +Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b- +20 thereunder, which require every issuer of a security registered pursuant to Section 12 of the +Exchange Act to file with the Commission accurate information, documents, and annual and +quarterly reports as the Commission may require, mandate that periodic reports contain such +further material information as may be necessary to make the required statements not misleading, +and require issuers to make and keep books, records, and accounts that accurately and fairly +reflect the transactions and dispositions of the assets of the issuer. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 10(b), 13(a), +13(b)(2)(A), and 13b(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and +13b2-1 thereunder. + + Respondent shall pay a civil money penalty in the amount of $75,000.00 to the +Securities and Exchange Commission. Payment shall be made in the following installments: + +• $15,000.00 within thirty days of the entry of this Order; +• an additional $15,000.00 every 75 days thereafter, with payments ending no later +than one year from the entry of this Order. + + 11 +Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. +§ 3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application to +the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and hand-delivered +or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Marc +Bandini as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Lara Mehraban, Division of Enforcement, +Securities and Exchange Commission, New York Regional Office, 100 Pearl Street, Suite 20-100, +New York, New York 10004. + + Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for any penalties referenced in paragraph IV(B) above. The Fair Fund may be +added to or combined with any other fair fund created in a related district court action or +administrative proceeding arising out of the same violations. The Fair Fund will be distributed to +harmed investors in accordance with a Commission-approved plan of distribution. Amounts +ordered to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid +to the government for all purposes, including all tax purposes. To preserve the deterrent effect of +the civil penalty, Respondent agrees that in any Related Investor Action, he shall not argue that he is +entitled to, nor shall he benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If +the court in any Related Investor Action grants such a Penalty Offset, Respondent agrees that he +shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission’s counsel in this action and pay the amount of the Penalty Offset to the Securities and + 12 +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall +not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes +of this paragraph, a “Related Investor Action” means a private damages action brought against +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4307.txt b/raw/aaer/2022/AAER-4307.txt new file mode 100644 index 0000000000000000000000000000000000000000..7e28e04cb7aa4988f09798b0ab390ac39476e164 --- /dev/null +++ b/raw/aaer/2022/AAER-4307.txt @@ -0,0 +1,220 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95054 / June 7, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4307 / June 7, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20888 + + +In the Matter of + +STEPHEN G. WALDIS, + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Stephen G. Waldis (“Waldis” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the +Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + + + + + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. Synchronoss Technologies, Inc. (“SNCR”), a New Jersey-based technology +company, that primarily provides products, software, and services to telecommunications +companies engaged in improper accounting from at least 2013 through 2017. As a result, SNCR +filed with the Commission materially misstated financial statements in its annual, quarterly and +current reports during the period. + + 2. In May 2017, SNCR announced that it would not be able to file its Form 10-Q on +time. On June 8, 2017, SNCR’s audit committee announced that it concluded that the financial +statements for the fiscal years (“FY”) ending December 31, 2015 and 2016 and their respective +quarterly periods should not be relied on. On October 5, 2017, SNCR’s audit committee +announced that it concluded that the financial statements for FY 2014 and its quarterly periods +should not be relied on. + + 3. On July 2, 2018, SNCR filed a Form 10-K with the Commission that included +restated financial statements for FY 2015 and 2016 and restated certain financial data for FY 2013 +and 2014 as well as its previously unissued financial statements for FY 2017. In the filing, it +acknowledged that it had accounted for numerous transactions improperly during the restated +period. + + 4. Stephen Waldis, SNCR’s Chief Executive Officer during relevant times, received +bonuses, incentive-based compensation, equity-based compensation, and realized profits from his +sales of SNCR’s stock during the 12-month period following the filings containing financial results +that SNCR restated as a result of misconduct. Waldis has not, however, reimbursed SNCR for +those profits as required under Section 304(a) of the Sarbanes-Oxley Act. + +Respondent + + 5. Waldis, age 54, resides in Naples, Florida. Waldis has never been associated with +an entity registered with the Commission in any capacity. Waldis founded SNCR in 2000, and +served as CEO from then through January 2017, and then again from April 2017 to November +2017. He also served on SNCR’s board of directors from 2000 through 2018. + + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and +are not binding on any other person or entity in this or any other proceeding. + + + 3 +Related Entity + +6. SNCR is a Delaware corporation with its principal place of business in New Jersey. +Its securities are registered pursuant to Section 12(b) of the Exchange Act. Its securities are +currently listed on NASDAQ, although SNCR’s common stock was suspended from trading on +NASDAQ from May 2018 to October 2018 because it had become delinquent in its required +filings. + +Facts + + 7. In February 2017, SNCR filed a Form 10-K with the Commission, announcing its +operating and financial results for FY 2016. + + 8. In May 2017, SNCR announced that it would not be able to file its Form 10-Q on +time. + + 9. On June 8, 2017, SNCR’s audit committee announced that it concluded that the +financial statements for FY 2015 and 2016 and their respective quarterly periods should not be +relied on. On October 5, 2017, SNCR’s audit committee announced that it concluded that the +financial statements for FY 2014 and its quarterly periods should not be relied on. + + 10. SNCR did not file any financial statements for over a year from February 2017 to +July 2018. As a result of SNCR’s inability to file any financial statements for nearly two years, the +company’s common stock was suspended from trading on NASDAQ from May to October 2018. + + 11. In July 2018, SNCR announced a restatement of its audited financial statements for +the fiscal years ended December 31, 2016 and 2015 and restated selected financial data for the fiscal +years ended 2014 and 2013 totaling approximately $190 million in cumulative revenues. In its +restatement, SNCR also acknowledged “pervasive material weaknesses” in its internal control over +financial reporting for the restatement period. + + 12. The restatement related to three categories of transactions, for which SNCR +improperly recognized revenue: (1) transactions for which there was no persuasive evidence of an +arrangement; (2) acquisitions/divestitures in which SNCR recognized revenue on license +agreement(s) rather than combining those purported amounts with the purchase or sales prices; and +(3) license/hosting transactions, in which SNCR converted prior multi-term software-as-a-service +agreements into perpetual licenses, and improperly recognized the revenue upfront, instead of +spreading it ratably over the term of the arrangements. + + 13. SNCR restated at least four transactions because, as SNCR acknowledged, it did +not have persuasive evidence of an arrangement within the period of original revenue recognition. + + 14. In addition, SNCR restated at least two transactions in which SNCR sold a license +in connection with an acquisition or divestiture when, as SNCR acknowledged, the license revenue + + 4 +should have been treated as an adjustment to the consideration of the acquisition or divestiture +instead of recognizing the license sale as revenue. + + 15. SNCR also prematurely recognized revenue from software licenses and services +provided in connection with certain hosting arrangements for at least four transactions. + +16. At least two of the above revenue misstatements were facilitated through the use +of “side letters or agreements” that had not initially been considered in recognizing revenue and +materially changed the terms of the transactions. SNCR’s audit committee discovered these +“side letters or agreements” as part of its investigation and presented these findings to Waldis, +who was the CEO of the Company, which resulted in the Company terminating the responsible +employees. +Compensation and Stock Sales of CEO Waldis + + 17. During the 12-month periods that followed the filing of financial statements in +SNCR’s quarterly and annual reports requiring restatement (“clawback period”), Waldis received +bonuses, incentive-based compensation, equity-based compensation, and realized profits from his +sales of SNCR’s stock. + + 18. Waldis has not reimbursed these amounts to SNCR. Waldis has already returned +all of the options granted during the clawback period. + +Violation + + 19. As a result of the conduct described above, Waldis violated Section 304 of the +Sarbanes-Oxley Act of 2002, which requires the chief executive officer or chief financial officer of +any issuer required to prepare an accounting restatement due to material noncompliance with the +securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other +incentive-based or equity-based compensation received by that person from the issuer during the +12-month period following the first public issuance or filing with the Commission of the financial +document embodying such financial reporting requirement and (2) any profits realized from the +sale of securities of the issuer during that 12-month period. Section 304 does not require that a +chief executive officer or chief financial officer engage in misconduct to trigger the reimbursement +requirement. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Waldis’s Offer. + + Accordingly, it is hereby ORDERED that: + + + 5 + A. Pursuant to Section 21C of the Exchange Act, Respondent Waldis cease and desist +from committing or causing any violations and any future violations of Section 304 of the Sarbanes- +Oxley Act of 2002. + + B. Respondent shall, within 30 days of the entry of this Order, reimburse SNCR for a +total of $1,312,326 pursuant to Section 304(a) of the Sarbanes-Oxley Act of 2002. In addition, +Waldis will return 16,266 shares he received as incentive compensation (or the cash equivalent +value calculated based on the last closing price as of January 24, 2022). Respondent shall +simultaneously deliver proof of satisfying this reimbursement obligation to Lara S. Mehraban, +Division of Enforcement, Securities and Exchange Commission, 100 Pearl Street, Suite 20-100, +New York, NY 10004. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4309.txt b/raw/aaer/2022/AAER-4309.txt new file mode 100644 index 0000000000000000000000000000000000000000..0cc4acf3e3e79269bc94535124c3b68f4111063f --- /dev/null +++ b/raw/aaer/2022/AAER-4309.txt @@ -0,0 +1,1319 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95066 / June 8, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4309 / June 8, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20891 + + + + +In the Matter of + +COHNREZNICK +LLP + +Respondent. + + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against +CohnReznick LLP (“Respondent” or “CohnReznick”) pursuant to Sections 4C1 and 21C of the + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + + + +2 +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C And 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules Of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + This matter involves improper professional conduct by CohnReznick in connection with the +2017 third quarter review and 2017 annual audit of Sequential Brands Group, Inc. (“Sequential”) +and the 2017 annual audit of Longfin Corp. (“Longfin”). For both the Sequential and Longfin +engagements, deficiencies in CohnReznick’s system of quality controls led to auditing failures, +including some failures that were identified by national office quality control reviewers but were not +appropriately addressed by the engagement teams, thereby resulting in the issuance of audit reports +that were inaccurate. During the course of these engagements, CohnReznick’s violations of +numerous professional standards were a cause of Sequential’s and Longfin’s filings of materially +misstated financial statements with the Commission. + + In the third quarter of 2017, Sequential conducted goodwill impairment testing in response +to indicators of impairment and concluded that goodwill was not impaired based on a valuation +analysis that relied heavily on assertions posited by Sequential’s management regarding the +market’s mispricing of Sequential’s stock that were not supported by relevant and reliable audit + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + +3 +evidence. During CohnReznick’s interim review process, the internal valuation specialists, the +assigned engagement quality control review (“EQCR”) partner from CohnReznick’s national office, +and its National Director of SEC Services expressed concerns that Sequential’s fair value estimates +were not adequately supported by the evidence. As a result, CohnReznick paused its interim review +process. Confronted with these disagreements and concerns of insufficient evidence to support +Sequential’s assertions, the engagement partner, with the concurrence of the engagement quality +review (“EQR”) partner and the Managing Partner of Assurance, nonetheless ultimately accepted +Sequential’s conclusion that goodwill was not impaired without obtaining sufficient relevant and +reliable evidence in support of management’s assertions or performing sufficient additional +contemporaneous procedures. + + After Sequential issued its third quarter 2017 Form 10-Q, CohnReznick documented its +third quarter conclusions in the work papers for the third quarter interim review and as part of the +annual audit, but failed to recognize the deficiencies of the engagement team’s analysis and the +continuing lack of evidential matter in support of Sequential’s conclusions. Due to deficiencies in +CohnReznick’s system of quality control, the firm failed to adequately consider and address +concerns raised by its national office staff and the firm’s internal valuation specialists. As a result, +CohnReznick failed to conduct its interim review and year-end audit for 2017 in accordance with +Public Company Accounting Oversight Board (“PCAOB”) standards. In addition, CohnReznick’s +statement in its audit report accompanying Sequential’s 2017 Form 10-K, filed with the +Commission on March 16, 2018, that it had conducted the audit in accordance with PCAOB +standards, was inaccurate. Moreover, CohnReznick was a cause of Sequential’s violation of the +reporting and books and records provisions of the Exchange Act. +CohnReznick also audited the 2017 financial statements of Longfin and engaged in +similar quality control and audit failures, as set forth in an Order of the Commission issued on +September 27, 2021 (the “Longfin Engagement Order”).4 The Longfin Engagement Order found +that the engagement partner did not comply with multiple PCAOB standards, resulting in audit +failures in critical areas including audit planning, revenue and receivables, related party +transactions, and intangible assets. The Longfin Engagement Order also found that the EQR +partner on the audit did not adequately conduct his review in accordance with the applicable +PCAOB standards. The audit failures concerned, among other things, aspects of related party +commodity transactions, which were a key component of Longfin’s fraudulent scheme. As with +Sequential, these audit deficiencies were compounded by shortcomings in CohnReznick’s +system of quality controls, which were insufficient to ensure that CohnReznick performed its +audit in accordance with professional standards. Prior to issuing the audit report, a director and a +senior manager from CohnReznick’s national office conducted two independent reviews of the +Longfin audit engagement. One review raised a question about a specific related party +transaction, while the other circulated a list of matters that needed to be “discussed, documented, +and concluded upon,” including whether there were related party transactions, and if there were +“any special terms with them.” Ultimately, the firm failed to apply appropriate professional +skepticism or perform audit procedures appropriate to the identified risk. As a result, + +4 See Accounting and Auditing Enforcement Release No. 4258, dated September 27, 2021. + + +4 +CohnReznick inaccurately stated in its audit report accompanying Longfin’s 2017 Form 10-K, +filed with the Commission on April 2, 2018, that it had conducted the audit in accordance with +PCAOB standards. +B. RESPONDENT + +1. CohnReznick LLP, a New Jersey limited liability partnership, is a public +accounting firm in the United States with over 3,000 employees in 25 cities and offers services in +three segments – accounting, tax and advisory. CohnReznick registered with the PCAOB in +October 2003. CohnReznick became the independent auditor for Sequential in 2013 and issued +reports on Sequential’s financial statements through the year-end 2020 financial statement audit. +CohnReznick served as the independent auditor for Longfin between February 7, 2018 and April 5, +2018, when it resigned from the Longfin engagement. + +C. RELEVANT ENTITIES + +2. Sequential Brands Group, Inc., is a Delaware corporation headquartered in New +York, New York. Sequential owns a portfolio of consumer brands and promotes, markets, and +licenses those brands through retailers, wholesalers and distributors in the United States and +abroad. Sequential’s common stock was registered with the Commission under Section 12(b) of +the Exchange Act and traded on the Nasdaq Capital Market under the ticker symbol “SQBG” at all +times during the relevant period. On August 31, 2021, Sequential filed for Chapter 11 bankruptcy +relief and on September 27, 2021, the Nasdaq Stock Market LLC delisted Sequential for failing to +meet listing requirements.5 + +3. Longfin Corp. is a Delaware corporation that, at relevant times, purported to be +headquartered in New York, New York and Lyndhurst, New Jersey. Longfin’s Class A common +stock was previously registered with the Commission pursuant to Section 12(b) of Exchange Act. +Between December 13, 2017 and its voluntary delisting from NASDAQ in May 2018, Longfin’s +Class A common stock traded on NASDAQ under the symbol “LFIN.” On May 24, 2018, +Longfin’s Class A common began trading over the counter. On November 21 and November 27, +2018, Longfin filed Forms 8-K announcing that the company had entered into an Assignment for + +5 To settle the Commission’s litigation against Sequential alleging failure to timely impair goodwill, +Sequential agreed to the entry of a final judgment permanently enjoining it from future violations of the +antifraud provision of Section 17(a)(3) of the Securities Act of 1933 and certain reporting, books and +records, and internal control provisions under the Securities Exchange Act of 1934. The U .S. District Court +for the Southern District of New York entered the final judgment against Sequential on December 1, 2021. +See Accounting and Auditing Enforcement Release No. 4277, dated December 15, 2021. + + + +5 +the Benefit of Creditors on November 14, 2018 in New Jersey state court and, as a result, had +terminated all of its employees and disbanded its Board of Directors.6 + +D. FACTS + +COHNREZNICK’S REVIEW AND AUDIT OF SEQUENTIAL’S +2017 GOODWILL IMPAIRMENT TESTING + + CohnReznick Identified Goodwill Impairment as an Area of Significant Risk + +4. Throughout the audit planning process in 2017, CohnReznick identified goodwill +impairment testing to be an area of significant risk, as it had done in the previous year’s audit. +Sequential’s goodwill constituted over 20% of the company’s assets and the likelihood of its +impairment increased as the company’s stock price, and therefore its market capitalization, +continued its decline in 2017. + +5. The engagement team understood that in the immediately preceding quarters +Sequential had disclosed its goodwill impairment testing policy, which relied exclusively on the +company’s market capitalization, as adjusted by a control premium (the “Market Approach”), to +estimate the company’s fair value. Under this policy, Sequential was required to recognize an +impairment charge for the amount by which its carrying value exceeded its fair value. The +continuing stock price decline, therefore, increased the likelihood that the company’s goodwill +impairment test would indicate that goodwill was impaired. + +In the Third Quarter of 2017, CohnReznick Reviewed Sequential’s Interim Goodwill +Impairment Test and Conclusion that Goodwill Was Not Impaired + +6. Following the identification of impairment indicators arising from the impairment +of five of its brands in the third quarter, Sequential determined that an interim quantitative +impairment test of goodwill was necessary as of the end of the third quarter. It accelerated by one +day the company’s annual impairment test scheduled for first day of the fourth quarter, October 1st +to September 30th. Based on the then current stock price and the number of shares outstanding, +the engagement team understood that the Market Approach would indicate that Sequential’s +goodwill was impaired. + + +6 In April 2018, the Commission filed a complaint against Longfin and several individuals alleging, among +other things, that the defendants illegally distributed and sold Longfin stock in unregistered transactions. In +June 2019, the court ordered disgorgement and penalties against the defendants. On June 5, 2019, the +Commission filed another complaint against Longfin and its CEO alleging that they engaged in a scheme to +obtain a NASDAQ listing through a fraudulent public offering and perpetrated an accounting fraud by +reporting fictitious revenue from commodity transactions. On September 26, 2019, a federal court in New +York entered a default judgment against Longfin. In December 2019, Longfin’s CEO agreed to pay +disgorgement and penalties to resolve the Commission’s fraud action against him. + + + +6 +7. Approximately a week before Sequential was required to file its third quarter Form +10-Q, and before the company had released its earnings, the engagement team received a draft +valuation report from Sequential. That report, which had been prepared by Sequential’s third party +valuation specialist, based on information and guidance provided by Sequential, departed from the +company’s previously disclosed Market Approach to goodwill impairment testing and instead +incorporated two different valuation methodologies: the income approach using a discounted cash +flow (“DCF”) model and the Market Approach. Specifically, this report relied on a weighted +average between the fair values obtained by the Market Approach (approximately $245 million) +and the DCF (approximately $650 million), which it compared to Sequential’s carrying value of +approximately $444 million, and concluded that the company’s goodwill was not impaired. + +8. To explain the wide discrepancy in the fair value estimates, Sequential’s report +cited three assertions by Sequential’s management, which in management’s view, supported the +conclusion that public markets had mispriced Sequential’s stock: (1) the company’s stock price +was low because Sequential was unfairly grouped with other out-of-favor companies in the retail +industry with business models incomparable to Sequential; (2) the market was undervaluing the tax +amortization benefit of its brands, which it believed would become significant in future periods +when the company was more profitable; and (3) the company’s high leverage ratio created a +“perception overhang.” + +CohnReznick’s Internal Valuation Specialists Raised Concerns with Sequential’s +Goodwill Impairment Testing Methodology + +9. Upon receiving Sequential’s goodwill impairment analysis from the engagement +team, CohnReznick’s assigned internal valuation specialist assessed the report and identified +several concerns suggesting that the company might fail the impairment test. He furnished his +written comments to the engagement team, a second valuation specialist at the firm, as well as the +firm’s Managing Partner of Assurance, who served as the liaison between CohnReznick’s internal +valuation group and CohnReznick’s auditors. + +10. In his comments, the internal valuation specialist observed that “[w]hile the DCF +implies that impairment is not present, the trading price approach implies impairment” and that +“[t]he difference in estimated values is significant and implies that one or both require adjustment.” +He also added, after applying additional potential valuation methods to the analysis, which he +included in his written comments, “the implication from the sensitivities is that the Step 1 test may +fail.” + +11. The next day, a second CohnReznick valuation specialist sent an email to the +engagement team and the Managing Partner of Assurance noting “troubling facts” in Sequential’s +impairment analysis, including that Sequential’s market capitalization was equal to 50% of book +value and that there was a “large disparity in equity value conclusions between the DCF and the +Market…2.68x…??? too big of a difference.” + + + +7 +In Response to CohnReznick’s Comments, Sequential Prepared a Quantitative +Reconciliation That Relied Heavily on Management Assertions that Sequential Was +Undervalued by the Market + +12. The engagement partner, the EQR partner, and the Managing Partner of Assurance +did not believe that the wide disparity in estimated values obtained from the Market Approach and +the DCF supported a finding that the DCF-based valuation was inaccurate. Rather, the +engagement partner, the EQR partner, and the Managing Partner of Assurance concluded that the +company could rely on the DCF-based valuation estimate if (i) Sequential management believed +the DCF valuation represented the best estimate of the company’s fair value, and (ii) it +supplemented its valuation report with a quantitative reconciliation to the Market Approach. In a +follow-up conference call attended by Sequential’s management and these partners, among others, +CohnReznick communicated these conclusions to Sequential’s management and its third party +valuation specialist. In response, Sequential’s third party valuation specialist, working at the +direction of Sequential’s management, prepared a revised valuation analysis quantifying the +reconciling factors. + +13. The revised report, which Sequential forwarded to CohnReznick hours after the +conference call, exclusively utilized the DCF valuation to estimate fair value and incorporated a +quantitative reconciliation to Sequential’s estimated fair value under the Market Approach. This +reconciliation analysis relied heavily on two assertions of the company’s management: (1) that the +stock market failed to properly incorporate the potential tax amortization value of the company’s +intangible indefinite-lived assets (primarily, its brands) to an acquirer; and (2) that the stock market +was not correctly pricing Sequential’s stock in relation to the company’s revenues because of +misperceptions of the company’s industry. These management assertions were not supported by +sufficient objective evidence or analysis to justify management’s view that the market was +undervaluing the company. + +CohnReznick’s Valuation Specialist Raised Concerns Regarding the Reasonableness +of Sequential’s Fair Value Assessment + +14. CohnReznick’s internal valuation specialist reviewed the revised report and raised +concerns about whether there was sufficient evidentiary support for management’s assertions. +Specifically, he did not believe the evidential matter provided by management supported the +magnitude of the quantitative reconciliation between the results of the DCF model and Market +Approach valuation. He communicated his concerns and conclusion to the engagement team and +the Managing Partner of Assurance, including his unwillingness to opine as to the reasonableness +of the fair value analysis. + +15. The engagement partner and the Managing Partner of Assurance did not agree with +the valuation specialist’s concerns regarding the magnitude of the reconciliation. Instead, they +viewed the reconciliation between the estimated fair values obtained by the DCF and the Market +Approach as an accounting consideration and outside the scope of the specialist’s expertise, despite + + +8 +his extensive experience in assessing fair value assessments similar to Sequential’s impairment +testing in prior engagements. They also determined that the internal valuation specialist’s concern +with inadequate evidence in support of the wide gap between the values yielded by the DCF model +and the Market Approach was not a valuation issue appropriate for his consideration. Rather, they +believed that the sufficiency of the evidence on the issue was solely an auditing issue for the +engagement team’s consideration. + +16. Contrary to the typical practice at CohnReznick, wherein the internal valuation +specialist would opine as to the reasonableness of an audit client’s overall fair value measurement, +in this case the engagement team assumed responsibility for assessing the reasonableness of the +determination, as a result of the specialist’s unwillingness to do so and based on the engagement +team’s and Managing Partner of Assurance’s conclusion that the sufficiency of evidential matter to +support the reconciliation between two fair value estimates presented an audit (rather than a +valuation) question. + +Sequential Issued Its Earnings Release, Even Though CohnReznick’s National Office +Quality Control Review Remained Incomplete, in Reliance on the Engagement +Team’s Assurances That Changes to the Financial Statements Were Unlikely + +17. As part of CohnReznick’s documented quality control system, an EQCR review, +in addition to the EQR review, was to be performed for each public company audit.7 The firm’s +national office assigned a partner or director from its Quality Control group to serve as the EQCR +reviewer. In addition to being a required sign-off for all public company reviews and audits, under +CohnReznick’s procedures, the EQCR was also required to be involved in the evaluation of +significant engagement team judgments and the evaluation of engagement documentation related +to areas deemed significant. + +18. Despite the requirement that the EQCR be involved in the evaluation of significant +engagement team judgments, the Sequential engagement team did not include the assigned EQCR +partner in their initial consultations with the Managing Partner of Assurance on Sequential’s +goodwill impairment analysis. Moreover, without notifying the EQCR, CohnReznick informed +Sequential’s management, as management was finalizing the company’s third quarter earnings +release, that additional changes to the financial statements in the Form 10-Q were unlikely. As a +result, the EQCR was unable to complete his review or provide input to the engagement team +regarding Sequential’s goodwill impairment testing prior to the issuance of Sequential’s earnings +release. + +19. Sequential’s third quarter earnings release was furnished as an exhibit to the +company’s Form 8-K and did not incorporate an impairment to goodwill. The EQCR promptly + +7 CohnReznick’s procedures and system of quality control required quality reviews conducted by national +office directors or partners for certain engagements. These EQCR reviews were distinct from EQR +reviews, which are required by PCAOB audit standards. + + + +9 +questioned the engagement team as to how the goodwill issue had been resolved without his +involvement and also alerted CohnReznick’s Chief Risk Officer and its National Director of SEC +Services. + +After the Publication of the Third Quarter Earnings Release, But Before the Filing of +the Quarterly Report on Form 10-Q, Disagreements Among the Engagement Team +and Members of the National Office Arose Within CohnReznick + +20. After evaluating Sequential’s third party fair valuation analysis, the EQCR partner +and the National Director of SEC Services (with whom the EQCR partner had shared Sequential’s +analysis) reached a mutual view that, based on the information they were provided, there was +insufficient evidence to support Sequential management’s assertions that the market was +undervaluing Sequential, and without more, the company needed to record goodwill impairment. + +21. The EQCR partner and the National Director of SEC Services communicated their +views to the engagement partner, the EQR, the Managing Partner of Assurance, as well as +members of the firm’s senior management. Among other concerns, they expressed the view that +the engagement team was not exercising appropriate professional skepticism with regard to +Sequential’s goodwill impairment testing. + +22. Although CohnReznick had previously notified Sequential that changes to the +financial statements were unlikely, due to the internal disagreement at CohnReznick, CohnReznick +notified Sequential that it had not completed its interim review of the financial statements, which +prevented Sequential from filing its Form 10-Q. In light of the fact that Sequential had already +issued its earnings release, Sequential’s management urged CohnReznick to resolve its concerns as +soon as possible, requesting “minute by minute” status updates and stating in an email to the +engagement partner: “[t]here is no choice but to resolve tonight." + +CohnReznick Resolved the Disagreement in Favor of the Engagement Team Without +Performing Sufficient Audit Procedures + +23. To resolve the disagreement, CohnReznick convened multiple meetings among the +disagreeing staff to review the information provided, as well as an external conference call +between Sequential management, the engagement team, and the dissenting CohnReznick partners. +None of these calls assisted in resolving the disagreement, as the EQCR partner and National +Director of SEC Services continued to assert that the engagement team had not gathered sufficient +evidence to support Sequential management’s assertions regarding the reconciling factors and the +engagement team’s conclusions. + +24. Notwithstanding the insufficient evidence supporting the engagement team’s +conclusions and the unresolved disagreement, CohnReznick’s senior management decided, after +internal discussion but without directing the engagement team to obtain or review further evidence +or perform additional procedures, that the engagement team could authorize Sequential to file its + + +10 +quarterly report on Form 10-Q. CohnReznick further determined that, in the event that the pending +disagreement over the reasonableness of Sequential’s goodwill impairment test could not be +resolved with the dissenting partners, the disagreement should be documented in the work papers, +consistent with PCAOB standards. Accordingly, the firm told Sequential it had completed its +interim review and that the company could file its Form 10-Q. + +CohnReznick Prepared an Inaccurate Consultation Memorandum, Which Purported +to Document the Engagement Team’s Analysis, Months After the Third Quarter +Interim Review was Complete + +25. In January 2018, months after the third quarter interim review was completed, the +engagement team supplemented the third quarter review file with a work paper entitled “Analysis +of Goodwill and Intangibles – CohnReznick memo.” This work paper purported to describe +Sequential’s goodwill impairment analyses and conclusions throughout 2017, as well the +engagement team’s views of those analyses, and its own internal analyses, to conclude that +management’s goodwill impairment conclusion for the third quarter of 2017 was reasonable. It +also purported to memorialize a consultation with the Managing Partner of Assurance and reflected +his concurrence, as well as the concurrence of the EQR partner. + +26. This work paper, while purportedly describing the engagement team’s analysis and +conclusions prior to the filing of the third quarter Form 10-Q, incorporated new data and +justifications for the engagement team’s impairment conclusions, which were not previously +documented prior to the filing of the Form 10-Q. This memo did not include sufficient and +accurate information to enable an experienced auditor to understand the timing, extent, and results +of the procedures performed and the evidence obtained. + +COHNREZNICK’S 2017 LONGFIN AUDIT + +27. In February 2018, CohnReznick commenced its first audit of Longfin. +CohnReznick’s audit of Longfin incorporated multiple levels of quality review, including by the +firm’s national office, but due to deficiencies in the firm’s system of quality control, the firm failed +to address adequately the concerns and issues raised by the reviewers outside of the engagement +team. The Longfin Engagement Order describes the failures by CohnReznick’s engagement +partner and EQR on the 2017 audit and finds that the engagement partner did not comply with +multiple PCAOB standards, including, but not limited to AS 2110, AS 2301, AS 1101, AS 2410, +AS 2310, AS 1201, and AS 1105. + +28. As detailed in the Longfin Engagement Order, these violations, which are +incorporated by reference herein, resulted in failures in four critical audit areas. + +29. First, CohnReznick failed appropriately to design the audit plan and address the risk +of material misstatements, including risks associated with material weaknesses in Longfin’s +Internal Control over Financial Reporting; Longfin’s precarious financial position; the nature of + + +11 +Longfin’s purported commodity sales, which occurred on the high seas, could not be physically +verified, and lacked reliable documentation; and Longfin’s practice of entering into transactions in +which related parties were involved in both sides of the purchase and sale of commodities. + +30. Second, CohnReznick failed to identify undisclosed related parties and +appropriately audit disclosed related party transactions. CohnReznick missed indications that +Longfin engaged in significant transactions with at least three undisclosed related parties that +accounted for more than 10% of Longfin’s 2017 revenues. CohnReznick also failed to perform +required audit procedures with respect to transactions involving disclosed related parties. In those +transactions, which accounted for almost 20% of Longfin’s commodity revenue, Longfin +purportedly bought commodities from one related party and instantly sold them to a second related +party. + +31. Third, CohnReznick failed to appropriately audit revenues and accounts +receivable. In its audit testing of revenues and accounts receivables, CohnReznick did not +appropriately evaluate whether the objectives of the procedures were achieved and the results of +the work adequately supported the conclusions reached. Nor did it ensure that adequate audit +procedures were planned and performed to obtain sufficient appropriate audit evidence. In +performing its audit, CohnReznick primarily relied on third party confirmations of commodity +revenues and related receivables as audit evidence. Many of the confirmations came from +unknown and unverified sources, yet CohnReznick relied on them as audit evidence to support +approximately one third of Longfin’s revenue without obtaining other sufficient appropriate +evidence. + +32. Fourth, CohnReznick failed to appropriately audit Longfin’s “developed +technology” asset. In June 2017, Longfin acquired a company in which Longfin ascribed a $32 +million fair value to a “Developed Technology” intangible asset that it obtained in the acquisition. +The audit work papers identified the acquisition as a significant risk and material event and as a +complex or troublesome engagement area, and also identified the valuations related to the +acquisition as a significant estimate. CohnReznick also should have been highly skeptical of +management’s assumptions and projections used in the valuation of the developed technology +asset. However, CohnReznick did not adequately evaluate the reasonableness of accounting +estimates made by management for the intangible asset, obtain sufficient appropriate evidential +matter, or adequately evaluate the sufficiency and competence of the audit evidence obtained from +auditing fair value measurements and disclosures. + +CohnReznick’s National Office Senior Manager Review of the Longfin Audit Work +Papers Failed to Reasonably Assure Compliance with Applicable Professional +Standards +33. On March 29, 2018, days before the scheduled issuance of Longfin’s Form 10-K, +CohnReznick’s audit engagement team learned for the first time that, a few weeks earlier, +Longfin had received a document request from the Commission’s Division of Enforcement. In +response to this development, three senior partners in CohnReznick’s national office asked that a + + +12 +senior manager assigned to CohnReznick’s national office review the Longfin audit file, asking +her simply to “go through [Longfin’s work papers] with a PCAOB eye and see if there is enough +there.” +34. In the course of her review, the senior manager identified two specific related +party sale and purchase commodity transactions and asked the engagement partner whether the +engagement team understood their substance. Unbeknownst to the senior manager, she had +identified one of many fraudulent related party commodity transactions recorded by Longfin. In +response to her questions, the engagement team failed to obtain sufficient evidence necessary to +evaluate the substance or business purpose of the transactions. Moreover, the audit work papers +do not refer to or otherwise document the nature or results of the senior manager’s review. In +addition, the engagement partner had no knowledge of the scope of the senior manager’s review, +and the EQR partner and the EQCR director assigned to the Longfin engagement were not aware +of what the senior manager reviewed. As a result of the lack of clear policies and procedures for +performing this type of review by the national office personnel, the fraudulent commodity +transaction – and many other transactions like it at Longfin – went undetected by the auditors. +CohnReznick Failed to Respond to “Critical Matters” Identified by the Engagement +Quality Control Review Director +35. In accordance with firm quality control policies, a director in CohnReznick’s +quality control department was assigned to the Longfin audit as an EQCR reviewer, whose role is +to provide an additional layer of quality assurance. The Longfin engagement was classified as a +“Tier I” EQCR, the most comprehensive review, which per firm policy was “effectively an +equivalent of an engagement quality review . . . .” A Tier I EQCR on a public company audit +required, among other things, involvement in the planning meeting and evaluation of significant +engagement judgments and evaluation of engagement documentation including, at a minimum, +areas which are deemed significant. + +36. In a March 30, 2018 email to the engagement and EQR partners, among others, the +EQCR reviewer communicated a list of eighteen “critical matters that need to be discussed, +documented and concluded upon.” The critical matters raised by the EQCR reviewer included, +“any commodity transaction with related parties as counterparties and are there any special terms +with them” and “given all of the [material weaknesses] identified by management have we +reassessed our planning materiality and our overall risk assessment and concluded we have done +appropriate testing?” + +37. After the EQCR raised these issues, the engagement partner, the EQR, the EQCR, +and a partner from CohnReznick’s national office, conducted a call with Longfin’s Audit +Committee, Longfin management, and multiple outside advisors, including Longfin’s outside SEC +counsel and GAAP accounting advisor, to discuss, among other things, the SEC Enforcement +document request and the EQCR’s list of “critical matters.” During this call, Longfin’s +management made oral representations about the related party transactions, but the representations + + +13 +were inconsistent with other information contained in the audit file and on their own did not +constitute relevant and reliable audit evidence. + +Due to CohnReznick’s Deficient System of Quality Controls, the Reviews Conducted +by the National Office Failed to Ensure that the Audit Met Professional Standards + +38. The relevant PCAOB quality control standard requires a CPA firm to have a +system of quality control for its auditing practice. The standard requires the firm to adopt +policies and procedures that provide the firm with reasonable assurance that “the work performed +by engagement personnel meets applicable professional standards, regulatory requirements, and +the firm’s standards of quality.” Firm policies and procedures should also provide reasonable +assurance that the policies and procedures established for the elements of quality control +described in the standard are “suitably designed and are being effectively applied.” + +39. The two reviews of the Longfin audit engagement performed by CohnReznick +national office personnel failed to ensure that the audit was performed in accordance with the +relevant professional standards: + + Both reviews identified related party commodity transactions as an area that +required further follow-up by the engagement team, but the engagement team did +not exercise appropriate professional skepticism, especially with respect to +management representations, nor did the engagement team undertake sufficient +audit procedures when presented with additional audit risks, and the EQCR did not +take adequate steps to follow up with the engagement team. + The national office review was performed on a highly compressed timetable that +was not commensurate with the scope and complexity of its review. + The national office senior manager’s review was not conducted with adequate +guidance or documented in a way that ensured the issues it identified were +adequately addressed prior to issuance of the audit opinion. + Pursuant to internal guidance, the EQCR Tier 1 review was supposed to be +effectively the equivalent to an EQR. Firm procedures, however, did not require +the EQCR to, among other things, evaluate the engagement team’s assessment of +and audit response to identified risks. + +E. VIOLATIONS +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT + +40. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in part, that the +Commission may censure or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who is found by the Commission to have engaged +in improper professional conduct. With respect to persons licensed to practice as accountants, + + +14 +“improper professional conduct” includes either of the following two types of negligent conduct: +(1) a single instance of highly unreasonable conduct that results in a violation of applicable +professional standards in circumstances in which an accountant knows, or should know, that +heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct, each resulting +in a violation of applicable professional standards, that indicate a lack of competence to practice +before the Commission. Rule 102(e)(1)(iv)(B). As a result of the conduct described above, +CohnReznick engaged in “improper professional conduct” within the meaning of Exchange Act +Section 4C(a)(2) and Rule 102(e)(1)(ii). + +41. As set forth above, CohnReznick should have known, that Sequential’s goodwill +was fully impaired by the 2017 third quarter and that Sequential’s financial statements were, as a +result, materially misstated and not presented in accordance with Generally Accepted Accounting +Principles (“GAAP”). Further, CohnReznick should have known there was not relevant and +reliable audit evidence to support Sequential’s accounting conclusion and in particular the +underlying assertions of management. Additionally, in the course of its 2017 year-end audit of +Sequential, CohnReznick should have known that Sequential’s impairment charge should have +been recorded as a third quarter event and that Sequential’s third quarter financial statements +therefore materially overstated the company’s assets and earnings. CohnReznick’s failures +violated its obligation to adhere to professional auditing standards. + +42. The two pre-issuance reviews of the Longfin audit engagement performed by +CohnReznick’s national office personnel failed to ensure that the audit was performed in +accordance with professional standards, resulting in CohnReznick issuing an unsupported audit +report that did not comply with PCAOB standards. Both reviews identified related party +commodity transactions as an area that required further follow-up by the engagement team, but the +engagement team did not apply additional appropriate scrutiny or engage in additional audit +procedures, and neither the national office senior manager nor the EQCR took steps to follow up. +Both reviews were also conducted without adequate guidance, and the national office review was +conducted on a highly compressed timetable that was not commensurate with the scope and +complexity of the review. + +Due Professional Care in the Performance of +Work (AS § 1015) + +43. AS § 1015 provides that auditors are to exercise due professional care in the +planning and performance of audits and the preparation of audit reports. + +44. AS § 1015.07 provides that auditors must maintain an attitude of professional +skepticism, which includes “a questioning mind and a critical assessment of audit evidence.” In +addition, AS § 1015.08 states the auditor should “consider the competency and sufficiency of the +evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism +should be exercised throughout the audit process.” + + + +15 +45. As a result of CohnReznick’s conduct described above, CohnReznick failed to +exercise due professional care and an attitude of professional skepticism in the Sequential and +Longfin engagements. + +Audit Risk (AS § 1101) + +46. AS § 1101 discusses the auditor's consideration of audit risk and provides that the +objective of the auditor is to conduct the audit of financial statements in a manner that reduces +audit risk to an appropriately low level. + +47. AS § 1101.03 requires the auditor to “plan and perform the audit to obtain +reasonable assurance about whether the financial statements are free of material misstatement due +to error or fraud.” It further requires the auditor to apply “due professional care, including +obtaining sufficient appropriate audit evidence.” + +48. As a result of CohnReznick’s conduct described above, CohnReznick failed to +perform auditing steps sufficient to reduce audit risk to an appropriate level in the Sequential and +Longfin engagements. + +Audit Evidence (AS § 1105) + +49. AS § 1105 establishes “requirements regarding designing and performing audit +procedures to obtain sufficient appropriate audit evidence.” It provides that audit evidence +“consists of both information that supports and corroborates management's assertions regarding the +financial statements or internal control over financial reporting and information that contradicts +such assertions.” + +50. AS § 1105.04 requires the auditor to “plan and perform audit procedures to obtain +sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.” + +51. AS § 1105.08 provides that the “reliability of evidence depends on the nature and +source of the evidence and the circumstances under which it is obtained,” including consideration +of its source and the manner in which the evidence is obtained by the auditor. + +52. As a result of CohnReznick’s conduct described above, CohnReznick failed to +obtain sufficient audit evidence to support its opinions in the Sequential and Longfin engagements. + + + +16 +Reviews of Interim Financial Information (AS § 4105) + +53. AS § 4105.01 “establish[es] standards and provide[s] guidance on the nature, +timing, and extent of the procedures to be performed by an independent accountant when +conducting a review of interim financial information…” + +54. Specifically, AS § 4105.22 requires an auditor to make additional inquiries or +perform additional procedures when the accountant becomes aware of information indicating that +the interim financials may not conform to GAAP. AS § 4105.28 requires that an auditor refrain +from completing a review and issuing a review report if it is unable to perform necessary review +procedures of the interim financial statements. + +55. As a result of CohnReznick’s conduct described above, CohnReznick failed to +comply with standards applicable to a review of interim financial statements, specifically AS §§ +4105.22 and 4105.28, in the Sequential matter, including by failing to adequately address +contradictory views expressed during the interim review process. + +Identifying and Assessing Risks of Material Misstatement (AS § 2110) + +56. AS § 2110 establishes requirements regarding the process of identifying and +assessing risks of material misstatement of the financial statements. + +57. As § 2110.05 provides that “[r]isks of material misstatement can arise from a +variety of sources, including external factors, such as conditions in the company's industry and +environment, and company-specific factors, such as the nature of the company, its activities, and +internal control over financial reporting.” It further requires auditors to perform procedures +“necessary to identify and appropriately assess the risks of material misstatement,” including +“consideration of both external factors and company-specific factors.” + +58. As a result of CohnReznick’s conduct described above, CohnReznick failed to +perform sufficient procedures to identify and assess risks of material misstatement arising from +Longfin’s business, particularly in light of its related party transactions and lack of sufficient +documentation relating thereto. + +The Auditor’s Responses to the Risks of Material Misstatement (AS § 2301) + +59. AS § 2301 requires that auditors implement appropriate responses to the risk of +material misstatements. + +60. Specifically, AS § 2301.42 provides “[t]he necessary extent of a substantive audit +procedure depend on the materiality of the account or disclosures, the assessed risk of material +misstatement, and the necessary degree of assurance from the procedure.” It goes on to explain +that “increasing the extent of an audit procedure cannot adequately address an assessed risk of + + +17 +material misstatement unless the evidence to be obtained from the procedure is reliable and +relevant.” + +61. As a result of CohnReznick’s conduct described above, CohnReznick failed to +appropriately respond to risks of material misstatement in the Sequential and Longfin +engagements. + +The Confirmation Process (AS § 2310) + +62. AS § 2310 provides guidance about the confirmation process in audits performed in +accordance with the standards of the PCAOB, and addresses “certain factors that affect the +reliability of confirmations.” + +63. AS § 2310.26 requires the auditor to “direct the confirmation request to a third +party who the auditor believes is knowledgeable about the information to be confirmed.” + +64. AS § 2310.27 further provides that the auditor should exercise professional +skepticism and “consider whether there is sufficient basis for concluding that the confirmation +request is being sent to a respondent from whom the auditor can expect the response will provide +meaningful and appropriate evidence.” + +65. As a result of CohnReznick’s conduct described above, CohnReznick failed to +adhere to the requirements of this standard in the Longfin engagement when it directed +confirmation requests to third parties in a manner that compromised their reliability. + +Related Parties (AS § 2410) + +66. AS § 2410 sets forth “requirements regarding the auditor's evaluation of a +company's identification of, accounting for, and disclosure of relationships and transactions +between the company and its related parties.” + +67. In particular, AS § 2410.03 requires the auditor to “perform procedures to obtain an +understanding of the company's relationships and transactions with its related parties that might +reasonably be expected to affect the risks of material misstatement of the financial statements in +conjunction with performing risk assessment procedures in accordance with AS 2110, Identifying +and Assessing Risks of Material Misstatement.” + +68. AS § 2410.11 further requires the auditor to design and perform “audit procedures +in a manner that addresses the risks of material misstatement associated with related parties and + + +18 +relationships and transactions with related parties.” + +69. As a result of CohnReznick’s conduct described above, CohnReznick failed to +perform sufficient procedures with respect to Longfin’s relationships and transactions with related +parties. + +Auditing Accounting Estimates (AS § 2501) + +70. AS § 2501 provides guidance to auditors “on obtaining and evaluating sufficient +appropriate evidential matter to support significant accounting estimates in an audit of financial +statements in accordance with the standards of the PCAOB.” + +71. AS § 2501.07 requires the auditor to obtain “sufficient appropriate evidential matter +to provide reasonable assurance that… [t]he accounting estimates are presented in conformity with +applicable accounting principles and are properly disclosed.” + +72. As a result of CohnReznick’s conduct described above, in the Sequential and +Longfin matters, CohnReznick failed to adequately evaluate the reasonableness of management’s +fair value estimates and thereby violated the foregoing standards. + +Auditing Fair Value Measurements (AS § 2502) + +73. AS § 2502 establishes “standards and provide guidance on auditing fair value +measurements and disclosures contained in financial statements.” + +74. AS § 2502.26 requires the auditor to evaluate whether “[m]anagement’s +assumptions are reasonable and reflect, or are not inconsistent with, market information,” whether +the fair value measurement “was determined using an appropriate model, if applicable” and +whether “[m]anagement used relevant information that was reasonably available at the time.” + +75. Further, AS § 2502.39 specifies that the auditor should evaluate “whether the data +on which the fair value measurements are based, including the data used in the work of a specialist, +is accurate, complete, and relevant; and whether fair value measurements have been properly +determined using such data and management's assumptions.” + +76. As a result of CohnReznick’s conduct described above, CohnReznick failed to +properly audit the fair value measurements in the Longfin engagement and thereby CohnReznick +violated the foregoing standards. + +Evaluating Audit Results (AS § 2810) + +77. AS § 2810.03 requires that “[i]n forming an opinion on whether the financial +statements are presented fairly, in all material respects, in conformity with the applicable financial + + +19 +reporting framework, the auditor should take into account all relevant audit evidence, regardless of +whether it appears to corroborate or to contradict the assertions in the financial statements.” + +78. As a result of CohnReznick’s conduct described above, in the Sequential +engagement CohnReznick violated this standard. + + Audit Documentation (AS § 1215) + +79. AS § 1215.06 requires that an “auditor must document the procedures performed, +evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. Audit documentation must clearly demonstrate that the work was in fact performed.” + +80. As a result of CohnReznick’s conduct described above, CohnReznick violated this +standard in the Sequential engagement. + +PCAOB Quality Control Standards (QC §§ 20 and 30) + +81. PCAOB Quality Control Standards, specifically QC § 20.01, provides that a “CPA +firm shall have a system of quality control for its accounting and auditing practice.” QC § 20.03 +broadly defines a system of quality control “as a process to provide the firm with reasonable +assurance that its personnel comply with applicant professional standards and the firm’s standards +of quality.” + +82. QC § 20.10 requires firms to “maintain objectivity” and remain impartial and +intellectually honest. In addition, QC § 20.17 requires a firm to have policies and procedures to +provide reasonable assurance that work performed by engagement personnel complies with +professional standards and the firm’s own standards of quality. QC § 20.18 provides that these +procedures should cover, among other things, appropriately supervising and documenting each +engagement. + +83. QC § 20.19 requires engagement personnel to consult, on a timely basis, with +individuals within or outside the firm “when appropriate (for example, when dealing with complex, +unusual, or unfamiliar issues.)” + +84. QC § 20.20 also imposes requirements on firms to properly monitor whether the +firm’s quality control policies and procedures are suitably designed and are being effectively +applied. + +85. PCAOB Quality Control Standard Section 30, Monitoring a CPA Firm’s +Accounting and Auditing Practice provides guidance on how a CPA firm implements the +monitoring element of a quality control system in its accounting and auditing practice. Monitoring +procedures taken as a whole should enable the firm to obtain reasonable assurance that its system + + +20 +of quality control is effective. A firm's monitoring procedures may include pre-issuance or post- +issuance review of selected engagements. + +86. As a result of CohnReznick’s conduct described above, CohnReznick violated QC +§ 20 and § 30 in the Sequential and Longfin engagements. + +COHNREZNICK WAS A CAUSE OF VIOLATIONS OF SECTIONS 13(a) AND +13(b)(2)(A) OF THE EXCHANGE ACT AND RULES 12b-20, +13a-1, 13a-11 AND 13a-13 THEREUNDER + +87. Section 13(a) of the Exchange Act requires all issuers with securities registered +under Section 12 of the Exchange Act to file periodic and other reports with the Commission +containing such information as the Commission’s rules prescribe. Pursuant to Section 13(a), the +Commission promulgated Rules 13a-1, 13a-11, and 13a-13, which require issuers to file annual, +current, and quarterly reports, respectively. + +88. Section 13(b)(2)(A) of the Exchange Act requires all issuers with securities +registered under Section 12 to make and keep books, records and accounts which, in reasonable +detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. In +addition, Exchange Act Rule 12b-20 requires that reports contain such further material information +as may be necessary to make the required statements, in light of the circumstances under which +they were made, not misleading. Scienter is not an element of these reporting provisions. + +89. In administrative proceedings, the Commission may impose sanctions upon any +person that is, was, or would be a cause of a violation, due to an act or omission the person knew or +should have known would contribute to such violation. In order to establish that a person caused a +non-scienter based violation, a showing of negligence will suffice. + +90. Sequential’s failure to record goodwill impairment in a timely manner rendered its +books, records and accounts materially inaccurate. Similarly, the financial statements that were +included in Sequential’s third quarter 2017 Form 10-Q, 2017 Form 10-K, and its third quarter +earnings release furnished on Form 8-K were materially misleading. CohnReznick’s failure to +abide by applicable PCAOB standards and perform appropriate audit and review procedures was a +cause of Sequential’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules +12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + +91. Longfin filed a materially false annual report on its 2017 Form 10-K. By not +conducting the audit of Longfin’s financial statements in accordance with applicable PCAOB +standards, and by allowing the issuance of an audit report, included in Longfin’s annual report, +falsely stating that it had conducted the audit in accordance with PCAOB standards, CohnReznick +was a cause of Longfin’s violation of Exchange Act Section 13(a) and Rule 13a-1 thereunder. + +COHNREZNICK VIOLATED RULE 2-02(b)(1) OF REGULATION S-X + + +21 + +92. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “whether +the audit was made in accordance with generally accepted auditing standards” (“GAAS”). +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the +standards of the PCAOB plus any applicable rules of the Commission.” See SEC Release No. 34- +49708 (May 14, 2004). + +93. Through the conduct described above, CohnReznick violated Regulation S-X Rule +2-02(b)(1) when CohnReznick issued (i) its audit report dated March 16, 2018, stating that +CohnReznick had conducted its audit of Sequential’s 2017 financial statements in accordance with +PCAOB standards when it had not, and (ii) its audit report dated April 2, 2018, stating that +CohnReznick had conducted its audit of Longfin’s 2017 financial statements in accordance with +PCAOB standards when it had not. + +F. FINDINGS + +94. Based on the foregoing, the Commission finds that Respondent committed +violations of Rule 2-02(b)(1) of Regulation S-X. + +95. Based on the foregoing, the Commission finds that Respondent caused (i) violations +Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 +thereunder by Sequential, and (ii) violations of Section 13(a) and Rule 13a-1 thereunder by +Longfin. + +96. Based on the foregoing, the Commission finds that Respondent engaged in +improper professional conduct pursuant to Sections 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii). + +G. UNDERTAKINGS +Client Acceptance + +97. Between the date of entry of this Order and the date on which CohnReznick +provides a copy of the Certification of Compliance to the Commission staff (the “Independent + + +22 +Consultant Review Period”), pursuant to Paragraph 99.C.4 below, CohnReznick will not accept +any New Audit Client8, if any of the following criteria apply to such potential client: + +(i) the new engagement would begin after September 30 of the year under audit for +December 31 year-ends, or more than nine (9) months after the prior fiscal year- +end date for entities with fiscal year-ends other than December 31; +(ii) the New Audit Client conducts the majority of its operations from outside of the +United States, unless such foreign operations of the New Audit Client are audited +by a PCAOB-registered firm serving as a component auditor; +(iii) the New Audit Client has an un-remediated material weakness in its internal +controls over financial reporting (a “MWICFR”); or +(iv) the New Audit Client has received an audit report containing an explanatory +paragraph indicating that a substantial doubt about its ability to continue as going +concern existed as of the end of the past fiscal year. +98. During the Independent Consultant Review Period, following CohnReznick’s +client acceptance process and prior to the Firm signing an engagement letter with any New Audit +Client, the independent consultant (“Independent Consultant”) retained pursuant to these +undertakings, shall determine, in its discretion, whether it approves CohnReznick’s decision to +accept the New Audit Client, taking into consideration the following factors: (i) whether the +proposed engagement partner, EQR, and engagement team members at the level of manager and +above possess the requisite competence, experience, and technical proficiency to conduct the +engagement in accordance with PCAOB auditing standards; (ii) whether, as of the date the +proposed new engagement is considered, CohnReznick’s policies, procedures, and quality control +system, as known or observed by the Independent Consultant at the time of acceptance are +sufficient for CohnReznick to conduct the engagement in accordance with such standards; (iii) +whether the staffing resources proposed to be dedicated to the engagement are sufficient to +conduct the engagement in accordance with such standards; and (iv) whether the New Audit +Client has reported a remediated MWICFR as of the previous fiscal year-end, and its impact on the +client acceptance decision. In the event the Independent Consultant disapproves the acceptance of +a New Audit Client, CohnReznick shall not accept the client. + +Independent Consultant + +99. Respondent CohnReznick has undertaken to retain, within 120 days after the entry +of this Order, an Independent Consultant, not unacceptable to the Commission staff. CohnReznick +shall provide to the Commission staff a copy of the engagement letter detailing the scope of the + +8 A New Audit Client is defined as an entity: (a) to which the Firm (including any future acquired or merged firm), in +the immediately prior financial reporting period, did not provide audit or review services, including any predecessor +to the entity; and (b) that is (i) an “Issuer,” as that term is defined in Section 2(a)(7) of the Sarbanes-Oxley Act of +2002 or (ii) is seeking an audit for the purpose of registering an offering with the Commission. + + +23 +Independent Consultant’s responsibilities. The Independent Consultant’s compensation and +expenses shall be borne exclusively by CohnReznick. + +A. Independence + +1. To ensure the independence of the Independent Consultant, +CohnReznick (1) shall not have the authority to terminate the +Independent Consultant or substitute another independent consultant +for the initial Independent Consultant, without the prior written +approval of the Commission staff; and (2) shall compensate the +Independent Consultant and persons engaged to assist the +Independent Consultant for services rendered pursuant to this Order +at their reasonable and customary rates. + +2. CohnReznick will require the Independent Consultant to enter into +an agreement that provides that, for the period of engagement and +for a period of two years from completion of the engagement, the +Independent Consultant shall not enter into any employment, +consultant, attorney-client, auditing or other professional +relationship with CohnReznick, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their +capacity as such. The agreement will also provide that the +Independent Consultant will require that any firm with which he/she +is affiliated or of which he/she is a member, and any person engaged +to assist the Independent Consultant in the performance of his/her +duties under this Order shall not, without prior written consent of the +Division of Enforcement, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with +CohnReznick, or any of its present or former affiliates, directors, +officers, partners, employees, or agents acting in their capacity as +such for the period of the engagement and for a period of two years +after the engagement. + +B. Scope of Independent Consultant’s Review. Within the time periods +specified below, the Independent Consultant will review and evaluate +CohnReznick’s audit, review, and quality control policies and procedures +applicable to Issuers regarding: + +1. The exercise of due professional care and professional skepticism +(See AS 1015 and AS 2401.13); + +2. Obtaining appropriate audit evidence that is sufficient to support the +opinion expressed in the auditor’s report, including using the + + +24 +conclusions of the company’s valuation specialist as audit evidence +and audit evidence in support of the footnotes to the audited +financial statements (See AS 1105); + +3. Identifying and assessing, and designing and implementing +appropriate responses to the risks of material misstatement of the +financial statements, including significant and fraud risks (See AS +2110 and AS 2301); + +4. The consideration of fraud in a financial statement audit (See AS +2401); + +5. The audit confirmation process (See AS 2310); + +6. Auditing related party transactions (See AS 2410); + +7. Evaluating reliance upon management representations (See AS +2805); + +8. Audit procedures concerning accounting estimates, including fair +value measurements and the impairment of goodwill (See AS 2501); + +9. The role and consideration of the findings of CohnReznick +valuation specialists when assisting engagement team with +impairment testing under ASC 350 (See AS 1210); + +10. The adequacy of interim review procedures in light of changes to +engagement team’s knowledge about entity’s business and +significant financial accounting and reporting issues identified in the +proceeding interim review or audit (See AS 4105); + +11. The adequacy of audit documentation that clearly demonstrates that +audit steps and procedures contained within CohnReznick’s audit +programs were in fact performed (See AS 1215); + +12. Formal or informal consultations with the Firm’s National +Assurance Group or Professional Practice Leaders, or any person or +group performing a similar function, concerning auditing or +accounting matters and the documentation of such consultations, +including but not limited to the scope of consultation, the +conclusions reached and the basis for those conclusions; + + + +25 +13. Performance and documentation of CohnReznick’s review program +or programs established in connection with the Firm’s compliance +with QC 20, System of Quality Control for a CPA Firm's +Accounting and Auditing Practice (such as ones presently +designated as Engagement Quality Control Reviews and, in-flight +reviews), including but not limited to the scope and extent of +procedures required under any review; the resolution of matters +brought to the attention of the engagement team by CohnReznick +personnel engaged in such reviews; and the documentation +associated with the reviews, including, if applicable, documentation +contained in the engagement work papers; + +14. The resolution and documentation of disputes, disagreements or +differences of opinion by and among the engagement team and +those consulted within the Firm; + +15. Performance and documentation of the Root Cause Analysis +program, reviews of restatements, and post-issuance review +programs; and + +16. The sufficiency of CohnReznick’s professional development and +training programs concerning the subject matters set forth in +subsections 1 through 15 above. + +CohnReznick shall cooperate fully with the Independent Consultant and shall provide +reasonable and timely access to firm personnel, information, and records as the Independent +Consultant may reasonably request for the Independent Consultant’s review and evaluation +described herein and the reports specified in Paragraph 99.C below. + +C. Independent Consultant Reports and Certifications. + +1. Within six (6) months of the Independent Consultant being retained, +CohnReznick shall require the Independent Consultant to issue a +detailed written report (“Report”) to CohnReznick: (a) summarizing +the Independent Consultant’s review and evaluation of the areas +identified in Paragraph 99.B above; and (b) making +recommendations, where appropriate, reasonably designed to ensure +that audits conducted by CohnReznick comply with Commission +regulations and with PCAOB standards and rules. CohnReznick +shall require the Independent Consultant to provide a copy of the + + +26 +Report to the Commission staff when the Report is issued. + +2. CohnReznick will adopt all recommendations of the Independent +Consultant in the Report. Provided, however, that within thirty (30) +days of issuance of the Report, CohnReznick may advise the +Independent Consultant in writing of any recommendation that it +considers to be unnecessary, unduly burdensome, or impractical. +CohnReznick need not adopt any such recommendation at that time, +but instead may propose in writing to the Independent Consultant +and the Commission staff an alternative policy or procedure +designed to achieve the same objective or purpose. CohnReznick +shall provide a copy of such written proposal to the Commission +staff within seven (7) days of issuance. CohnReznick and the +Independent Consultant will engage in good-faith negotiations in an +effort to reach agreement on any recommendations objected to by +CohnReznick. + +3. In the event that the Independent Consultant and CohnReznick are +unable to agree on an alternative proposal within sixty (60) days, +CohnReznick either will abide by the determinations of the +Independent Consultant or seek approval from the Commission staff +pursuant to Paragraph 99.A.1 above to engage, at CohnReznick’s +expense, a qualified third party acceptable to the Commission staff +to promptly resolve the issue(s). + +4. Within sixty (60) days of issuance of the Report, but not sooner than +thirty (30) days after a copy of the Report is provided to the +Commission staff, CohnReznick will certify to the Commission +staff in writing that it has adopted and has implemented or will +implement all recommendations of the Independent Consultant +(“Certification of Compliance”). CohnReznick will provide a copy +of the Certification of Compliance to the Commission staff. + +5. Within six (6) months of the issuance of the Report, CohnReznick +shall require the Independent Consultant to complete testing of +whether CohnReznick has implemented and enforced its written +policies and procedures concerning the areas specified in Paragraph +99.B above and assess the effectiveness of those policies and +procedures. Within thirty (30) days of the completion of this testing, +CohnReznick shall require the Independent Consultant to issue a +written final report summarizing the results of the Independent +Consultant’s testing and assessment (“Final Report”) and to provide +a copy of the Final Report to the Commission staff. At this time, if + + +27 +the Independent Consultant determines that CohnReznick has +implemented and adopted all recommendations set forth in the +Report, CohnReznick shall require the Independent Consultant to +certify in writing that CohnReznick has satisfied such undertakings +(“Independent Consultant Certification”) and provide a copy of this +certification to the Commission staff. In all events, CohnReznick +must complete all undertakings concerning the implementation of +the recommendations set forth in the Independent Consultant’s +Report and provide the Independent Consultant Certification to the +Commission staff no later than nineteen (19) months after the entry +of this Order. + +6. The Report, Final Report, Certification of Compliance, Independent +Consultant Certification, and any related correspondence or other +documents shall be submitted to Melissa Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549, with a copy +to Sam Waldon, Chief Counsel, Office of Chief Counsel of the +Enforcement Division. + +7. The Report and Final Report by the Independent Consultant will +likely include confidential financial, proprietary, competitive +business or commercial information. Public disclosure of these +reports could discourage cooperation, impede pending or potential +government investigations or undermine the objectives of the +reporting requirement. For these reasons, among others, these +reports and the contents thereof are intended to remain and shall +remain non-public, except (1) pursuant to court order, (2) as agreed +to by the parties in writing, (3) to the extent that the Commission +determines in its sole discretion that disclosure would be in +furtherance of the Commission’s discharge of its duties and +responsibilities, or (4) is otherwise required by law. + +D. CohnReznick’s CEO shall also certify, in writing, compliance with the +undertakings set forth above. The certification shall identify the +undertakings, provide written evidence of compliance in the form of a +narrative, and be supported by exhibits sufficient to demonstrate +compliance. The Commission staff may make reasonable requests for +further evidence of compliance, and CohnReznick agrees to provide such +evidence. This certification and supporting material shall be submitted to +Melissa Hodgman, Associate Director, Division of Enforcement, Securities +and Exchange Commission, 100 F St., N.E., Washington, DC 20549, with a +copy to the Office of Chief Counsel of the Enforcement Division, no later + + +28 +than sixty (60) days from the date of the completion of the undertakings. + +E. For good cause shown, the Commission staff may extend any of the +procedural dates relating to the undertakings. Deadlines for procedural dates +shall be counted in calendar days, except that if the last day falls on a +weekend or federal holiday, the next business day shall be considered to be +the last day. + +F. CohnReznick agrees that if the Division of Enforcement believes that +CohnReznick has not satisfied these undertakings, it may petition the +Commission to reopen the matter to determine whether additional sanctions +are appropriate. + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, +13a-1, 13a-11, and 13a-13 promulgated thereunder; and Rule 2-02(b)(1) of Regulation S-X. + + B. Respondent is censured. + +C. Respondent shall comply with its undertakings enumerated in Paragraphs 97-99 of +Section III above. + +D. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1.9 million to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +E. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + + +29 +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +CohnReznick LLP as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Melissa Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549 + + F. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph D above and shall be combined with the Fair Fund +established in the Commmission’s related civil action, SEC v. Longfin Corp., et. al., 18-cv-2977- +DLC (S.D.N.Y.) for distribution to harmed investors in accordance with the distribution plan +approved by the Court in that action. Amounts ordered to be paid as civil money penalties pursuant +to this Order shall be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees that in any +Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or +reduction of any award of compensatory damages by the amount of any part of Respondent’s +payment of a civil penalty in this action ("Penalty Offset"). If the court in any Related Investor +Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a +final order granting the Penalty Offset, notify the Commission's counsel in this action and pay the +amount of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall +not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + +30 + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4311.txt b/raw/aaer/2022/AAER-4311.txt new file mode 100644 index 0000000000000000000000000000000000000000..f80f2eb64d0caf9bc9a1fa7e6ae7bdb288b8b7a2 --- /dev/null +++ b/raw/aaer/2022/AAER-4311.txt @@ -0,0 +1,1126 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95071 / June 8, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4311 / June 8, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20894 + + + +In the Matter of + +STEVEN C. AVIS, CPA, + +and + +STEVEN W. HURD, CPA + +Respondents. + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS, PURSUANT +TO SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Steven C. +Avis (“Avis”) and Steven W. Hurd (“Hurd”) (collectively, “Respondents”) pursuant to Sections + +2 + + +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii)2 of +the Commission’s Rules of Practice. + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) that the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondents consent to the entry of this +Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Section 4C and +21C of the Securities and Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of +Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + +3 + + +SUMMARY +1. This matter involves Respondents’ improper professional conduct in connection +with their roles in Haynie & Company P.C.’s (“Haynie”) 2017 audit and 2018 interim reviews of +United Health Products, Inc.’s (“UHP”) financial statements. +2. UHP recorded two fraudulent revenue entries for its fiscal year 2017 that resulted in +material overstatements of its reported revenues and accounts receivable balances in its financial +statements included in each of its 2017 Forms 10-Q and 10-K, and related misstatements in its +2018 Forms 10-Q. UHP later restated these financial statements. +3. Avis served as the engagement partner and Hurd served as the audit manager on the +engagement team during the 2017 audit and the 2018 interim reviews of UHP. In those capacities, +Respondents failed to adhere to numerous standards of the Public Company Accounting Oversight +Board (“PCAOB”) by (1) failing to exercise due professional care and skepticism; (2) failing to +obtain sufficient appropriate audit evidence for revenue and accounts receivables; (3) failing to +adequately identify and examine a significant unusual transaction; (4) failing to assess the risks of +material misstatement and consider fraud; and (5) failing to investigate relevant information +received after Haynie issued its audit report. In addition, Avis (1) failed to properly supervise the +audit team during the 2017 audit; (2) failed to properly evaluate whether UHP’s financial +statements in its 2017 10-K were fairly presented; and (3) failed to address uncorrected material +misstatements of UHP’s 2017 revenues presented as comparative period results in UHP’s 2018 +interim financial statements in its 2018 10-Qs. +4. As a result, Respondents engaged in improper professional conduct within the +meaning of Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of +Practice and were a cause of certain of UHP’s violations of the reporting provisions under Section +13(a) of the Exchange Act. +RESPONDENTS +5. Avis, age 50, is a Certified Public Accountant (“CPA”) licensed to practice in Utah +and is a partner at Haynie & Company. Avis served as the engagement partner on Haynie’s 2017 +audit and 2018 interim reviews of UHP. +6. Hurd, age 36, is a CPA licensed to practice in Utah. Hurd served as the audit +manager on Haynie’s 2017 audit and 2018 interim reviews of UHP. +OTHER RELEVANT ENTITIES +7. UHP is a Nevada corporation with a principal office address in Henderson, Nevada +that develops and manufactures hemostatic gauze for the healthcare and wound care sectors. +UHP’s common stock is registered with the Commission pursuant to Exchange Act section 12(g) +and is quoted on the OTC Pink (ticker: UEEC). UHP files periodic reports, including Forms 10-K + +4 + + +and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and related rules +thereunder. At all relevant times, UHP followed a calendar year fiscal year. +8. Haynie is a PCAOB-registered accounting and auditing firm based in Salt Lake +City, UT. Haynie was appointed as UHP’s independent auditor in late March 2018 to audit UHP’s +fiscal year 2017 financial statements. Haynie continued as UHP’s auditor until its resignation in +December 2019 for reasons unrelated to the conduct described herein. +FACTS +A. UHP’s Fraudulent Revenue Recognition +9. UHP recorded two fraudulent revenue entries for purported sales transactions that +resulted in material overstatements of its reported revenues and accounts receivable balances in its +financial statements included in its Q1, Q2, and Q3 2017 Forms 10-Q and 2017 Form 10-K, and +related misstatements in the financial statements included in its 2018 Q1, Q2, and Q3 Forms 10-Q. +10. The first fraudulent entry involved UHP recording $130,725 of revenue as a March +31, 2017 sale of product to Customer-1 (the “March Revenue”), based on a fraudulent, back-dated +purchase order that UHP management procured from Customer-1 in May 2017 and which was +formally “cancelled” by Customer-1 the following day. UHP never shipped the product to +Customer-1 and no payment was sought or received from Customer-1. Nevertheless, when UHP +filed its Q1 2017 Form 10-Q on July 31, 2017, UHP fraudulently reported the March Revenue and +the full amount in its accounts receivable balance in its Q1 interim financial statements. UHP also +reported the revenue and full amount in its accounts receivable balance as reflected in the interim +financial statements in its Q2 and Q3 Forms 10-Q. As reflected in those filings, the March +Revenue accounted for 58% of reported revenue and 56% of its accounts receivable balance at Q1 +2017; over 49% of reported revenue for the first six months of 2017 and 78% of the accounts +receivable balance as of the end of Q2 2017; and over 39% of reported revenue for the first nine +months of 2017 and 79% of the accounts receivable balance as of the end of Q3 2017. +11. As described further herein, UHP ultimately removed the March Revenue from its +reported revenues and reduced the accounts receivable balance by the same amount when it filed +its 2017 annual financial statements, audited by Haynie, on Form 10-K. However, UHP neither +restated the 2017 interim financial statements nor made any disclosure of its removal of the March +Revenue from its revenue and accounts receivable figures in the accompanying notes to the 2017 +annual financial statements or otherwise when filing the 2017 Form 10-K. Moreover, UHP +continued to report the previously-reported 2017 revenue figures, inclusive of the March Revenue, +as comparative results in its 2018 interim financial statements in its Q1, Q2, and Q3 2018 Forms +10-Q, which were reviewed by Haynie. +12. The second fraudulent revenue entry involved UHP recording $438,596 of revenue +as a purported December 20, 2017 sale of product to Customer-2 (the “December Revenue”). This +purported purchase amount was exponentially larger than any prior purchases by Customer-2, +which was UHP’s largest customer and exclusive U.S. distributor. In fact, Customer-2 never + +5 + + +agreed to place such an order at any time, and no purchase order existed. Instead, UHP decided to +send the product in late December 2017 to be sterilized at its sterilization facility while UHP +attempted to persuade Customer-2 to make a purchase. In late January 2018, after Customer-2 +expressly refused UHP’s efforts to have Customer-2 purchase or store the product on any terms, +UHP unilaterally decided that it would, without Customer-2’s authorization or prior notice, ship +the product to Customer-2’s warehouse, with delivery occurring in early February 2018. +13. Despite the fact that there was no sale to Customer-2, UHP management included +the December Revenue in its reported revenue and the full amount in its accounts receivable +balance in UHP’s 2017 annual financial statements filed on Form 10-K. The December Revenue +accounted for 68% of UHP’s reported 2017 annual revenues and 98% of its accounts receivable +balance as of year-end 2017. +14. As discussed further herein, approximately one week after UHP had filed its 2017 +Form 10-K, Customer-2 returned an accounts receivable confirmation response to Haynie in which +it denied that it owed any amount to UHP as of year-end 2017 and that it had nothing to +substantiate the claimed balance “whether before or after December 31, 2017.” +15. Approximately two weeks later, by letter dated May 8, 2018, Customer-2 gave +formal notice to UHP management that it was terminating the distribution agreement based on +what it had discovered of UHP’s conduct and would not be paying for the unordered product. +UHP did not advise Haynie of Customer 2’s May 8, 2018 letter. +16. UHP continued to include the full amount of the December Revenue in its accounts +receivable balances in its Q1 and Q2 2018 Forms 10-Q, and in its Q3 2018 Form 10-Q, UHP +included the amount minus a write-off of $100,000 as a bad debt expense. UHP wrote off the +remaining balance in its 2018 Form 10-K filed on April 1, 2019. +B. Respondents’ Audit and Review Failures + i. Background + +17. Haynie was appointed as UHP’s independent auditor as of March 29, 2018 to audit +UHP’s 2017 annual financial statements. When Haynie began its work on the audit, Avis and +Hurd understood that UHP sought to be able to file its 2017 Form 10-K by April 17, 2018, UHP’s +extended deadline for relief under Commission rules. +18. Avis, Hurd, and other members of the Haynie audit team identified improper +revenue recognition as a significant risk during their 2017 audit planning for UHP. Through +Haynie’s 2017 audit procedures, Avis and Hurd were aware that, among other things, UHP had +written distribution agreements with its customers, that it was necessary for UHP’s product to be +shipped to a third-party sterilization facility for sterilization before it could be shipped to a +customer, and that UHP generally used third-party commercial shipping companies for shipments. +They also determined that UHP could not properly recognize revenue until delivery to the + +6 + + +customer’s facilities occurred. Hurd directly participated in Haynie’s revenue and accounts +receivable testing procedures. +19. Ultimately, UHP filed its 2017 Form 10-K on April 17, 2018 with Haynie’s +unqualified opinion, after sign-off by Hurd and final approval by Avis. As detailed below, the +2017 audit and 2018 interim reviews were flawed in their planning, supervision, and execution, +and Avis and Hurd failed to meet professional standards in a number of respects. +ii. Avis’s Audit and Review Failures with Respect to the March Revenue +20. UHP included the March Revenue in the files it provided to Haynie at the outset of +the audit, but in those files reflected it as revenue and a receivable owed by a commercial shipping +company. Haynie selected the March Revenue as part of its revenue testing procedures because it +exceeded Haynie’s dollar threshold for items deemed individually significant. Based on Haynie’s +inquiries of UHP management regarding the March Revenue, Avis was informed of management’s +explanation that no product was delivered to Customer-1 because it was lost in transit by a +commercial shipping company during shipment from UHP’s third-party sterilization facility to the +customer, and that UHP had booked the revenue and receivable as due from the shipping company +on the basis that UHP had filed a claim against the shipping company. Avis was also aware that +UHP management argued that the March Revenue should be recognized because the product had +been received by a third-party sterilization facility and because the shipping company was +responsible for the lost sale amount and UHP had filed a claim against the shipping company for +that amount. +21. Avis reviewed the situation with certain members of the audit team, including +Hurd, and determined that the transaction did not meet the revenue recognition criteria for a sale. +Avis then reviewed and approved a draft email Hurd prepared to UHP to explain Haynie’s +position, which Hurd sent to UHP on April 6, 2018. The email explained Haynie’s position that +UHP could not recognize revenue until delivery to the customer’s facilities occurred based on its +agreements with customers and other practices, and that because the shipping company was not the +intended customer and had no agreement to purchase the product it also could not be considered a +sale to the shipping company either. The email proposed that UHP reverse the revenue and related +accounts receivable balance. The email also advised that there were revenue cut off issues at year +end, including several entries for smaller sales recorded with late December 2017 dates in which +the product was not delivered until January 2018, which did not yet meet the revenue recognition +criteria, and would need to be recognized in the correct period. +22. After UHP’s CEO responded that he disagreed, Avis sent a follow up email on +April 7, 2018, which provided a further detailed explanation and analysis of the conditions +necessary for revenue recognition and reiterated that UHP needed to remove the March Revenue +and related accounts receivable amount from its 2017 year-end financial statements. Among other +things, Avis noted that they had reviewed UHP’s “sales agreements, [and] they are clearly marked +FOB Destination,” which “indicates that the risk of loss does not transfer from the seller to the + +7 + + +buyer until the product was received by the buyer.”4 Avis further explained that “FOB destination +coupled with the fact that the product must be sterilized prior to the sale taking place” meant that +for UHP the revenue recognition criteria “have not been met until after the product has been +sterilized and received by the customer.” Avis also reiterated that the entries for several smaller +year-end sales that were not delivered until January 2018, would also need to be removed from the +2017 revenues. +23. UHP removed the $130,725 March Revenue amounts from its revenue and +accounts receivable balances presented in its year-end 2017 annual financial statements filed on +Form 10-K. Avis accepted UHP’s removal without properly evaluating whether UHP’s 2017 +annual financial statements together with disclosures in the accompanying notes were fairly +presented in accordance with generally accepted accounting principles (“GAAP”). UHP did not +restate its 2017 interim financial statements at or prior to the time that it filed its 2017 Form 10-K +and UHP did not make any other type of disclosure in the accompanying notes to the annual +financial statements or otherwise. +24. Although Haynie was not the auditor that performed the reviews of UHP’s Q1, Q2, +and Q3 2017 Forms 10-Q, Avis was aware that the March Revenue of $130,725 had accounted for +significant percentages of the revenue and accounts receivable balances reported in those reports. +He was also aware that UHP’s original recording of revenue was erroneous. +25. ASC 250-10-45-23 requires that errors “in the financial statements of a prior period +discovered after [those] financial statements [were] issued, . . ., be reported as an error correction, +by restating the prior-period financial statements.” Avis did not consider or raise with UHP +whether UHP needed to restate its 2017 interim financial statements, and UHP made no such +restatement, either as amended Forms 10-Q or as part of the 2017 Form 10-K filing. As a result, +UHP’s filing of the 2017 Form 10-K annual financial statements with the subsumed reversal of +revenue and accounts receivable balances without disclosing the reversal in the notes to the +financial statements and without restating the previously issued interim financial statements was +not in accordance with GAAP. +26. In addition, when Avis proposed and accepted UHP’s removal of the March +Revenue from its 2017 annual financial statements as a year-end adjustment—which itself was not +in accordance with GAAP’s requirement for correction of a material error—Avis also failed to +consider requirements under GAAP for disclosure in the notes to the annual financial statements of +such a material year-end adjustment. ASC 270-10-50-2 notes that financial statement users often +make inferences about the fourth quarter when interim financial data and disclosures are not +separately reported for the fourth quarter, as in UHP’s case, by subtracting data based on the third- +quarter interim report from the annual results. That provision goes on to require disclosure in a + +4 “FOB” stands for “free on board” or “freight on board” and is a shipment term used to +designate the point at which the risk of loss for a shipment shifts from the seller to the buyer. +“FOB Origin” means that the risk of loss shifts from the seller to the buyer at the shipping point. +“FOB Destination” means that the seller has the risk of loss during shipment and it shifts to the +buyer when the goods are delivered to the customer’s destination. + +8 + + +note to the annual financial statements of, among other things, “the aggregate effect of year-end +adjustments that are material to the results of [the fourth] quarter” when, as here, the issuer has not +issued a separate fourth quarter report or disclosed the results of the fourth quarter in its annual +report. +27. The reversal of $130,725 of revenue attributable to the March Revenue that was +previously reported in the 2017 interim financial statements was material to Q4, as well as to a +user’s reasonable understanding of those previously-issued interim financial reports. UHP’s 2017 +10-K reported $645,652 in revenue for 2017. For the nine months ended September 30, 2017, +UHP had reported $336,543 (inclusive of the $130,725 improperly recognized as Q1 revenue), so a +user of the financial statements would reasonably infer $309,109 in revenue rather than the +$439,834 UHP’s records attributed to Q4 2017. +28. Avis also departed from PCAOB standards in the reviews of UHP’s 2018 interim +financial statements in relation to the March Revenue. Even though Avis had determined that the +March Revenue should never have been recognized, UHP’s 2018 interim financial statements +continued to report the materially misstated 2017 quarterly revenue results that included the March +Revenue amount when presenting the 2017 periods as comparative results in UHP’s Q1, Q2, and +Q3 2018 financial statements filed on Forms 10-Q. Avis never considered or took any steps to +address UHP’s continued reporting of those materially misstated 2017 comparative period results +in the financial statements presented in each of UHP’s 2018 Forms 10-Q. +iii. Avis’s and Hurd’s Audit Failures with Respect to the December Revenue +29. The initial trial balance and general ledger that UHP provided to Haynie at the +outset of the 2017 audit did not include the December Revenue, and as a result it was not part of +Haynie’s initial selections of sales for testing. With the exception of the March Revenue, all of the +other revenue entries were each for less than $20,000. Haynie’s initial selections included, among +others, the March Revenue entry (as discussed above), entries for sales to Customer-2 and another +customer that were dated December 28, 2017, and a number of entries for other sales to +Customer-2 on various dates throughout 2017. Hurd directly participated in Haynie’s revenue and +accounts receivable testing procedures and was involved in the discussions and determinations +regarding the March Revenue and other matters as described above in paragraphs 17-22, all of +which occurred prior to Haynie selecting the December Revenue for testing. +30. After Haynie had made its initial revenue testing selections, UHP provided updated +records that included the purported December Revenue of $438,596. Once UHP had removed the +March Revenue and moved smaller late December 2017 sales that were not delivered until 2018 to +the Q1 2018 period, the December Revenue accounted for 68% of UHP’s 2017 annual revenue and +constituted virtually all of the revenue UHP recorded for Q4 2017. +31. As discussed in more detail below, the engagement team failed to plan and execute +appropriate steps to obtain sufficient appropriate audit evidence to substantiate the December +Revenue. In an email dated April 12, 2018, Hurd added the December Revenue to Haynie’s + +9 + + +revenue testing selections, which asked that UHP provide copies of the invoice, shipping +document, and the date payment, if any, was received for the selections. +32. Although Avis and Hurd had reviewed the prior auditor’s 2016 audit work papers +which showed that purchase orders had been obtained with respect to UHP sales to Customer-2 +and other customers during 2016, UHP’s invoices each listed an associated PO number on them, +and UHP’s distribution agreement with Customer-2 provided that Customer-2 “has no obligation +to purchase any Products except as stated in a written purchase order,” Haynie’s revenue testing +request did not ask for purchase orders, and no purchase order for the December Revenue was later +requested or obtained by Haynie. As such, the engagement team either failed to obtain a sufficient +understanding of UHP’s sales process or failed to use that understanding to inform its audit +procedures. The engagement team also did not request or document an understanding of the +business purpose, including any explanation of why Customer-2 would make such a large purchase +in one order, contrary to its prior purchase patterns. +33. In response to Hurd’s testing request for the December Revenue, on April 13, 2018, +UHP provided Avis, Hurd, and others at Haynie with a purported invoice for the December +Revenue, and on April 16, 2018, UHP initially provided a tracking number that did not work and +after Hurd followed up UHP provided a new tracking number later that day. +34. The invoice UHP provided listed a purchase date and shipment date of December +20, 2017, a delivery address in Devens, MA, a PO number, freight terms of “FOB Origin,” and +payment terms of 120 days. Avis and Hurd knew or should have known that both the 120-day +payment term and “FOB Origin” term were inconsistent with the other invoices Haynie obtained +involving Customer-2 and with express terms in UHP’s distribution agreement with Customer-2. +Notwithstanding the “FOB Origin” freight term in the invoice, the engagement team did not +inquire about that listed term and instead analyzed the sale as if an “FOB Destination” term +applied. Avis, Hurd, and the engagement team failed to engage in any adequate analysis of these +inconsistencies with other invoices and the distribution agreement’s terms and failed to document +any management explanations that may have been provided. +35. With respect to the shipping tracking number, after receiving the newly-provided +number, Hurd forwarded it to the audit senior on the engagement team and asked whether the +number worked. The available information that could be obtained by entering the tracking number +on the shipping company’s website was limited to the dates of shipment and delivery, the city and +state of the shipping and delivery locations, the number of pieces in the shipment, and the total +weight of the shipment. It did not identify the shipper’s name or full address from where it shipped +or the recipient name or the full address to which it was delivered. In fact, the tracking number +provided was for a shipment from UHP’s storage facility that was delivered to its third-party +sterilization facility—and not Customer-2. +36. The audit senior entered the tracking number into the shipper’s website, which led +to the following email exchange between the audit senior and Hurd: + +10 + + + “Hey Steve, I do see it shipped from Indianapolis and arrived in Newark NJ on +12/26. Did they ship this one from a different location than all the others then?” + Hurd replied, “Maybe” and then noted that UHP had multiple locations for +inventory and that sales orders “pass through a sterilization process at a 3rd party +facility before they get shipped out, so it’s likely they shipped from their warehouse +to a sterilization facility in Indianapolis before they sent out the final shipment to +the customer in Newark, NJ, which is what we are seeing. It probably doesn’t give +you a lot of details on that shipping info, does it?” + The audit senior replied, “Ok, no I don’t have a lot of info on it. I can see it’s +shipping from IN, and that it’s 3 pieces, a total of 625 lbs, which I would expect to +be quite heavy because of the amount being shipped per the invoice. Are you ok +with me documenting that then wrapping up the sales testing?” + Hurd answered, “Yeah, sounds like that information lines up (and is probably all +we’re really going to be able to see), so let’s document that delivery has occurred +and wrap up sales testing based on that.” +37. Not only was the Indianapolis location a different city than all other shipments as +specifically noted by the audit senior, but the Newark, NJ location was also not a city that UHP had +ever shipped to for Customer-2 before and the location did not match the shipping address of +Devens, MA listed on the invoice. Nor did Hurd make, or instruct others to make, any inquiries to +request additional information or to take steps to determine whether Customer-2 had any locations +in Newark, NJ. +38. Hurd also did not raise any of the uncertainties and discrepancies from the invoice +or available shipping information from the tracking number with Avis. Instead, despite his +awareness that product delivery involved two shipments and his acknowledgement of the +uncertainty based on the limited information provided by the tracking number, Hurd concluded +that the tracking information was sufficient evidence of delivery to Customer-2. Not only was the +available information insufficient to conclude that delivery was to Customer-2—as opposed to the +sterilization facility or some other location—but the fact that the shipping point and delivery point +cities were different from all of other shipments constituted additional unresolved red flags. +39. Moreover, the revenue testing work papers that Hurd signed off on did not note or +suggest these uncertainties or discrepancies in the invoice or shipping documentation, so a +reviewer of the work paper would not have been alerted to them. To the contrary, the work paper +asserted: “[Haynie] received the [shipment] tracking number from the client and noted the +shipment was shipped on 12/20/17 from Indianapolis and arrived in Newark NJ on 12/26/17” and +that “[a]s the shipment details show the final delivery from the sterilization faciility [sic] to the +customer, we consider the product as delivered in 2017.” +40. The December Revenue also comprised over 98 percent of UHP’s total accounts +receivable balance at year end. Yet Avis and Hurd determined to conclude the audit without + +11 + + +receipt of the confirmation that it had sent to Customer-2 and without sufficient alternative +procedures for testing of revenue and accounts receivable. +41. Avis and Hurd also failed to appropriately respond to additional unusual +circumstances surrounding the confirmation response. Specifically, on April 16, 2018, a member +of UHP management told Hurd that he spoke with an individual at Customer-2 who had told him +that the confirmation was sent back to the Haynie audit team member indicated on the +confirmation. Hurd responded to UHP, in an email copying Avis, that both he and that audit team +member had checked to confirm it wasn’t missed on their end and had not found anything, and +further explained that “[w]e are hoping [Customer-2 will] get us a response back ASAP since +payment isn’t due on those AR balances until 4/30, making alternative procedures for that sale +difficult.” Neither Avis nor Hurd took measures to have the audit team follow up directly with +anyone at Customer-2 and took no further steps to determine what had occurred with respect to the +confirmation. Instead, Hurd signed off on the accounts receivable work paper that stated that a +confirmation from Customer-2 was not received and cited alternative procedures that were limited +to the deficient revenue testing procedures discussed above along with noting from a review of the +general ledger that UHP regularly received payment from Customer-2. However, Customer-2’s +prior payment history was of limited relevance given that, among other things, the December +Revenue was exponentially larger than any prior sale and its unusual purported extended payment +terms. +42. It was not until the morning of April 17, 2018, the date that UHP’s Form 10-K was +filed, that Haynie requested that UHP provide a copy of its distribution agreement with +Customer-2. That request was prompted by the audit senior who noted in an email to Hurd and +Avis the distribution agreement “could help support the large sale [to Customer-2] right at year- +end” and “also could indicate if there’s any issues with revenue recognition (like … if [Customer-2 +has] a right of return, or if [Customer-2] does not need to pay until they’ve sold the product).” A +few minutes later, Avis replied, “We should get to the bottom of this.” +43. UHP emailed the requested distribution agreement to Hurd and others a few hours +later. The distribution agreement was made part of Haynie’s work papers with a note on it, signed +off on by Hurd, stating that it was “reviewed to ensure there were no provisions that would affect +the Company’s revenue recognition policies.” However, the note and other work papers failed to +identify or address the inconsistencies and gaps between the audit evidence and the distribution +agreement, such as discrepancies in payment and freight terms and their failure to obtain +Customer-2’s purchase order. +44. In fact, the only specific term of the distribution agreement addressed in the note on +the work paper related to the fact that “the customer does have the right to return product that has +not been sold within the preceding 9 months,” but dismissed this as affecting revenue recognition +on the basis that “per review of the GL detail, … the Company has had no returns … through the +date of fieldwork from any customers and management does not anticipate that any returns in 2018 +would be material to the financial statements.” However, even that justification was lacking given +that the December Revenue was exponentially larger than any prior sales. + +12 + + +45. Notwithstanding numerous unresolved red flags regarding the December Revenue, +Hurd signed off on, and Avis provided final approval for, the issuance of an unqualified audit +opinion later that day, which UHP included when it filed its 2017 Form 10-K on April 17, 2018. +iv. Avis and Hurd Failed to Investigate or Address Customer-2’s Accounts +Receivable Confirmation Response +46. On the morning of April 25, 2018, approximately one week after Haynie issued its +unqualified opinion on UHP’s 2017 financial statements, Customer-2 emailed its accounts +receivable confirmation response to the designated Haynie engagement team member. +Customer-2’s response stated that its records indicated that a balance of zero dollars was due to +UHP as of December 31, 2017, and provided the following statement under the section for +additional information to assist the auditors in reconciling any differences: “All invoices received +by [Customer-2] on or before December 31, 2017 were paid in full as of that date. We have +nothing to substantiate the [$447,574.08] amount stated … above, whether before or after +December 31, 2017.” The confirmation response was signed and dated April 18, 2018. +47. Neither Hurd nor Avis took any steps to investigate Customer-2’s response. +Instead, following a discussion between Avis and Hurd, Hurd sent an email to UHP management, +copying Avis, that forwarded the confirmation response but affirmed that he and Avis “still feel +comfortable with the AR balance being correct.” Without having asked for any explanation from +management as to why Customer-2, as of April 18, 2018 when it was signed—which was within +days of the purported extended payment due date—would still be unaware of any liabilities due +“whether before or after December 31, 2017” as was stated in the response—the email instead +indicated that the issue was “whether the Company is experiencing delays in delivering their +invoices” and recommended “that those invoices are sent out timely after shipment of goods.” +48. Neither the Customer-2 confirmation response nor the email to UHP management +were made part of the 2017 audit work papers, and no procedures or notes addressing it were +documented in any work papers. Avis and Hurd also failed to address the Customer-2 +confirmation response even after learning during their Q1, Q2, and Q3 2018 interim review +procedures that no payment had been made by Customer-2, nor after UHP had written off the full +balance of the receivable for the December Revenue as of year-end 2018. +VIOLATIONS +A. Rule 102(e) of the Commission’s Rules of Practice and Exchange Act Section 4C +49. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Section 4C(b) of the +Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice define improper +professional conduct with respect to persons licensed to practice as accountants as including +either of two types of negligent conduct, (1) a single instance of highly unreasonable conduct + +13 + + +that results in a violation of professional standards in circumstances in which heightened scrutiny +is warranted; or (2) repeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards that indicate a lack of competence to practice before the +Commission. + +i. Avis Failed to Adhere to PCAOB Auditing Standards in Connection with the +March Revenue +Failure to Exercise Due Professional Care and +Evaluate Audit Results + +50. PCAOB Auditing Standard (“AS”) 1015, Due Professional Care in the +Performance of Work, requires the auditor to exercise “due professional care” in the planning and +performance of the audit,” and that the auditor “plan and perform his or her work with due +professional care.” (AS 1015.01, 02). AS 2810, Evaluating Audit Results, requires an auditor to +“evaluate whether the financial statements are presented fairly, in all material respects, in +conformity with the applicable financial reporting framework.” (AS 2810.30). The auditor +“should evaluate whether the financial statements contain the information essential for a fair +presentation of the financial statements,” including by considering “the form, arrangement, and +content of the financial statements (including the accompanying notes). . .”. (AS 2810.31). +51. As set forth above, after Avis determined that the March Revenue should never +have been recognized by UHP at any time, Avis should have known that UHP’s 2017 annual +financial statements and accompanying notes that were filed on Form 10-K failed to comply with +GAAP because there was no prior or accompanying restatement of the 2017 quarterly financial +statements at the time of the filing and the removal of the March Revenue amount from the +revenue and accounts receivable balances presented was not disclosed in the accompanying notes +to the financial statements. +52. As a result of his conduct described above, Avis departed from AS 1015 by failing +to exercise due care in not considering the applicability of ASC 250 and ASC 270. Similarly, Avis +departed from AS 2810 by failing to evaluate whether UHP’s financial statements and the +accompanying notes thereto in the 2017 10-K were fairly presented. +Failure to Address Material Misstatements in Interim Reviews +53. AS 4105, Reviews of Interim Financial Information, provides that “[m]isstatements +identified by the accountant or brought to the accountant's attention, including inadequate +disclosure, should be evaluated individually and in the aggregate to determine whether material +modification should be made to the interim financial information for it to conform with [GAAP].” +(AS 4105.26). In doing so, “[t]he accountant should use his or her professional judgment in +evaluating the materiality of any likely misstatements that the entity has not corrected” and +“consider matters such as … whether the misstatements originated in the preceding year or interim +periods of the current year . . . [and] materiality judgments made in conjunction with the current or + +14 + + +prior year's annual audit . . . .” (AS 4105.26). The requirements of AS 1015 to exercise due +professional care are also applicable to reviews of interim financial information. (AS 4105.01). +54. As described above, Avis determined during the 2017 audit that the March Revenue +that had been recognized in Q1 2017 should never have been recognized as revenue. Nevertheless, +Avis failed to take any action to address the fact that the originally-reported revenue figures from +the 2017 interim financial statements were presented in the 2018 interim financial statements as +comparative period results filed in UHP’s Q1, Q2, and Q3 2018 Forms 10-Q. +55. As a result of his conduct described above, Avis departed from AS 4105 and AS +1015 in the Q1, Q2, and Q3 2018 interim reviews. +ii. Avis and Hurd Failed to Adhere to PCAOB Standards in Connection with the +December Revenue +Failures to Exercise Due Professional Care and to Obtain +Sufficient Appropriate Audit Evidence + +56. AS 1015 requires the auditor to use “reasonable care and diligence” in conducting +an audit, including exercising professional skepticism, in order to obtain reasonable assurance +about whether financial statements are free of material misstatement. (AS 1015.05, .07, .10). +“Professional skepticism is an attitude that includes a questioning mind and a critical assessment of +audit evidence” and the auditor should “consider the competency and sufficiency of the evidence.” +(AS 1015.07, 08). “The independent auditor’s objective is to obtain sufficient appropriate +evidential matter to provide him or her with a reasonable basis for forming an opinion.” In +addition, “judgment is required in interpreting the results of audit testing and evaluating audit +evidence.” (AS 1015.11). The engagement partner is responsible for supervising the engagement +team. (AS 1015.06). +57. AS 1105, Audit Evidence, provides that “[t]he auditor must plan and perform audit +procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or +her opinion.” (AS 1105.04). “Appropriateness is the measure of the quality of audit evidence, i.e., +its relevance and reliability. To be appropriate, audit evidence must be both relevant and reliable +in providing support for the conclusions on which the auditor's opinion is based.” (AS 1105.06). +Moreover, “[i]f audit evidence obtained from one source is inconsistent with that obtained from +another, or if the auditor has doubts about the reliability of information to be used as audit +evidence, the auditor should perform the audit procedures necessary to resolve the matter and +should determine the effect, if any, on other aspects of the audit.” (AS 1105.29). +58. As set forth above, the engagement team had identified revenue recognition as a +significant risk during audit planning. Moreover, prior to the engagement team performing any +audit procedures relating to the December Revenue, both Avis and Hurd were knowledgeable +about the material revenue and accounts receivable misstatements that UHP had recorded for the +March Revenue, as well as the revenue recognition cut-off issues that required correction, which +should have increased the perceived risk. Avis and Hurd were also aware of multiple additional + +15 + + +red flags concerning the December Revenue, including their awareness that: (i) it was not included +in the initial files that UHP provided to Haynie in late March 2018; (ii) it was a purported sale +occurring right at year-end, which constituted more than 68% of revenues for the entire year and +98% of the year-end accounts receivable balance; (iii) it was exponentially larger than any prior +sale to Customer-2 or any other customer; (iv) no payment had been made due to the purported +extended payment terms and none was expected to be made prior to UHP’s extended deadline for +filing its 2017 Form 10-K; and (v) there was no confirmation response received from Customer-2. +59. Accordingly, Avis and Hurd were on notice that the December Revenue required +heightened scrutiny, yet they failed to take steps to ensure that the engagement team obtained +sufficient appropriate audit evidence as required and failed to exercise due professional care and +professional skepticism. Among other things, as described above, Avis and Hurd failed to take +steps to ensure that the engagement team obtained a purchase order or other evidence that there +was an arrangement for the December Revenue in circumstances in which they knew or should +have known of the requirement for a purchase order under the distribution agreement and that it +was UHP’s standard practice to obtain a purchase order prior to shipping goods to a customer. +60. The audit evidence the engagement team did obtain with respect to the December +Revenue was both insufficient and unreliable for revenue and accounts receivable testing. As +detailed above, the information in the UHP-generated invoice had multiple unresolved +inconsistencies with both other invoices to Customer-2 and the distribution agreement. The limited +information obtained from the shipping tracking number revealed additional inconsistencies and +was insufficient to substantiate that delivery to Customer-2 had occurred by December 31, 2017. +Similarly, Customer-2’s prior payment history was of limited relevance given that the December +Revenue was exponentially larger than any prior sale and the purported extended payment terms. +61. As a result of their conduct, Avis and Hurd departed from AS 1015 by failing to +exercise due professional care and professional skepticism in connection with Haynie’s testing of +the December Revenue. Avis and Hurd also departed from AS 1105 by failing to obtain sufficient +appropriate audit evidence to substantiate UHP’s recognition of the revenue and the receivable. +Failures to Identify and Assess the Risks of Material Misstatement and Consideration of Fraud +62. AS 2110, Identifying and Assessing Risks of Material Misstatement, provides that +“the objective of the auditor is to identify and appropriately assess the risks of material +misstatement, thereby providing a basis for designing and implementing responses to the risks of +material misstatement.” (AS 2110.03). To that end, among other things, the auditor must obtain +“an understanding of the nature of the company” and “an understanding of internal control +includ[ing] evaluating the design of controls that are relevant to the audit and determining whether +the controls have been implemented”. (AS 2110.10, .20). Further, the auditor's inquiries regarding +fraud risks should include inquiries of management regarding “[w]hether the company has entered +into any significant unusual transactions and, if so, the nature, terms, and business purpose (or the +lack thereof) of those transactions . . .” (AS 2110.56). + +16 + + +63. AS 2401, Consideration of Fraud in a Financial Statement Audit, states that the +term significant unusual transactions refers to “[s]ignificant transactions that are outside of the +normal course of business for the company or that otherwise appear to be unusual due to their +timing, size or nature” and “may be used to engage in fraudulent financial reporting. . . .” (AS +2401.66). Further, AS 2401.66A provides: +The auditor should design and perform procedures to obtain an understanding of the +business purpose (or the lack thereof) of each significant unusual transaction that the +auditor has identified. The procedures should include: +a. Reading the underlying documentation and evaluating whether the terms and other +information about the transaction are consistent with explanations from inquiries +and other audit evidence about the business purpose (or the lack thereof) of the +transaction; +b. Determining whether the transaction has been authorized and approved in +accordance with the company's established policies and procedures; +c. Evaluating the financial capability of the other parties with respect to significant +uncollected balances, loan commitments, supply arrangements, guarantees, and +other obligations, if any; and +d. Performing other procedures as necessary depending on the identified and assessed +risks of material misstatement. (AS 2401.66A). +64. Finally, under AS 2110.74, “[t]he auditor's assessment of the risks of material +misstatement, including fraud risks, should continue throughout the audit. When the auditor +obtains audit evidence during the course of the audit that contradicts the audit evidence on which +the auditor originally based his or her risk assessment, the auditor should revise the risk assessment +and modify planned audit procedures or perform additional procedures in response to the revised +risk assessments.” +65. Avis and Hurd departed from these PCAOB standards, both in their initial inquiries +and assessments and throughout the audit. Avis and Hurd knew or should have known that the +December Revenue was a significant unusual transaction due to its timing, size, and nature, yet +failed to identify and assess it as such. It presented as a sale occurring near year-end, comprised +over 68% of UHP’s revenue for all of 2017, and was exponentially larger than any other sale to +Customer-2. Among other things, they either failed to obtain a sufficient understanding of UHP’s +distribution agreement key terms with customers and its sterilization and shipping process or failed +to use such understanding as a basis for designing and implementing responses to the risks of +material misstatements. Accordingly, they did not take steps to ensure that customer purchase +orders were obtained and reviewed by the engagement team in their testing and failed to address +the insufficiency of the tracking number as sufficient appropriate evidence. In addition, neither +Avis nor Hurd took any steps to obtain, or have others obtain, a documented understanding as to +why Customer-2 would place an order of that size, which was contrary to prior purchase patterns. + +17 + + +66. Similarly, Avis and Hurd failed to properly evaluate the underlying +documentation’s inconsistencies with the explanations from inquiries and the other audit evidence, +including failing to identify that the transaction was not in accordance with UHP’s established +policies and procedures, which required a purchase order from Customer-2. Avis and Hurd +likewise failed to revise Haynie’s risk assessments or design additional audit procedures as +required for this significant unusual transaction. Reflective of the fact that no procedures were +designed or performed addressing this significant unusual transaction, Hurd prepared and Avis +reviewed an audit completion work paper that indicated there were no significant unusual +transactions encountered during the audit and that additional procedures were not applicable. + +67. As a result of their conduct described above, Avis and Hurd departed from the +standards of AS 2110 and AS 2401. + +Failures to Address Subsequent Discovery of Facts + +68. AS 2905, Subsequent Discovery of Facts Existing at the Date of the Auditor’s +Report, provides: “When the auditor becomes aware of information which relates to financial +statements previously reported on by him, but which was not known to him at the date of his +report, and which is of such a nature and from such a source that he would have investigated it had +it come to his attention during the course of his audit, he should, as soon as practicable, undertake +to determine whether the information is reliable and whether the facts existed at the date of his +report. In this connection, the auditor should discuss the matter with his client at whatever +management levels he deems appropriate, including the board of directors, and request cooperation +in whatever investigation may be necessary.” (AS 2905.04). +69. As set forth above, approximately one week after Haynie signed off on the 2017 +audit, Customer-2 emailed back its confirmation response asserting that it did not owe any amount +to UHP as of December 31, 2017, in contrast to the $447,574.08 figure claimed by UHP on the +confirmation request. The confirmation response further provided the explanation that Customer-2 +had nothing to substantiate the $447,574.08 balance, “whether before or after December 31, 2017” +(emphasis added). +70. Despite receiving this significant new information which called into question the +recognition of the revenue and accounts receivable balance for the December Revenue, neither +Avis nor Hurd took any additional steps or instructed others to take steps upon receiving the +confirmation response. In addition, the assumption by Avis and Hurd that the response was likely +due to the UHP having sent the invoice late would not have been a reasonable explanation given +the fact that the response was returned on April 25, 2018 stating that the Customer-2 had nothing to +substantiate the purported amount due “whether before or after December 31, 2017.” +71. As a result of their conduct described above, Respondents departed from the +standards of AS 2905. + +18 + + +Avis’s Failure To Supervise +72. AS 1201, Supervision of the Audit Engagement, provides that “[t]he engagement +partner is responsible for the engagement and its performance. Accordingly, the engagement +partner is responsible for proper supervision of the work of engagement team members and for +compliance with PCAOB standards…” (AS 1201.03). Avis’s supervision of the 2017 engagement +team constituted a departure from AS 1201 given the various deficiencies in the audit evidence and +procedures followed in testing the December Revenue. +73. As set forth above, Avis was aware of the magnitude of the December Revenue as +well as numerous red flags, yet failed to ensure that the engagement team plan and execute +appropriate audit procedures. Avis provided his final sign off for Haynie to issue its 2017 audit +opinion while either being aware of the deficiencies in the audit evidence or having failed to take +appropriate steps to sufficiently inquire about the evidence relied on to substantiate the December +Revenue. Avis also failed to ensure that the engagement team took steps to address the subsequent +receipt of Customer-2’s confirmation response. +74. As a result of his conduct described above, Avis departed from the standards of AS +1201. + +B. Causing Violations of Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 + +75. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +that every issuer of a security registered pursuant to Section 12 of the Exchange Act file with the +Commission annual reports and quarterly reports as the Commission may require. The +obligation to file such reports embodies the requirement that they be true and correct. +76. UHP’s annual report on Form 10-K for fiscal year 2017 included Haynie’s audit +opinion that stated that the audit was conducted “in accordance with the standards of the +PCAOB” and that UHP’s financial statements presented fairly, in all material respects, the +company’s financial position and results. These statements were materially misleading. As a +result of Respondents’ above-described conduct, Haynie’s 2017 audit was not conducted in +accordance with PCAOB standards and the financial statements included in UHP’s 2017 Form +10-K were materially misstated. In addition, each of UHP’s 2018 Forms 10-Q included the +materially misstated 2017 revenues as comparative results in the financial statements. Avis and +Hurd knew or should have known that their acts or omissions would contribute to UHP’s filing +of the false 2017 Form 10-K for 2017 and Avis should have known that his acts or omissions +would contribute to UHP’s filing of the false Forms 10-Q for 2018. +FINDINGS +77. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct within the meaning of Sections 4C(a)(2) and 4C(b)(2)(A) of the +Exchange Act and Rules 102(e)(1)(ii) and 102(e)(1)(iv)(B)(1) and (2) of the Commission’s Rules +of Practice. The conduct by Respondents involved repeated instances of unreasonable conduct, + +19 + + +each resulting in violations of PCAOB standards and indicating a lack of competence. The +conduct by Respondents also satisfies the standard of at least a single instance of highly +unreasonable conduct resulting in violations of PCAOB standards in circumstances in which +heightened scrutiny was warranted. +78. Based on the foregoing, the Commission finds that Avis and Hurd were a cause of +UHP’s violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder and that Avis +was also a cause of UHP’s violations of Section 13(a) of the Exchange Act and Rule 13a-13 +thereunder. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately that: + +A. Pursuant to Section 21C of the Exchange Act, Avis shall cease and desist from committing +or causing any violations and any future violations of Section 13(a) of the Exchange Act and +Rules 13a-1 and 13-13 thereunder. +B. Pursuant to Section 21C of the Exchange Act, Hurd shall cease and desist from committing +or causing any violations and any future violations of Section 13(a) of the Exchange Act and +Rule 13a-1 thereunder. +C. Avis is denied the privilege of appearing or practicing before the Commission as an +accountant. +D. After three years from the date of the Order, Avis may request that the Commission +consider his reinstatement by submitting an application to the attention of the Office of the +Chief Accountant. +E. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, Avis shall submit a written statement attesting to an undertaking to have his +work reviewed by the independent audit committee of any public company for which he +works or in some other manner acceptable to the Commission, as long as Avis practices +before the Commission in this capacity and will comply with any Commission or other +requirements related to the appearance and practice before the Commission as an +accountant. +F. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) + +20 + + +of the Exchange Act, as a preparer or reviewer, or as a person responsible for the +preparation or review, of any public company’s financial statements that are filed with the +Commission, Avis shall submit a statement prepared by the audit committee(s) with which +he will be associated, including the following information: +1. A summary of the responsibilities and duties of the specific audit committee(s) with +which Avis will be associated; +2. A description of Avis’s role on the specific audit committee(s) with which he will +be associated; +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; +4. A description relating to the necessity of Avis’s service on the specific audit +committee; and +5. A statement noting whether Avis will be able to act unilaterally on behalf of the +Audit Committee as a whole. +G. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Avis must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Avis shall submit the following additional +information: +1. A statement from the public accounting firm (the “Firm”) with which Avis is +associated, stating that the firm is registered with the PCAOB in accordance with +the Sarbanes-Oxley Act of 2002; +2. A statement from the Firm with which Avis is associated that the Firm has been +inspected by the PCAOB and that the PCAOB did not identify any criticisms of or +potential defects in the Firm’s quality control system that would indicate that Avis +will not receive appropriate supervision; and +3. A statement from Avis indicating that the PCAOB has taken no disciplinary actions +against Avis since seven (7) years prior to the date of the Order other than for the +conduct that was the basis for the Order. +H. In support of any application for reinstatement, Avis shall provide documentation showing +that he is currently licensed as a certified public accountant (“CPA”) and that he has +resolved all other disciplinary issues with any applicable state boards of accountancy. If +Avis is not currently licensed as a CPA, he shall provide documentation showing that his +licensure is dependent upon reinstatement by the Commission. + +21 + + +I. In support of any application for reinstatement, Avis shall also submit a signed affidavit +truthfully stating, under penalty of perjury: +1. That Avis has complied with the Commission suspension Order, and with any +related orders and undertakings, or any related Commission proceedings, including +any orders requiring payment of disgorgement or penalties; +2. That Avis undertakes to notify the Commission immediately in writing if any +information submitted in support of the application for reinstatement becomes +materially false or misleading or otherwise changes in any material way while the +application is pending; +3. That Avis, since the entry of the Order, has not been convicted of a felony or a +misdemeanor involving moral turpitude that would constitute a basis for a forthwith +suspension from appearing or practicing before the Commission pursuant to Rule +102(e)(2); +4. That Avis, since the entry of the Order: +i. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the basis for +the Order; +ii. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not been +enjoined from violating the federal securities laws, except for any finding or +injunction concerning the conduct that was the basis for the Order; +iii. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning the +conduct that was the basis for the Order; +iv. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or possession, +or any bar thereof to have committed an offense (civil or criminal) involving +moral turpitude, except for any finding concerning the conduct that was the +basis for the Order; and +v. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, civilly +or criminally, with having committed an act of moral turpitude, except for +any charge concerning the conduct that was the basis for the Order. +5. That Avis’s conduct is not at issue in any pending investigation of the +Commission’s Division of Enforcement, the PCAOB’s Division of Enforcement + +22 + + +and Investigations, any criminal law enforcement investigation, or any pending +proceeding of a State Board of Accountancy, except to the extent that such conduct +concerns that which was the basis for the Order. +6. That Avis has complied with any and all orders, undertakings, or other remedial, +disciplinary, or punitive sanctions resulting from any action taken by any State +Board of Accountancy, or other regulatory body. +J. Avis shall also provide a detailed description of: +1. Avis’s professional history since the imposition of the Order, including +i. all job titles, responsibilities and role at any employer; +ii. the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Avis reported for +such work; and +2. Avis’s plans for any future appearance or practice before the Commission. +K. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. +L. If Avis provides the documentation and attestations required in this Order and the +Commission (1) discovers no contrary information therein, and (2) determines that Avis +truthfully and accurately attested to each of the items required in Avis’s affidavit, and the +Commission discovers no information, including under Paragraph K, indicating that Avis +has violated a federal securities law, rule or regulation or rule of professional conduct +applicable to Avis since entry of the Order (other than by conduct underlying Avis’s +original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the +respondent for cause shown. +M. If Avis is not able to provide the documentation and truthful and accurate attestations +required in this Order or if the Commission has discovered contrary information, including +under Paragraph K, the burden shall be on Avis to provide an explanation as to the facts +and circumstances pertaining to the matter setting forth why he believes cause for +reinstatement nonetheless exists and reinstatement would not be contrary to the public +interest. The Commission may then, in its discretion, reinstate Avis for cause shown. +N. If the Commission declines to reinstate Avis pursuant to Paragraphs L and M, it may, at +Avis’s request, hold a hearing to determine whether cause has been shown to permit Avis to +resume appearing and practicing before the Commission as an accountant. +O. Hurd is denied the privilege of appearing or practicing before the Commission as an +accountant. + +23 + + +P. After one year from the date of the Order, Hurd may request that the Commission consider +his reinstatement by submitting an application to the attention of the Office of the Chief +Accountant. +Q. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, Hurd shall submit a written statement attesting to an undertaking to have his +work reviewed by the independent audit committee of any public company for which he +works or in some other manner acceptable to the Commission, as long as Hurd practices +before the Commission in this capacity and will comply with any Commission or other +requirements related to the appearance and practice before the Commission as an +accountant. +R. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) +of the Exchange Act, as a preparer or reviewer, or as a person responsible for the +preparation or review, of any public company’s financial statements that are filed with the +Commission, Hurd shall submit a statement prepared by the audit committee(s) with which +he will be associated, including the following information: +1. A summary of the responsibilities and duties of the specific audit committee(s) with +which Hurd will be associated; +2. A description of Hurd’s role on the specific audit committee(s) with which he will +be associated; +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; +4. A description relating to the necessity of Hurd’s service on the specific audit +committee; and +5. A statement noting whether Hurd will be able to act unilaterally on behalf of the +Audit Committee as a whole. +S. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Hurd must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Hurd shall submit the following additional +information: +1. A statement from the public accounting firm (the “Firm”) with which Hurd is +associated, stating that the firm is registered with the PCAOB in accordance with +the Sarbanes-Oxley Act of 2002; + +24 + + +2. A statement from the Firm with which Hurd is associated that the Firm has been +inspected by the PCAOB and that the PCAOB did not identify any criticisms of or +potential defects in the Firm’s quality control system that would indicate that Hurd +will not receive appropriate supervision; and +3. A statement from Hurd indicating that the PCAOB has taken no disciplinary actions +against Hurd since seven (7) years prior to the date of the Order other than for the +conduct that was the basis for the Order. +T. In support of any application for reinstatement, Hurd shall provide documentation showing +that he is currently licensed as a certified public accountant (“CPA”) and that he has +resolved all other disciplinary issues with any applicable state boards of accountancy. If +Hurd is not currently licensed as a CPA, he shall provide documentation showing that his +licensure is dependent upon reinstatement by the Commission. +U. In support of any application for reinstatement, Hurd shall also submit a signed affidavit +truthfully stating, under penalty of perjury: +1. That Hurd has complied with the Commission suspension Order, and with any +related orders and undertakings, including any related Commission proceedings, +including any orders requiring payment of disgorgement or penalties; +2. That Hurd undertakes to notify the Commission immediately in writing if any +information submitted in support of the application for reinstatement becomes +materially false or misleading or otherwise changes in any material way while the +application is pending; +3. That Hurd, since the entry of the Order, has not been convicted of a felony or a +misdemeanor involving moral turpitude that would constitute a basis for a forthwith +suspension from appearing or practicing before the Commission pursuant to Rule +102(e)(2); +4. That Hurd, since the entry of the Order: +i. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the basis for +the Order; +ii. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not been +enjoined from violating the federal securities laws, except for any finding or +injunction concerning the conduct that was the basis for the Order; + +25 + + +iii. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning the +conduct that was the basis for the Order; +iv. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or possession, +or any bar thereof to have committed an offense (civil or criminal) involving +moral turpitude, except for any finding concerning the conduct that was the +basis for the Order; and +v. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, civilly +or criminally, with having committed an act of moral turpitude, except for +any charge concerning the conduct that was the basis for the Order. +5. That Hurd’s conduct is not at issue in any pending investigation of the +Commission’s Division of Enforcement, the PCAOB’s Division of Enforcement +and Investigations, any criminal law enforcement investigation, or any pending +proceeding of a State Board of Accountancy, except to the extent that such conduct +concerns that which was the basis for the Order. +6. That Hurd has complied with any and all orders, undertakings, or other remedial, +disciplinary, or punitive sanctions resulting from any action taken by any State +Board of Accountancy, or other regulatory body. +V. Hurd shall also provide a detailed description of: +1. Hurd’s professional history since the imposition of the Order, including +i. all job titles, responsibilities and role at any employer; +ii. the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Hurd reported for +such work; and +2. Hurd’s plans for any future appearance or practice before the Commission. +W. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. +X. If Hurd provides the documentation and attestations required in this Order and the +Commission (1) discovers no contrary information therein, and (2) determines that Hurd +truthfully and accurately attested to each of the items required in Hurd’s affidavit, and the +Commission discovers no information, including under Paragraph W, indicating that Hurd +has violated a federal securities law, rule or regulation or rule of professional conduct +applicable to Hurd since entry of the Order (other than by conduct underlying Hurd’s + +26 + + +original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the +respondent for cause shown. +Y. If Hurd is not able to provide the documentation and truthful and accurate attestations +required in this Order or if the Commission has discovered contrary information, including +under Paragraph W, the burden shall be on Hurd to provide an explanation as to the facts +and circumstances pertaining to the matter setting forth why he believes cause for +reinstatement nonetheless exists and reinstatement would not be contrary to the public +interest. The Commission may then, in its discretion, reinstate Hurd for cause shown. +Z. If the Commission declines to reinstate Hurd pursuant to Paragraphs X and Y, it may, at +Hurd’s request, hold a hearing to determine whether cause has been shown to permit Hurd +to resume appearing and practicing before the Commission as an accountant. +AA. Avis shall, within 21 days of the entry of this Order, pay a civil money penalty in the +amount of $20,000 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Avis +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Lara Mehraban, Division of Enforcement, +Securities and Exchange Commission, 200 Vesey Street, Suite 400, New York, NY 10281. + +BB. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated +as penalties paid to the government for all purposes, including all tax purposes. To + +27 + + +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related +Investor Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or +reduction of any award of compensatory damages by the amount of any part of +Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in +any Related Investor Action grants such a Penalty Offset, Respondent agrees that he shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission's counsel in this action and pay the amount of the Penalty Offset to the +Securities and Exchange Commission. Such a payment shall not be deemed an additional +civil penalty and shall not be deemed to change the amount of the civil penalty imposed in +this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Avis, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts +due by Avis under this Order or any other judgment, order, consent order, decree or settlement +agreement entered in connection with this proceeding, is a debt for the violation by Avis of the +federal securities laws or any regulation or order issued under such laws, as set forth in Section +523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4312.txt b/raw/aaer/2022/AAER-4312.txt new file mode 100644 index 0000000000000000000000000000000000000000..464be42915b0a77aa0ae81af9dec02aa5646a6dd --- /dev/null +++ b/raw/aaer/2022/AAER-4312.txt @@ -0,0 +1,322 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95076 / June 9, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4312 / June 9, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20896 + + + + +In the Matter of + +LIJUAN “SANDRA” +HAO, CPA + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) OF +THE COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE-AND- +DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Lijuan +“Sandra” Hao, CPA (“Respondent” or “Hao”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over her and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY +1. This matter involves insider trading by Respondent Lijuan Sandra Hao, a certified +public accountant who purchased stock on the basis of material nonpublic information she obtained +regarding two of her publicly traded tax clients while working at a tax services firm (“Tax Services +Firm”). In June 2017, Hao purchased the stock of her client Finisar Corporation in advance of +Finisar’s quarterly and year end earnings announcement, and in March 2018, Hao purchased the +stock of another client – Oclaro, Inc. – in the days preceding Oclaro’s announcement of a merger +with another company. In each instance, Hao had obtained material nonpublic information about +her clients in the course of her employment at Tax Services Firm, and by trading improperly on the +basis of it, she obtained illicit profits of nearly $48,000. By engaging in this conduct, Hao violated +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + +3 +B. RESPONDENT +2. Lijuan “Sandra” Hao, age 50, resides in San Jose, CA, and is a certified public +accountant (“CPA”) licensed in California. During the time period relevant to this proceeding, +Hao served as a Senior Director of Tax for Tax Services Firm. + +C. RELATED ENTITIES +3. Finisar Corporation (“Finisar”) was a Delaware corporation headquartered in +Sunnyvale, California. Prior to its merger with optoelectronics firm II-VI Incorporated, Finisar’s +common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act +and was listed on the NASDAQ stock exchange (“NASDAQ”) under the ticker symbol “FNSR.” +4. Oclaro, Inc. (“Oclaro”) was a Delaware corporation headquartered in San Jose, +California. Prior to its merger with Lumentum Holdings, Inc., Oclaro’s common stock was +registered with the Commission pursuant to Section 12(b) of the Exchange Act and was listed on +the NASDAQ under the ticker symbol “OCLR.” +5. Lumentum Holdings, Inc. (“Lumentum”) is a Delaware corporation +headquartered in San Jose, California. Lumentum’s common stock is registered with the +Commission pursuant to Section 12(b) of the Exchange Act and is listed on the NASDAQ under +the ticker symbol “LITE.” + + +D. FACTS +Background + +6. Hao provided tax advisory services at various firms from at least 1999 to 2022. At +Tax Services Firm, where she worked from 2016-2018, Hao was engaged by clients to provide +assistance with their quarterly and annual income tax provisions, and she supervised other +accountants at the firm in their work. Before beginning her employment with Tax Services Firm in +2016, Hao signed an employment offer letter which informed her that she could not make use of +her clients’ confidential information obtained during the course of her employment without the +prior written consent of the firm. Hao also signed an acknowledgment of receipt of the firm’s +employee handbook that prohibited trading in securities of any public company while in possession +of material nonpublic information, and she received compliance training regarding insider trading. + + +4 + +Hao’s Trading in Finisar + +7. Hao provided tax advisory services to Finisar from at least February 2016 through +July 2018 in her capacity as a CPA. +8. In late May and early June 2017, a Finisar employee asked Hao and her colleague +to update the tax risk footnote for the company’s not yet filed Form 10-K for fiscal year 2017. +Finisar’s fiscal year ended April 30, 2017. +9. On or around June 7, 2017, in support of Finisar’s decision to release a $103 +million valuation allowance, Hao co-authored a memorandum which contained specific nonpublic +details regarding the company’s positive outlook for the coming year, and referenced the +company’s upcoming business plans. +10. On June 14, 2017, Hao communicated with Finisar employees regarding the draft +Form 10-K footnote that discussed the company’s decision to release the valuation allowance +based on positive evidence of profitability and demand for certain new products. +11. Hao knew or was reckless in not knowing that the tax and financial information she +received in advance of Finisar’s earnings announcement was material and nonpublic, and that she +owed a duty of trust and confidence to Tax Services Firm, Finisar, and Finisar’s shareholders to +refrain from trading in Finisar securities while in possession of this material, nonpublic +information. +12. On June 15, 2017, Hao purchased 3,000 shares of Finisar stock at a price of $24.86 +per share on the basis of material nonpublic information regarding Finisar’s valuation allowance +and upcoming business plans. She neither sought permission from nor informed her employer of +her purchase of Finisar shares. +13. After the close of business on June 15, 2017, Finisar announced its positive +financial results for its fourth quarter and full fiscal year. The following day, Finisar’s stock price +closed at $27.79 per share, an 8.4 percent increase from the previous day’s closing price of $25.64 +per share. +14. By purchasing Finisar securities before the company’s financial results for its fourth +quarter and full fiscal year were released to the public, Hao misappropriated the material, +nonpublic information she was privy to and breached the duty of trust or confidence she owed to +Finisar, Finisar’s shareholders, and Tax Services Firm. +15. Hao obtained illicit profits of $8,790 from her June 15, 2017 purchase of 3,000 +Finisar shares. + + + +5 +Hao’s Trading in Oclaro + +16. Hao provided tax advisory services to Oclaro from at least February 2010 through +July 2018 in her capacity as a CPA employed by Tax Services Firm, and prior to 2016, a firm that +was later acquired by Tax Services Firm. +17. On March 3, 2018, Hao’s supervisor, Tax Services Firm partner, asked Hao, in her +capacity as a Senior Director of Tax, to assist in a due diligence project for Oclaro in advance of a +potential merger with Lumentum. Between March 3rd and 5th, Hao supervised the collection of +materials that needed to be provided to the diligence team. Hao received emails regarding the +confidential due diligence requests. She also provided input on the materials that were to be +uploaded to the due diligence data room. +18. Hao knew or was reckless in not knowing that the information she received +regarding Oclaro’s pending merger with Lumentum was material and nonpublic, and that she owed +a duty of trust and confidence to Tax Services Firm, Oclaro, and Oclaro’s shareholders to refrain +from trading in Oclaro securities while in possession of this material, nonpublic information. +19. On March 5, 2018, two days after she was informed of Oclaro’s potential merger +with Lumentum, Hao purchased 15,000 shares of Oclaro stock. She neither sought permission +from nor informed her employer of her purchase of Oclaro shares. +20. By purchasing Oclaro securities when the company’s potential merger with +Lumnetum had not yet been publicly announced, Hao misappropriated the material, nonpublic +information she was privy to and breached a duty of trust or confidence she owed to Oclaro, +Oclaro’s shareholders, and Tax Services Firm. +21. On Monday, March 12, 2018, Lumentum publicly announced the definitive merger +agreement with Oclaro. The same day, Hao sold her Oclaro shares. That day, Oclaro’s stock price +closed at $10.01 per share, a 27.5 percent increase from the previous trading day’s closing price of +$7.85 per share. +22. Hao obtained illicit profits of $39,060 from her March 5, 2018 purchase of 15,000 +Oclaro shares. +Violations + +23. As a result of the conduct described above, Hao violated Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with +the purchase or sale of securities. + + +6 +Findings + +24. Based on the foregoing, the Commission finds that Hao willfully violated Section +10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in +connection with the purchase or sale of securities. +25. Based on the forgoing, the Commission finds that Hao engaged in willful violations +of the federal securities laws or the rules and regulations thereunder within the meaning of Section +4(C)(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +Disgorgement and Civil Penalties + +26. The disgorgement and prejudgment interest ordered in paragraph IV.C. is consistent +with equitable principles, does not exceed Respondent’s net profits from her violations, and +returning the money to Respondent would be inconsistent with equitable principles. Therefore, in +these circumstances, distributing disgorged funds to the U.S. Treasury is the most equitable +alternative. The disgorgement and prejudgment interest ordered in paragraph IV.C. shall be +transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange +Act. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Hao’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Hao shall cease and desist from committing or causing any violations and any future +violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + B. Hao is denied the privilege of appearing or practicing before the Commission as an +accountant. + +C. Hao shall pay disgorgement of $47,850, prejudgment interest thereon of $9,507.43, +and a civil money penalty of $47,850, for a total of $105,207.43 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). Payment shall be made in the following installments: $51,207.43 within 10 +days of entry of this Order, and the remaining payment of $54,000, plus any additional interest due, +within 250 days of entry of this Order. Payments shall be applied first to post-Order interest, +which accrues pursuant to SEC Rule of Practice 600 and pursuant to 31 U.S.C. § 3717. Prior to +making the final payment set forth herein, Hao shall contact the staff of the Commission for the +amount due. If Hao fails to make any payment by the date agreed and/or in the amount agreed +according to the schedule set forth above, all outstanding payments under this Order, including + + +7 +post-Order interest, minus any payments made, shall become due and payable immediately at the +discretion of the staff of the Commission without further application to the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Lijuan “Sandra” Hao as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to David A. Becker, +Assistant Director, Division of Enforcement, United States Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549. + + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, she shall not argue that she is entitled to, nor shall she benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that she shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + +8 + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4317.txt b/raw/aaer/2022/AAER-4317.txt new file mode 100644 index 0000000000000000000000000000000000000000..03731edb6814f23d78f78d1c0c7656c0063bfdaa --- /dev/null +++ b/raw/aaer/2022/AAER-4317.txt @@ -0,0 +1,39 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95413 / August 3, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4317 / August 3, 2022 + +Admin. Proc. File No. 3-18292 + + +In the Matter of + +GREGORY A. WAHL, CPA, MICHAEL +DEUTCHMAN, CPA, and GEORGIA CHUNG, CPA + + + + + + + +ORDER EXTENDING TIME TO ISSUE DECISION + + The Commission has determined, in its discretion, that it is appropriate to extend by 90 +days the period within which the decision in this matter may be issued. Accordingly, IT IS +ORDERED that such period be, and hereby is, extended to November 1, 2022. + + By the Commission. + + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4318.txt b/raw/aaer/2022/AAER-4318.txt new file mode 100644 index 0000000000000000000000000000000000000000..42fb9fe48d41a32d141e07a412489d3f56d836e0 --- /dev/null +++ b/raw/aaer/2022/AAER-4318.txt @@ -0,0 +1,605 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11088 / August 3, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95415 / August 3, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4318 / August 3, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20945 + + + + +In the Matter of + +SURGALIGN HOLDINGS, +INC., and ROBERT P. +JORDHEIM, + +Respondents. + + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933, SECTIONS +4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, AND RULE +102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND- +DESIST ORDER + + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Surgalign +Holdings, Inc. (“Surgalign”) (formerly known as RTI Surgical Holdings, Inc., and RTI Surgical, +Inc.) (“RTI”) and Robert P. Jordheim (“Jordheim”) (collectively, “Respondents”) pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C of the Securities + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +2 +Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice.2 +II. +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities +Exchange Act of 1934, and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. +III. +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +INTRODUCTION +1. From 2015 through 2019, RTI shipped orders weeks or months before its customers +had originally requested delivery, thereby pulling sales forward from future quarters, to address +projected quarterly revenue shortfalls. In some instances, RTI did so after requesting and +obtaining customer permission; in other instances, RTI shipped orders early without customer +approval and then prematurely recognized revenue for the sales. In multiple quarters, RTI would +not have met its revenue guidance without these undisclosed pull-forwards. RTI and its former +senior management, including its CFO until September 2017, Robert Jordheim, did not disclose to +investors that RTI’s apparent success at achieving its revenue guidance resulted from its reliance +on pull-forwards, and they did not disclose the known uncertainty that this practice created for +RTI’s future revenue streams. In 2020, RTI issued a restatement to correct, among other things, its + +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 +premature recognition of revenue, in violation of generally accepted accounting principles +(GAAP), for orders shipped early to customers without their approval. +RESPONDENTS +2. Surgalign Holdings, Inc. (formerly known as RTI Surgical Holdings, Inc., and +RTI Surgical, Inc. (“RTI”)) is a Delaware corporation with its principal place of business in +Deerfield, Illinois, and currently has a class of securities registered pursuant to Section 12(b) of the +Exchange Act. Surgalign’s common stock trades on the Nasdaq exchange under the symbol +“SRGA.” Surgalign files periodic reports, including annual reports on Form 10-K and quarterly +reports on Form 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. During the relevant period, RTI had a class of securities registered +pursuant to Section 12(b) of the Exchange Act, and its stock traded on the Nasdaq exchange under +the symbol “RTIX.” +3. Jordheim, age 58, resides in Ponte Vedra Beach, Florida. Jordheim was RTI’s +CFO from June 2010 through September 2017, except that he served instead as RTI’s Interim CEO +from December 2016 through March 2017. Jordheim obtained a CPA license from the State of +North Dakota in 1987, and that license lapsed in 1989. +FACTS +A. RTI’s Reliance on Pull-Forwards to Achieve Its Revenue Guidance, and Its Deficient +Disclosures and Controls. +4. RTI manufactured and sold surgical implants, such as orthopedic and spinal +implants. Its pull-forward practices were concentrated in its Commercial division, which primarily +sold RTI’s products to large distributors that typically placed orders months in advance. +5. Without the use of pull-forwards, including unauthorized early shipments, RTI +would not have achieved its quarterly revenue guidance from Q1 2015 through Q1 2016, except in +Q3 2015 (when RTI missed its guidance because of a single large customer’s resistance to a pull- +forward). RTI periodically continued to use pull-forwards to help achieve its revenue guidance or +analyst estimates in 2016 through 2019. +6. Members of RTI’s former senior management, including Jordheim, discussed +opportunities for pull-forwards, including during regular staff meetings. RTI employees expressed +concern about the impact of pull-forwards on future revenue and customer relationships, and +suggested setting more conservative revenue targets, but were overruled by RTI’s former senior +management. When RTI needed additional revenue to meet financial targets, Jordheim and other +former senior management asked the Commercial division to identify additional potential pull- +forwards and discussed specific customers that could be targeted for pull-forwards, and Jordheim +and other former senior management approved discounts to induce customers to accept early +shipments. Jordheim and other former senior management regularly received information about +the volume of pull-forwards and their impact on RTI’s ability to achieve future revenue targets. +4 +7. RTI and members of its former senior management, including Jordheim, also knew +or should have known that RTI sent some shipments early to customers without their approval and +that RTI recognized revenue prematurely for those shipments. RTI, Jordheim, and other former +senior management failed to implement controls reasonably designed to ensure that RTI obtained +and documented customer approval for early shipments. Rather, RTI employees typically relied on +verbal customer approvals, and in some instances, they did not request or receive approval at all. +RTI, Jordheim, and other former senior management also failed to implement controls reasonably +designed to ensure that RTI properly recorded revenue in the correct period for shipments where +customers did not agree to early delivery. +8. RTI’s reliance on pull-forwards, including unauthorized early shipments, disguised +RTI’s true business performance and resulted in uncertainties for RTI’s business and future +operating results that RTI and its former senior management, including Jordheim, did not disclose. +The use of pull-forwards cannibalized future sales and resulted in revenue shortfalls in future +quarters that RTI filled with additional pull-forwards. RTI and its former senior management, +including Jordheim, did not disclose that RTI was using early shipments to address revenue +shortfalls, that RTI did not have enough orders to achieve its quarterly revenue guidance without +using pull-forwards, or that earlier pull-forwards had significantly reduced the amount of available +future orders. Nor did RTI, Jordheim, or other former senior management disclose that RTI was +recognizing revenue prematurely for unauthorized early shipments in violation of generally +accepted accounting principles (GAAP). RTI, Jordheim, and other former senior management also +failed to disclose that RTI’s use of pull-forwards jeopardized RTI’s future revenue streams when +its most significant customers imposed restrictions on future early shipments and required RTI to +agree to substantial discounts or forgo annual fee increases to convince customers to accept pull- +forwards. +9. Members of RTI’s former senior management, including Jordheim, prepared and +reviewed RTI’s Commission filings, and participated in RTI’s earnings calls. RTI failed to ensure +that these disclosures were accurate and complete, despite its customers’ objections and +employees’ concerns about the effect of the early shipments on customer relationships. +10. Members of RTI’s former senior management, including Jordheim, signed +management representation letters to RTI’s auditor, letters which stated inaccurately that RTI’s +financial statements had been prepared and presented in accordance with GAAP. Jordheim and +other former senior management did not disclose to RTI’s auditor that RTI had relied on pull- +forwards to achieve its revenue guidance, that RTI had recognized revenue prematurely for +unauthorized early shipments, or that RTI’s accounting records omitted essential details regarding +RTI’s unauthorized early shipments. +B. RTI’s Reliance on Pull-Forwards, Including Unauthorized Early Shipments, to +Achieve Revenue Guidance in 2015. +11. RTI used $5.8 million of pull-forwards to meet revenue projections in Q1 2015. +In Q1 2015, RTI’s former senior management, including Jordheim, determined that RTI was likely +to miss its revenue guidance as a result of shortfalls in its international sales and because RTI had +previously used pull-forwards in 2014. In response, they elected to pull forward sales to achieve +5 +RTI’s Q1 revenue guidance. Jordheim had concluded that RTI was generating a disproportionate +amount of its revenue at the end of each quarter, and he reported to other former senior +management that this was “not a good trend.” Nevertheless, RTI used $5.8 million of pull- +forwards to meet its revenue guidance for Q1 2015. RTI did not disclose its use of pull-forwards +in its Form 10-Q, earnings release, or earnings call; rather, RTI’s former senior management +suggested during the earnings call that its success occurred because “The orders from our +commercial partners just keep coming in.” +12. RTI used $6.2 million of pull-forwards to meet revenue projections in Q2 2015. +In early June 2015, Jordheim informed other former senior management that RTI was likely to fall +short of its Q2 guidance. RTI’s former senior management described RTI’s Q2 forecast internally +as “very concerning” and issued directions to “accelerate” sales. Jordheim and other former senior +management received regular updates tracking RTI’s pull-forward efforts. When the quarter +ended, RTI’s former senior management credited the Commercial division with “stepp[ing] up big +this quarter to offset shortfalls” by using $6.2 million of pull forwards to bridge the revenue gap. +RTI and its former senior management, including Jordheim, did not disclose RTI’s use of pull- +forwards in RTI’s Form 10-Q, earnings release, or earnings call, including when RTI announced in +its Q2 2015 earnings release (which was an exhibit to RTI’s 8-K filed with the SEC on July 30, +2015) that its revenue had exceeded its guidance for the quarter. +13. RTI attempted to use unauthorized early shipments and other pull-forwards to +meet revenue projections in Q3 2015. When RTI’s Q3 sales started to fall short of expectations, +RTI’s former senior management described the trend as “really unacceptable” and directed +employees to use early shipments to bridge the gap to RTI’s revenue guidance and “deliver on our +commitment to the street.” RTI’s former senior management warned that “We would all be better +off” if RTI did not disappoint investors by falling short of its revenue guidance. During the +quarter, RTI shipped $8.4 million of pull-forwards, including a $2 million unauthorized early +shipment to a major customer. The customer complained that the unauthorized early shipment had +caused its “inventory levels [to] go sky high” and directed RTI “to not ship ANYTHING early +without prior approvals.” Despite its use of unauthorized early shipments and other pull-forwards, +RTI ultimately missed its guidance because another one of its largest customers refused a $2.5 +million pull-forward, which was the exact amount of RTI’s shortfall in Q3. +14. RTI used $3.8 million in pull-forwards, including unauthorized early shipments, +and a $7.2 million one-time transaction to meet revenue projections in Q4 2015. At the end of +2015, RTI used $3.8 million of pull forwards, including unauthorized early shipments, to meet +revenue guidance. During the quarter, Jordheim told a subordinate to “ship whatever it takes” to +achieve forecasted Commercial revenue targets. He was told that RTI planned to ship $1.4 million +of goods to a major customer, and that the shipment would largely exhaust that customer’s orders +through Q1 2016. After receiving the shipment, the customer complained to RTI and insisted that +RTI must obtain the customer’s approval before sending any shipments in the future. Jordheim +and other former senior management were told about this customer’s new directive and that it was +a “response” to RTI’s December 2015 shipments. They were also told that this directive would +make it more difficult for RTI to achieve future revenue targets because RTI had planned to pull +forward that customer’s sales into Q1 2016. +6 +15. In addition, at RTI’s request, another customer agreed to a one-time $7.2 million +inventory transaction in Q4 2015 in lieu of continuing a consignment arrangement for products. +The customer received a substantial price discount to purchase the inventory upfront and eliminate +future payments under the consignment arrangement, which would otherwise have continued +through at least 2016. Internally, Jordheim and other former senior management deliberated about +whether to disclose the effect of this one-time transaction, but they decided instead to refer to +“continued strong orders” to explain RTI’s revenues. RTI and its former senior management, +including Jordheim, did not disclose this transaction or RTI’s use of pull-forwards in RTI’s 10-K, +earnings release, or earnings call, including when RTI announced in its Q4 2015 earnings release +(which was an exhibit to RTI’s 8-K filed with the SEC on January 8, 2016) that its revenue had +exceeded its guidance for the quarter. +C. RTI’s Use of a $1.6 Million Unauthorized Early Shipment and Other Pull-Forwards in +Q1 2016 to Achieve Revenue Guidance. +16. RTI’s ability to meet its revenue guidance in early 2016 was jeopardized by poor +business performance and shortfalls created by a major customer’s objections to RTI’s +unauthorized early shipments, which kept RTI from pulling forward $3 million of that customer’s +sales into Q1 2016. At the quarter end, another customer also rejected RTI’s request for a $1 +million pull-forward, despite RTI’s offer of an unusually large discount. Jordheim understood that +this meant that RTI would “have no buffer” if some divisions missed their revenue targets. RTI’s +former senior management wrote to RTI’s business leaders that “There is no cushion, no room for +error. We need to hit the guidance, at a minimum,” and were kept informed about plans to pull +forward millions of dollars in shipments from future quarters into Q1 2016. +17. RTI achieved its Q1 2016 revenue guidance and analyst estimates of revenue by +relying on $3.3 million in pull-forwards, which included a $1.6 million unauthorized early +shipment to a major RTI customer. RTI employees decided that they were “not seeking [the +customer’s] authorization for early shipments,” and Jordheim was informed in an email that RTI +planned to “ship [to the customer] and deal with any issues later.” RTI identified orders for which +the customer had specified delivery dates through June 2, and shipped those orders on March 29, in +violation of its contractual arrangement with the customer. On April 1, the customer contacted +RTI to object to this early shipment, because the order had been delivered early without +authorization and the customer lacked the storage and processing capacity to receive this shipment +early and properly inspect it. +18. Jordheim and other former senior management learned that the customer was +“pretty upset about the amount of product we shipped at quarter end” and was “contemplating +returning at least a subset of” the early shipments. Jordheim and other former senior management +also learned that the customer requested “pre-approval” of any further early shipments. During the +quarter close process, RTI’s former senior management was kept updated about the discussions +with the customer, including that RTI had “still not gotten a response” to RTI’s offers of a discount +to induce the customer to accept the shipment. The customer did not accept the shipment, or +inform RTI that it would be accepting the shipment, until late in April 2016, after RTI had closed +its books for Q1 2016. +7 +19. RTI recognized revenue for this shipment in Q1 2016 even though the revenue +recognition criteria of ASC 605 (Revenue Recognition) were not satisfied: the shipment was not +made pursuant to an arrangement with the customer; collectability was not reasonably assured; +delivery had not occurred because the customer had not taken title or assumed the risks and +rewards of ownership; and the price was not fixed or determinable because RTI had to +retroactively offer a discount for the shipment, and did not know whether the customer would +accept that offer. RTI and Jordheim never disclosed to investors or RTI’s auditor that RTI had +recognized revenue for this shipment in violation of GAAP, or that RTI had relied on this and other +early shipments to achieve its revenue guidance, including when RTI announced in its Q1 2016 +earnings release (which was an exhibit to RTI’s 8-K filed with the SEC on April 28, 2016) that its +revenue had exceeded its guidance for the quarter. +20. In addition, Jordheim and other former senior management did not take any steps to +prevent RTI from sending early shipments in the future without customer approval, or from +recognizing revenue for such shipments; two months later, at the end of Q2, RTI again sent a $1.4 +million early shipment to a major customer, despite that customer’s clear instructions prohibiting +such shipments. +D. RTI’s Restatement and Jordheim’s Compensation. +21. In response to the Commission’s investigation, RTI conducted an internal +investigation. Based on the findings of that investigation, RTI was required to prepare an +accounting restatement due to its material noncompliance, as a result of misconduct, with the +financial reporting requirements under the securities laws. On June 8, 2020, RTI filed an amended +Form 10-K for the fiscal year ended December 31, 2018, which restated RTI’s financial statements +for the quarterly and annual periods of 2016, 2017, and 2018, and certain data on its financial +statements, including annual revenues and income, for 2014 and 2015. Those financial statements +were contained, as required by federal securities laws, in RTI’s Forms 10-K and 10-Q that were +filed starting with RTI’s 2014 10-K on March 4, 2015, and ending with RTI’s 2018 10-K on +March 5, 2019. On June 8, 2020, RTI also filed its Form 10-K for the fiscal year ended December +31, 2019, which restated RTI’s financial statements for the first three quarterly periods of 2019, +which were contained, as required by federal securities laws, in RTI’s Forms 10-Q that were filed +from May 7, 2019, through November 7, 2019. +22. RTI identified and corrected several errors in its financial statements, including that +“revenue for certain invoices should have been recognized at a later date than when originally +recognized” because RTI had shipped certain orders “early to customers without obtaining +authorized approval” from the customer as required by GAAP. RTI acknowledged that “[s]ome of +those unapproved shipments were shipped by employees in order to generate additional revenue +and resulted in shipments being pulled from a future quarter into an earlier quarter.” In addition, +RTI determined that its disclosure controls and procedures were not effective and that it had +material weaknesses in its internal controls over financial reporting. +23. RTI offered and sold securities during the relevant period, including selling +discounted stock under the company’s employee stock purchase plan and issuing shares as +compensation to certain employees under its employee incentive plan. +8 +24. As CFO or Interim CEO of RTI, Jordheim signed RTI’s 2014, 2015, and 2016 10- +Ks, and the 10-Qs filed during 2015, 2016, and the first two quarters of 2017 (among other filings). +During the relevant period, Jordheim sold RTI stock to satisfy withholding obligations in +connection with the vesting of previously awarded RTI securities. Jordheim has not reimbursed +RTI for the bonuses, incentive-based compensation, and equity-based compensation that he +received from RTI, or the profits he received from sales of RTI securities, during the twelve-month +periods following the first public issuance or filing of the financial documents that were restated by +RTI. +VIOLATIONS +25. Section 17(a)(2) of the Securities Act proscribes, in the offer or sale of a security, +the receipt of “money or property by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading.” Section 17(a)(3) of the Securities +Act proscribes, in the offer or sale of a security, engaging “in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser.” A violation of +these provisions does not require scienter and may rest on a finding of negligence. See Aaron v. +SEC, 446 U.S. 680, 702 (1980). +26. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of annual, +current, and quarterly reports, respectively. The obligation to file such reports embodies the +requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 +(D.C. Cir. 1978). In addition to the information expressly required to be included in such reports, +Rule 12b-20 of the Exchange Act requires issuers to add such further material information, if any, +as may be necessary to make the required statements, in the light of the circumstances under which +they are made not misleading. A violation of these reporting provisions does not require scienter +and may rest on a finding of negligence. See SEC v. Wills, 472 F.Supp. 1250, 1268 (D.D.C. 1978). +27. Quarterly and annual reports for issuers such as RTI must comply with Regulation +S-K Item 303, which requires, among other things, a discussion of “any known trends or +uncertainties that have had or that the registrant reasonably expects will have a material favorable +or unfavorable impact on net sales or revenues or income from continuing operations.” It also +requires that reports describe “any other significant components of revenues or expenses that, in +the registrant’s judgment, should be described in order to understand the registrant’s results of +operations.” Instruction 3 to Item 303(a) of Regulation S-K requires that the “discussion and +analysis shall focus specifically on material events and uncertainties known to management that +would cause reported financial information not to be necessarily indicative of future operating +results or of future financial condition.” Item 303(b) of Regulation S-K requires discussion of +material changes in such known trends or uncertainties in quarterly reports on Form 10-Q. By +disguising the company’s true business performance and cannibalizing future sales, RTI’s use of +pull-forwards created an uncertainty or event that was known to RTI and that was reasonably +expected to have a material effect on its future revenue and that caused reported financial +information not to be necessarily indicative of future operating results, which was not disclosed by +9 +RTI. Likewise, RTI’s quarterly earnings releases, which were filed as exhibits to RTI’s current +reports, disclosed that RTI’s revenues had exceeded its revenue guidance, without disclosing the +effect of pull-forwards. As a consequence, RTI violated Section 13(a) of the Exchange Act and +Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder. +28. Exchange Act Rule 13a-14 requires that the principal financial officer of an issuer +sign a certification that the issuer’s Forms 10-K and 10-Q fairly present, in all material respects, +the financial condition and results of operations of the company. +29. Section 13(b)(2)(A) of the Exchange Act requires, among other things, Exchange +Act Section 12 registrants to make and keep books, records, and accounts that accurately and fairly +reflect the transactions and dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act +requires, among other things, Exchange Act Section 12 registrants to devise and maintain a system +of internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance with GAAP. +Scienter is not an element of a violation of the books-and-records and internal control provisions. +See Ponce v. SEC, 345 F.3d 722, 737 n.10 (9th Cir. 2003). +30. Exchange Act Rule 13b2-1 prohibits any person from directly or indirectly +falsifying or causing to be falsified any book, record, or account subject to Section 13(b)(2)(A). +Exchange Act Rule 13b2-2 prohibits an officer or director of an issuer from, among other things, +making or causing to be made a materially false or misleading statement to an accountant in +connection with any required audit of the issuer’s financial statements or the preparation of a report +required to be filed with the Commission. Scienter is not required to establish a violation of either +of these rules. See SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1997). +31. Section 304(a) of the Sarbanes-Oxley Act of 2002 requires the CEO and CFO of +any issuer required to prepare an accounting restatement due to material noncompliance with the +securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other +incentive-based or equity-based compensation received by that person from the issuer during the +12-month periods following the false filings, and (2) any profits realized from the sale of securities +of the issuer during those 12-month periods. +32. Based on the foregoing, the Commission finds that Surgalign violated Securities +Act Sections 17(a)(2) and 17(a)(3); Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B); +and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. +33. Based on the foregoing, the Commission finds that Jordheim violated Securities Act +Sections 17(a)(2) and 17(a)(3), Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and Sarbanes- +Oxley Act Section 304; was a cause of Surgalign’s violations of Exchange Act Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13; and +engaged in improper professional conduct proscribed by Exchange Act Section 4C(a)(2) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. +10 +SURGALIGN’S COOPERATION +34. In determining to accept Surgalign’s Offer, the Commission considered the +cooperation it provided during the Commission’s investigation. Surgalign and RTI provided +substantial cooperation to the Commission’s staff throughout the investigation, including by +disclosing information about conduct that the staff had not yet uncovered through its own +investigation, conducting an internal investigation regarding this conduct, and providing the staff +regular and detailed updates on the internal investigation and key documents identified through +that investigation. This cooperation substantially advanced the quality and efficiency of the staff’s +investigation and conserved Commission resources. +IV. +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondents’ Offers. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Surgalign shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act; Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; and Exchange Act Rules 12b-20, 13a-1, 13a- +11, and 13a-13. +B. Jordheim shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act; Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act; Section 304 of the Sarbanes-Oxley Act; and Exchange Act +Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2. +C. Jordheim is denied the privilege of appearing or practicing before the Commission +as an accountant. +D. After five years from the date of the Order, Jordheim may request that the +Commission consider his reinstatement by submitting an application to the attention of the Office of +the Chief Accountant. +E. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Jordheim +shall submit a written statement attesting to an undertaking to have his work reviewed by the +independent audit committee of any public company for which he works or in some other manner +acceptable to the Commission, as long as he practices before the Commission in this capacity and +will comply with any Commission or other requirements related to the appearance and practice +before the Commission as an accountant. +F. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +11 +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, of +any public company’s financial statements that are filed with the Commission, Jordheim shall +submit a statement prepared by the audit committee(s) with which Jordheim will be associated, +including the following information: +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Jordheim will be associated; +2. A description of Jordheim’s role on the specific audit committee(s) with which +Jordheim will be associated; +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; +4. A description relating to the necessity of Jordheim’s service on the specific +audit committee; and +5. A statement noting whether Jordheim will be able to act unilaterally on behalf +of the Audit Committee as a whole. +G. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Jordheim must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Jordheim shall submit the following additional information: +1. A statement from the public accounting firm (the “Firm”) with which Jordheim +is associated, stating that the firm is registered with the PCAOB in accordance +with the Sarbanes-Oxley Act of 2002; +2. A statement from the Firm with which Jordheim is associated that the Firm has +been inspected by the PCAOB and that the PCAOB did not identify any +criticisms of or potential defects in the Firm’s quality control system that would +indicate that Jordheim will not receive appropriate supervision; and +3. A statement from Jordheim indicating that the PCAOB has taken no +disciplinary actions against Jordheim since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. +H. In support of any application for reinstatement, Jordheim shall provide +documentation showing that he is currently licensed as a certified public accountant (“CPA”) and +that he has resolved all other disciplinary issues with any applicable state boards of accountancy. +If Jordheim is not currently licensed as a CPA, he shall provide documentation showing that +Jordheim’s licensure is dependent upon reinstatement by the Commission. +I. In support of any application for reinstatement, Jordheim shall also submit a signed +affidavit truthfully stating, under penalty of perjury: +12 +1. That Jordheim has complied with the Commission suspension Order, and with +any related orders and undertakings, including any orders in In the Matter of +Surgalign Holdings, Inc. and Robert P. Jordheim or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; +2. That Jordheim undertakes to notify the Commission immediately in writing if +any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; +3. That Jordheim, since the entry of the Order, has not been convicted of a felony +or a misdemeanor involving moral turpitude that would constitute a basis for a +forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); +4. That Jordheim, since the entry of the Order: +(a) has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the basis for +the Order; +(b) has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not been +enjoined from violating the federal securities laws, except for any finding or +injunction concerning the conduct that was the basis for the Order; +(c) has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning the +conduct that was the basis for the Order; +(d) has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or possession, +or any bar thereof to have committed an offense (civil or criminal) +involving moral turpitude, except for any finding concerning the conduct +that was the basis for the Order; and +(e) has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, civilly +or criminally, with having committed an act of moral turpitude, except for +any charge concerning the conduct that was the basis for the Order; +5. That Jordheim’s conduct is not at issue in any pending investigation of the +Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement investigation, or +13 +any pending proceeding of a State Board of Accountancy, except to the extent +that such conduct concerns that which was the basis for the Order; and +6. That Jordheim has complied with any and all orders, undertakings, or other +remedial, disciplinary, or punitive sanctions resulting from any action taken by +any State Board of Accountancy, or other regulatory body. +J. Jordheim shall also provide a detailed description of: +1. Jordheim’s professional history since the imposition of the Order, including: +(a) all job titles, responsibilities and role at any employer; +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent +reported for such work; and +2. Jordheim’s plans for any future appearance or practice before the Commission. +K. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. +L. If Jordheim provides the documentation and attestations required in this Order and +the Commission (1) discovers no contrary information therein, and (2) determines that Jordheim +truthfully and accurately attested to each of the items required in Respondent’s affidavit, and the +Commission discovers no information, including under Paragraph K, indicating that Jordheim has +violated a federal securities law, rule or regulation or rule of professional conduct applicable to +Jordheim since entry of the Order (other than by conduct underlying Jordheim’s original Rule +102(e) suspension), then, unless the Commission determines that reinstatement would not be in the +public interest, the Commission shall reinstate the respondent for cause shown. +M. If Jordheim is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph K, the burden shall be on Jordheim to provide an explanation as to the +facts and circumstances pertaining to the matter setting forth why Jordheim believes cause for +reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. The +Commission may then, in its discretion, reinstate the Respondent for cause shown. +N. If the Commission declines to reinstate Jordheim pursuant to Paragraphs L and M, it +may, at Jordheim’s request, hold a hearing to determine whether cause has been shown to permit +him to resume appearing and practicing before the Commission as an accountant. +O. Surgalign shall, within 14 days of the entry of this Order, pay a civil money penalty +in the amount of $2,000,000 to the Securities and Exchange Commission. Jordheim shall, within +14 days of the entry of this Order, pay a civil money penalty in the amount of $75,000 to the +Securities and Exchange Commission. If timely payment is not made, additional interest shall +accrue pursuant to 31 U.S.C. § 3717. +14 +Payment must be made in one of the following ways: +(1) Respondents may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondents may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying the +Respondents in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to D. Mark Cave, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. +P. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph O above. Amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondents agree that in any Related Investor Action, they shall not argue that they are entitled +to, nor shall they benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If +the court in any Related Investor Action grants such a Penalty Offset, Respondents agree that they +shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission's counsel in this action and pay the amount of the Penalty Offset to the Securities and +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall +not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes +of this paragraph, a “Related Investor Action” means a private damages action brought against +Respondents by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. +Q. Jordheim shall, within 14 days of the entry of this Order, reimburse Surgalign for a +total of $206,831, representing bonuses, incentive-based compensation, equity-based +compensation, and profits from sales of RTI stock, pursuant to Section 304(a) of the Sarbanes- +Oxley Act. Jordheim shall simultaneously deliver proof of satisfying this reimbursement +obligation to D. Mark Cave, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., NE, Washington, DC 20549. If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. § 3717. +15 +R. Surgalign acknowledges that the Commission is not imposing a civil penalty in +excess of $2 million based upon its cooperation in a Commission investigation. If, at any time +following the entry of the Order, the Division of Enforcement (“Division”) obtains information +indicating that Surgalign knowingly provided materially false or misleading information or +materials to the Commission or in a related proceeding, the Division may, at its sole discretion and +with prior notice to Surgalign, petition the Commission to reopen this matter and seek an order +directing that Surgalign pay an additional civil penalty. Surgalign may contest by way of defense +in any resulting administrative proceeding whether it knowingly provided materially false or +misleading information, but may not: (1) contest the findings in the Order; or (2) assert any +defense to liability or remedy, including, but not limited to, any statute of limitations defense. +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, Jordheim stipulates that the findings in this Order +are true, and that such findings shall be accepted and deemed true, without further proof by any +party, in any nondischargeability proceeding involving the Commission, and further, that any debt +for disgorgement, prejudgment interest, civil penalty or other amounts due by Jordheim under this +Order or any other judgment, order, consent order, decree or settlement agreement entered in +connection with this proceeding, is a debt for the violation by Jordheim of the federal securities +laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the +Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4319.txt b/raw/aaer/2022/AAER-4319.txt new file mode 100644 index 0000000000000000000000000000000000000000..9bc3c64726437cc5859bc582f55c7e15c41539f6 --- /dev/null +++ b/raw/aaer/2022/AAER-4319.txt @@ -0,0 +1,1407 @@ + + + + + + + + + + + + + + + + SEC.gov | Brian K. Hutchison + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/527671","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Hutchison + + + + + + + + + + + + Brian K. Hutchison + + + + + + + + + + + + + + + + + + + + + --> + + SEC Charges Surgical Implant Manufacturer Surgalign and Former Senior Executives with Accounting and Disclosure Fraud + + Litigation Release No. 25463 / August 3, 2022 + + Accounting and Auditing Enforcement No. 4319 / August 3, 2022 + + Securities and Exchange Commission v. Brian K. Hutchison , No. 1:22-cv-02296 (D.D.C. filed Aug. 3, 2022) + + + + + + + + + The Securities and Exchange Commission today charged Surgalign Holdings, Inc., formerly RTI Surgical Holdings, Inc., and former executives Brian Hutchison and Robert Jordheim for masking disappointing sales numbers by shipping future orders ahead of schedule to accelerate, or "pull forward," revenue and then failing to disclose this practice to investors. In June 2020, RTI restated its public financial statements from 2014 through 2019 to correct errors caused by this practice. + + As alleged by the SEC, RTI's reliance on pull-forwards cannibalized future revenue streams and damaged important customer relationships while the company reassured investors it was meeting revenue guidance. The SEC further alleged that RTI sometimes shipped orders early without customer approval and recognized revenue for those shipments prematurely, in violation of generally accepted accounting principles (GAAP), and that RTI's former CEO, Hutchison, and former CFO, Jordheim, permitted RTI to recognize revenue for such shipments. + + The SEC's complaint against Hutchison, filed in federal district court in Washington, DC, charges him with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges him with violating Exchange Act Section 13(b)(5) and Rules 13a-14, 13b2-1, and 13b2-2 thereunder, and Sarbanes-Oxley Act Section 304, and with aiding and abetting RTI's violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The SEC seeks a permanent injunction, civil penalties, disgorgement with prejudgment interest, the return pursuant to SOX Section 304 of Hutchison's bonuses and profits from sales of RTI stock, and an officer-and-director bar. + + In a separate proceeding, without admitting or denying the SEC's findings, Surgalign and Jordheim agreed to cease and desist from violating Sections 17(a)(2) and (3) of the Securities Act of 1933 and other provisions of the securities laws and to pay civil penalties of $2 million and $75,000, respectively. Jordheim also agreed to return $206,831 to Surgalign pursuant to SOX Section 304 and to be suspended from appearing and practicing before the SEC as an accountant. The order permits Jordheim to apply for reinstatement after five years. Separately, three other former RTI executives returned over $361,000 of incentive-based compensation to Surgalign.  Their tenure as RTI executives post-dated Hutchison's and Jordheim's alleged violations of the antifraud and other provisions of the federal securities laws. + + The SEC's investigation was conducted by Nishchay Maskay, Colin Rand, and Robert Gray, with the assistance of Alex Lefferts of the Office of Investigative and Market Analytics. The investigation was supervised by Mr. Cave and Kristen Dieter. The litigation against Hutchison will be led by John Timmer under the supervision of Melissa Armstrong. + + + + + + + + SEC Complaint + Order - Surgalign Holdings, Inc. and Robert P. Jordheim + + + + + + + + + + + + Resources + + + + + Complaint + + + + + Administrative Proceedings Release + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2022/AAER-4320.txt b/raw/aaer/2022/AAER-4320.txt new file mode 100644 index 0000000000000000000000000000000000000000..e4faad39f69d170729a27b873c41974a4d926cf2 --- /dev/null +++ b/raw/aaer/2022/AAER-4320.txt @@ -0,0 +1,117 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95451 / August 9, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4320 / August 9, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20949 + +In the Matter of + +FRANK OKUNAK, CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Frank +Okunak (“Respondent” or “Okunak”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and the findings contained in +paragraph III.3, below, and consents to the entry of this Order Instituting Public Administrative +Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and +Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Okunak, age 56, has been a certified public accountant licensed to practice in +the State of Pennsylvania. He served as Global Chief Financial Officer of a subsidiary (the +“Subsidiary”) of a publicly traded company (the “Issuer”), between approximately 2009 and 2019. +Okunak also served as the Subsidiary’s Chief Operating Officer from 2013 until he was terminated +in July 2020. Okunak was previously licensed as a CPA in Pennsylvania. His license expired in +December 2017. + + 2. The Issuer was, at all relevant times, a Delaware corporation with its +principal place of business in New York, New York. The Issuer is a marketing and advertising firm +with a number of subsidiary companies, including the Subsidiary, a public relations firm. At all +relevant times, the Issuer’s common stock was registered with the Commission pursuant to Section +12(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the New York Stock +Exchange. + + 3. On August 3, 2022, a judgment was entered against Okunak, permanently +enjoining him from future aiding and abetting violations of Section 13(b)(2)(A) of the Exchange +Act and future violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, in +the civil action entitled Securities and Exchange Commission v. Frank Okunak, Civil Action +Number 22-cv-6389 (PKC) , in the United States District Court for the Southern District of New +York. The judgment also prohibits Okunak from acting as an officer or director of any issuer that +has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to +file reports pursuant to Section 15(d) of the Exchange Act. The Commission is seeking +disgorgement, prejudgment interest thereon, and civil penalties in the civil action. + + 4. The Commission’s complaint alleged, among other things, that between +2011 and July 2020, Okunak falsified the Issuer’s books and records and circumvented its +internal accounting controls to facilitate his misappropriation of approximately $16 million from +the Issuer. The complaint further alleged that Okunak falsified books and records by directing +the submission of, and approving, “vendor” invoices and purchase orders that remitted payment + 3 +to entities in which he had an interest, to entities performing services for those entities, or for +personal expenses. The complaint alleged that the books and records were false because they +did not relate to services being provided to the Issuer, but instead related to services being +provided to Okunak or his related entities. The complaint also alleged that Okunak +circumvented the Issuer’s internal accounting controls by, among other things, routinely +falsifying certifications concerning potential conflicts of interest, and submitting false +information as part of the process by which a vendor was on-boarded and the process by which +vendor expenses were approved. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Okunak’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Okunak is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4322.txt b/raw/aaer/2022/AAER-4322.txt new file mode 100644 index 0000000000000000000000000000000000000000..99ff6d999e8d4daee728a25a373bea259790202e --- /dev/null +++ b/raw/aaer/2022/AAER-4322.txt @@ -0,0 +1,1403 @@ + + + + + + + + + + + + + + + + SEC.gov | Ronald D. 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Paul + + + + + + + + + + + + Ronald D. Paul + + + + + + + + + + + + + + + + + + + + + --> + + SEC Charges Former Eagle Bancorp CEO with Failing to Disclose Related Party Loans + + Litigation Release No. 25471 / August 17, 2022 + + Accounting and Auditing Enforcement No. 4322 / August 17, 2022 + + Securities and Exchange Commission v. Ronald D. Paul , No. 1:22-cv-06985 (S.D.N.Y. filed August 16, 2022) + + + + + + + + + The Securities and Exchange Commission charged Eagle Bancorp, Inc., based in Bethesda, Maryland, and its former Chief Executive Officer and Chairman of the Board, Ronald D. Paul, with negligently making false and misleading statements about related party loans extended by the bank to Paul's family trusts. Eagle and Paul have agreed to settle the SEC's charges. + + The SEC's complaint against Paul, which was filed in the United States District Court for the Southern District of New York, alleges that from March 2015 through April 2018, Eagle failed to include loans to Paul's family trusts totaling at times nearly $90 million in the related party loan balances included in its annual reports and proxy statements. Both SEC regulations and Generally Accepted Accounting Principles (GAAP) required Eagle to disclose these material related party transactions. The SEC's complaint also alleges that, following a December 2017 short seller's report asserting Eagle had made significant undisclosed loans to Paul's family trusts, Eagle falsely stated in press releases and meetings with investors that the trust loans were not related party loans and that Eagle was in compliance with all related party loan requirements, and Eagle again failed to disclose the trust loans as related party loans in its 2017 annual report. + + The SEC's complaint charges Paul with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 14(a) of the Securities Exchange Act of 1934, and Rule 13a-14 and 14a-9 thereunder. Without admitting or denying the SEC's allegations, Paul has agreed to a permanent injunction, to a two-year officer and director bar, and to pay disgorgement of $109,000, prejudgment interest of $22,216, and a penalty of $300,000. The settlement is subject to court approval. + + The SEC's settled order as to Eagle finds that the company violated the negligence-based anti-fraud, proxy, reporting, books and records, and internal accounting controls provisions of the federal securities laws. Without admitting or denying the SEC's findings, Eagle agreed to cease and desist from future violations and to pay disgorgement of $2.6 million, prejudgment interest of $750,493, and a civil penalty of $10 million. + + In a parallel action, the Federal Reserve Board today announced settled enforcement actions against EagleBank and Paul. + + The SEC's investigation was led by Emily Shea, with assistance from Avron Elbaum, Peter Rosario, James Carlson, and Fred Block. It was supervised by Kevin Guerrero. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2022/AAER-4323.txt b/raw/aaer/2022/AAER-4323.txt new file mode 100644 index 0000000000000000000000000000000000000000..a469e96e5f68676438a03fc459573f534c59b491 --- /dev/null +++ b/raw/aaer/2022/AAER-4323.txt @@ -0,0 +1,371 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95589 / August 24, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4323 / August 24, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20997 + +In the Matter of + +THE BANCORP, INC., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against The Bancorp, Inc. (“Bancorp,” “company,” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement of The Bancorp, Inc. (“Offer”) which the Commission has determined to accept. +Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of +the Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 the following: + +SUMMARY + +1. This matter concerns violations of reporting, record-keeping, and internal accounting +controls provisions of the Exchange Act by Bancorp. Beginning in the first quarter of 2017 and +continuing through the first quarter of 2019 (“Relevant Period”), Bancorp made filings with the +Commission in which it reported gains that it received from the sales of loans included in five +commercial real estate securitizations (“CRE Transactions”). The CRE Transactions involved the +securitization by Bancorp of floating-rate, short-term, transitional commercial real estate (“CRE”) +loans. In connection with each of the CRE Transactions, Bancorp obtained a tranche of certificates +classified as debt securities (“CRE certificates”) that included two components: principal-and- +interest and interest-only (“IO”) components. Bancorp’s reported gain was based on the value that +Bancorp assigned to the certificates that it received and, in particular, the IO component of the +certificates. + +2. During the Relevant Period, generally accepted accounting principles (“GAAP”) +governed the valuation of the CRE certificates and required that they be measured at fair value. +Because the initial valuation of each CRE certificate and, specifically, the IO components required +the use of what GAAP characterized as “unobservable inputs,” the certificates were categorized as +assets measured using level 3 inputs that are significant to the overall measurement (“Level 3” +assets). One significant unobservable input was the prepayment rate assumption for the loans that +provided the collateral for the CRE Transactions. Bancorp failed to maintain adequate books and +records and did not sufficiently incorporate all reasonably available market data in support of these +valuations. Bancorp also lacked policies and procedures applicable to its initial valuations of the +CRE certificates that were reasonably designed to ensure that those valuations conformed with +certain GAAP requirements. Bancorp further omitted and misstated material information related to +the certificates and the assumptions that it had used in valuing those certificates in certain of its +quarterly and annual financial statements filed with the Commission from the first quarter of 2017 +through the first quarter of 2019.2 + +RESPONDENT + +3. The Bancorp, Inc. is a Delaware corporation with its principal executive offices in +Wilmington, Delaware. Its common stock is registered with the Commission pursuant to Section +12(b) of the Exchange Act and trades on the NASDAQ Stock Market under the ticker symbol +TBBK. Bancorp is the holding company for Bancorp Bank. In September 2019, the Commission + +1 The findings herein are made pursuant to Bancorp’s Offer and are not binding on any other +person or entity in this or any other proceeding. + +2 The filings at issue are Bancorp’s quarterly filings for the first and third quarters of 2017 and +2018, the quarterly filing for the first quarter of 2019, and the annual filings for fiscal years 2017 +and 2018. + 3 +entered a settled cease-and-desist order against Bancorp for violations of reporting, record-keeping, +and internal accounting controls provisions for conduct that took place between 2012 and 2014. +Bancorp implemented certain remedial measures in response to that order, which was entered after +the occurrence of the majority of the conduct described in this Order. + +FACTS + +4. In the Relevant Period, Bancorp securitized floating-rate, short-term commercial +real estate loans that Bancorp had originated to improve or rehabilitate existing properties. In each +of the CRE Transactions, Bancorp sold the loans to a trust established for the transaction. The trust +then offered tranches of certificates with variable rate coupons that were collateralized by loans +that Bancorp had originated. In consideration for the loans that it sold to the trust, Bancorp +received cash in an amount less than the carrying value of the loans, and a tranche of non-offered +certificates also collateralized by the loans. + +6. The CRE certificates that Bancorp obtained in each of the CRE Transactions +(referred to as “CRE1,” CRE2,” “CRE3,” “CRE4,” and “CRE5”) were comprised of two +components that had different risk profiles: (a) a principal balance certificate, referred to as the +Class E or Class C Regular Interest, which was like a regular coupon bond and received +distributions of principal and interest; and (b) an IO component, referred to as the Class X Regular +Interest, which received only distributions of interest that were in excess of interest required to be +distributed to other certificates. + +7. In a subsequent sixth CRE transaction that is not the subject of this action, the Class +C certificates that Bancorp obtained consisted only of the Class C Regular Interest. A separate IO +tranche of certificates was created and sold to a third party unrelated to Bancorp. + +A. Bancorp Failed to Document Adequately and Incorporate All Reasonably +Available Market Data into Its Valuation Assumptions for the CRE +Certificates + +8. When valuing the CRE certificates, Bancorp determined that there were no +observable inputs or standard market assumptions that could be used for pricing. Bancorp derived +its initial valuation of the CRE certificates from Level 3 unobservable inputs and worked with third +parties as part of its valuation process. Certain of those third parties generated reports and +provided Bancorp with information that it used in its valuations. + +9. Throughout the Relevant Period, GAAP governed the fair value measurement of +Level 3 and other assets. Many of those standards were set forth in Fair Value Measurement, +Financial Accounting Standards Board Accounting Standards Codification Topic 820 (“ASC +820”). In relevant part, ASC 820 provided as follows: + + “Fair value is a market-based measurement, not an entity-specific measurement. . . . +[T]he objective of a fair value measurement in both cases [observable and +unobservable market transactions and market information] is the same—to estimate + 4 +the price at which an orderly transaction to sell the asset or transfer the liability +would take place between market participants at the measurement date under +current market condition (that is, an exit price at the measurement date from the +perspective of a market participant that holds the asset or owes the liability).” ASC +820-10-05-1B (bold in original); + + “A reporting entity shall measure the fair value of an asset or liability using the +assumptions that market participants would use in pricing the asset or liability, +assuming that market participants act in their economic best interest.” ASC 820- +10-35-9; + + “Unobservable inputs shall be used to measure fair value to the extent that relevant +observable inputs are not available, thereby allowing for situations in which there +are little, if any, market activity for the asset or liability at the measurement date. +However, the fair value measurement objective remains the same, that is, an exit +price at the measurement date from the perspective of a market participant that +holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the +assumptions that market participants would use when pricing the asset or liability, +including assumptions about risk.” ASC 820-10-35-53; + + “A reporting entity shall develop unobservable inputs using the best information +available in the circumstances, which might include the reporting entity’s own data. +In developing unobservable inputs, a reporting entity may begin with its own data, +but it shall adjust those data if reasonably available information indicates that other +market participants would use different data or there is something particular to the +reporting entity that is not available to other market participants (for example, an +entity-specific synergy). A reporting entity need not undertake exhaustive efforts to +obtain information about market participant assumptions. However, a reporting +entity shall take into account all information about market participant assumptions +that is reasonably available.” ASC 820-10-35-54A; and + + “A reporting entity shall use valuation techniques that are appropriate in the +circumstances and for which sufficient data are available to measure fair value, +maximizing the use of relevant observable inputs and minimizing the use of +unobservable inputs.” ASC 820-10-35-24; see also ASC-820-10-35-36. + +10. In assigning prices to the CRE certificates, including the IO components of those +certificates, Bancorp projected future cash flows using a baseline prepayment assumption of 0% +CPY (constant prepayment yield) or 5% CPY. Bancorp then discounted those cash flows at the +London Interbank Offered Rate (“LIBOR”), plus an additional discount margin. + +11. Bancorp ostensibly sought to account for the prepayment risk to the IO components +through its use of the discount margins that it applied in its valuation. For the CRE1 through +CRE3 certificates, Bancorp used an 800 basis point discount margin, i.e., the spread above the + 5 +LIBOR, in connection with its prepayment assumption.3 For the IO components of the certificates +that it obtained in the CRE4 and CRE5 transactions, Bancorp used a 1,000-basis point discount +margin in connection with its prepayment assumption. + +12. Bancorp, however, failed to sufficiently document adequate support for this +approach, which was inconsistent with certain market information that was reasonably available to +Bancorp and other market participants at the time. + +13. For example, at the times Bancorp sponsored the CRE Transactions, there was a +convention used in pricing IO strips of commercial mortgage-backed securities (“CMBS”)4 based +on an assumption known as 100% CPY. This convention assumed that at the end of any +prepayment penalty periods, all of the underlying loans in the transaction would be prepaid. In +assigning values to the CRE certificates, Bancorp did not reasonably consider the 100% CPY +assumption. + +14. There also was, for example, historical market data showing actual prepayments on +comparable loans included in other securitizations. Throughout the Relevant Period, Bancorp +received and, through market research, had available historical information on prepayments. That +information showed that prepayments on comparable loans generally exceeded 30% CPY. + +15. As Bancorp continued to sponsor the CRE Transactions and obtain CRE +certificates, the underlying collateral for the CRE Transactions experienced prepayments at a rate +significantly higher than the 0% CPY and 5% CPY assumptions that Bancorp used, which +Bancorp failed to appropriately consider in its valuations. + +16. Bancorp failed to document adequate support for or analysis behind its use of the +CPY assumptions and discount margins that the company used in its valuations. Although +Bancorp did prepare Exception Reports that provided some analysis for its valuations of the CRE +certificates, the Exception Reports did not address the available market information that was +inconsistent with Bancorp’s valuation, explain why a 0% CPY or 5% CPY assumption was a +reasonable assumption for the IO components of the CRE certificates, or include analysis showing +how Bancorp arrived at the discount margins it used. In addition, while Bancorp’s Investment +Policy in effect at the time included policies and procedures applicable to subsequent valuations, +Bancorp lacked written policies and procedures specific to initial valuations of the CRE +certificates. + +17. Because Bancorp failed to sufficiently document adequate support for the +prepayment rate assumptions and discount margins that it used to assign values to the CRE + +3 Notwithstanding the different risk profiles, the 800 basis point discount margin that Bancorp used +in pricing the IO components of the certificates it obtained in the CRE1 and CRE2 transactions is +the same discount margin that it used in pricing the regular coupon portions of the certificates. + +4 In its periodic reports filed with the Commission, Bancorp classified the certificates that it +obtained in the CRE Transactions as CMBS. + + 6 +certificates and did not incorporate sufficiently its own data and reasonably available information +that market participants would use, Bancorp failed to comply with ASC 820. + +B. Bancorp Omitted and Misstated Material Information About the CRE +Transactions + +18. Bancorp first made specific disclosures about the CRE Transactions in its quarterly +report for the third quarter of 2018. After Bancorp began making specific disclosures about the +CRE Transactions, Bancorp never disclosed, in its Commission filings, that the certificates that it +obtained included an IO component or that the gains it reported were based on the values that +Bancorp had assigned to those IO components. + +19. With respect to the CRE1 through CRE4 transactions, the company, in the notes to +its financial statements, disclosed that the loans that provided the collateral for the transactions had +prepayment protections and loan extension options and that it was expected that those features +“would generally offset the impact of prepayments which are accordingly not assumed.” Bancorp, +however, based its prepayment assumptions on the CPY method, which assumes that prepayment +protections already have expired. Bancorp did not adequately document or have sufficient support +for its representation that prepayment protections and loan extension options would offset the +impact of prepayments. + +20. In addition, at the times of the CRE transactions, ASC 820-10-50-2(bbb) and ASC +820-10-55-103 provided that for fair value measurements of assets categorized as Level 3 within +the fair value hierarchy, reporting entities were to provide quantitative information about the +“significant unobservable inputs” used in the fair value measurements. ASC 820-10-55-103 +additionally set forth examples of the types of unobservable inputs that a reporting entity might +disclose. For CMBS, the specified examples included the prepayment rate. + +21. In the notes to its financial statements included in its periodic reports, Bancorp +failed to provide quantitative information about certain “significant unobservable inputs” used in +its fair value measurements of the CRE certificates. For example, while Bancorp provided +discount rate information about the CRE certificates, it did not include information about the +prepayment rates, which were a significant unobservable input for valuing those certificates. + +22. For these reasons, there were material omissions from, and misstatements in, the +annual and quarterly reports for 2017 through 2019 and the interim periods therein that Bancorp +filed with the Commission. Additionally, the filings failed to include further information necessary +to make certain required statements, in the light of the circumstances under which they are made, +not misleading. + +REMEDIAL MEASURES + +23. In determining to accept Bancorp’s Offer of Settlement, the Commission +considered remedial measures undertaken by Bancorp. Prior to the entry of this Order, Bancorp +instituted additional company-wide controls and related infrastructure. This included the creation + 7 +of a new committee structure, the New Product and Services Committee, with the purpose of +identifying new controls, compliance and risk issues relating to potential and actual new lines of +business and products, and assuring that new products are appropriately challenged and vetted. An +expanded risk committee was also established at the Board level. + +VIOLATIONS + +24. As a result of the conduct described above, Bancorp violated Section 13(a) of the +Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. Section 13(a) and Rules 13a-1 +and 13a-13 require issuers of securities registered pursuant to Section 12 of the Exchange Act to +file with the Commission, among other things, annual and quarterly reports as the Commission +may require. The information reported must be true, correct, and complete. Rule 12b-20 requires +that, in addition to the information expressly required to be included in a statement or report filed +with the Commission, there shall be added such further material information, if any, as may be +necessary to make the required statements, in light of the circumstances under which they are +made, not misleading. + +25. As a result of the conduct described above, Bancorp also violated Section +13(b)(2)(A) of the Exchange Act. This provision requires issuers of securities registered pursuant +to Section 12 of the Exchange Act to make and keep books, records, and accounts which, in +reasonable detail, accurately and fairly reflect the issuer’s transactions and dispositions of assets. + +26. As a result of the conduct described above, Bancorp additionally violated Section +13(b)(2)(B) of the Exchange Act. This provision requires issuers of securities registered pursuant +to Section 12 of the Exchange Act to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that transactions are executed in accordance with +management’s general or specific authorization; transactions are recorded as necessary to permit +preparation of financial statements in conformity with GAAP or any other criteria applicable to +such statements, and to maintain accountability for assets; access to assets is permitted only in +accordance with management’s general or specific authorization; and the recorded accountability +for assets is compared with the existing assets at reasonable intervals and appropriate action is +taken with respect to any differences. + +IV. + +In view of the foregoing, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1,750,000.00 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Section 21F(g)(3) of the Exchange Act. +If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + 8 + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +Commission website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying The Bancorp, Inc. as the Respondent in these proceedings, and the file number +of these proceedings; a copy of the cover letter and check or money order must be sent to +Armita S. Cohen, Assistant Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., NE, Washington, DC 20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it +shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4325.txt b/raw/aaer/2022/AAER-4325.txt new file mode 100644 index 0000000000000000000000000000000000000000..be3928db6cb5182c67c3c2822c94cd8d3c46eb20 --- /dev/null +++ b/raw/aaer/2022/AAER-4325.txt @@ -0,0 +1,185 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95609 / August 25, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4325 / August 25, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21003 + + +In the Matter of + +James H. Roberts + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against James H. Roberts (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondent consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set +forth below. + + + + + 2 + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary +1. Granite Construction Inc. (“Granite”) is a publicly traded company that specializes +in the construction of infrastructure projects. From at least 2017 through the third quarter of 2019 +(“the Relevant Period”), Granite recognized revenue in incorrect periods with respect to multiple +projects managed by its significant subdivision, the Heavy Civil operating group (“Heavy Civil +Group”). As a result, Granite materially overstated revenue for certain reporting periods and +understated revenue in other periods. +2. In February 2021, Granite announced material misstatements in its financial +statements for its Forms 10-K for fiscal years 2017 and 2018 and its Forms 10-Q for each of the +quarters of 2018 and 2019. +3. James H. Roberts, who was Granite’s Chief Executive Officer during the Relevant +Period, received bonuses, incentive-based compensation, and equity-based compensation during the +12-month periods following the filings containing financial results that Granite misstated as a result +of misconduct. Roberts, who is not being charged with misconduct, has not reimbursed Granite for +this compensation as required under Section 304(a) of the Sarbanes-Oxley Act of 2002. +Respondent +4. James H. Roberts is 65 years old and resides in Carmel, California. Roberts was +Granite’s Chief Executive Officer and President from 2010 until September 2020. +Related Entity +5. Granite Construction Inc. is a Delaware corporation headquartered in Watsonville, +California that was founded in 1922. Granite’s common stock is registered with the Commission +pursuant to Section 12(b) of the Securities Exchange Act of 1934. Granite’s stock has been publicly +traded since 1990. Granite’s common stock trades on the New York Stock Exchange. Granite files +periodic reports, including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of +the Exchange Act and related rules thereunder. + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + + 3 +Facts +6. On March 2, 2020, Granite announced that its Audit Committee was conducting an +internal investigation into the accuracy of the Heavy Civil Group’s prior-period reporting, and that it +would need to delay the filing of its Form 10-K for fiscal year 2019. +7. On February 19, 2021, Granite announced material misstatements in its financial +statements and related disclosures for fiscal years 2017 and 2018 and the quarterly reports for 2018 +and 2019 because of errors in the Heavy Civil Group’s project forecasts. +8. On February 22, 2021, Granite restated its previously issued consolidated financial +statements for its Forms 10-K for fiscal years 2017 and 2018 and its Forms 10-Q for each of the +quarters of 2018 and 2019. The restatement corrected misstatements that overstated its revenue for +certain periods and understated its revenue in other periods. +9. The restatement of Granite’s revenues resulted from its improper deferral of +expected costs in quarterly project forecasts for several of the Heavy Civil Group’s largest projects. +According to Granite’s critical accounting policies disclosed in its Forms 10-K for fiscal years 2017 +and 2018, the company recognized quarterly and annual revenues under long-term construction +contracts using a percentage of completion ratio, which analyzed actual incurred costs and total +expected costs for each construction project, to determine how much revenue was earned by Granite +during that period. Thus, an increase in the total expected costs from period to period would result +in lower earned revenues. +10. The Senior Vice President of the Heavy Civil Group, while acting on behalf of +Granite, approved and certified project forecasts despite, among other things, being presented with +warning signs that the project forecasts understated costs, and thus overstated revenue, during +multiple quarters. These inaccurate project forecasts caused Granite to recognize revenue earlier in +incorrect periods for fiscal years 2017 and 2018. +Compensation of CEO Roberts +11. During the 12-month periods that followed the filing of financial statements in +Granite’s quarterly and annual reports requiring restatement, Roberts received bonuses, incentive- +based compensation, and equity-based compensation. +12. Roberts has not reimbursed these amounts to Granite. +Violation +13. As a result of the conduct described above, Roberts violated Section 304 of the +Sarbanes-Oxley Act of 2002, which requires the chief executive officer and chief financial officer of +any issuer required to prepare an accounting restatement due to material noncompliance with the +securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other incentive- +based or equity-based compensation received by that person from the issuer during the 12-month +period following the first public issuance or filing with the Commission of the financial document + + 4 +embodying such financial reporting requirement and (2) any profits realized from the sale of +securities of the issuer during that 12-month period. Section 304 does not require that a chief +executive officer or chief financial officer engage in, or be aware of, misconduct to trigger the +reimbursement requirement. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Roberts’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations of Section 304(a) of the Sarbanes-Oxley Act of 2002. + + B. Roberts shall, within 365 days of the entry of the Order, reimburse Granite for a +total of $629,000 pursuant to Section 304(a) of the Sarbanes-Oxley Act of 2002. Payment of the +reimbursement shall be made in the following installments: (1) a payment of $62,900 within 21 +days of the entry of this Order; (2) a payment of $62,900 on or before January 30, 2023; (3) a +payment of $62,900 on or before April 30, 2023; and (4) a payment of $440,300 within 365 days +of the entry of this Order. Payments shall be deemed made on the date they are received by Granite +and shall be applied first to post order interest, which shall accrue pursuant to SEC Rule of Practice +600 on any unpaid amounts due after 21 days of entry of the Order. Prior to making the final +payment herein, Respondent shall contact the staff of the Commission for the amount due for the +final payment. If Respondent fails to make any payment by the date agreed and/or in the amount +agreed according to the schedule set forth above, all outstanding payments, including post-order +interest, minus any payments made, shall become due and payable immediately at the discretion of +the staff of the Commission without further application to the Commission. Payments made +pursuant to this payment schedule shall be sent to Granite. + +In addition, within 365 days of the entry of the Order, Roberts will return to Granite 27,527 +shares he received as incentive compensation (or the cash equivalent value calculated based on the +last closing price as of June 17, 2022). Roberts shall simultaneously deliver proof of satisfying +each reimbursement obligation detailed herein to Monique C. Winkler, Associate Regional +Director, Division of Enforcement, Securities and Exchange Commission, 44 Montgomery Street, +Suite 2800, San Francisco, CA 94104. + + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by + + 5 +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4328.txt b/raw/aaer/2022/AAER-4328.txt new file mode 100644 index 0000000000000000000000000000000000000000..49c33936ac59b63f49017c7d643b02a833460635 --- /dev/null +++ b/raw/aaer/2022/AAER-4328.txt @@ -0,0 +1,1405 @@ + + + + + + + + + + + + + + + + SEC.gov | Taronis Technologies, Inc., et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/527566","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Taronis Technologies, Inc., et al. , No. 8:22-cv-01939 (M.D. Fla. filed August 24, 2022) + + + + + + + + + The Securities and Exchange Commission today announced fraud charges against Taronis Technologies, Inc. (now known as BBHC, Inc., "Taronis Tech") and its former subsidiary, Taronis Fuels, Inc. ("Taronis Fuels"), Arizona-based distributors of industrial gas and water products, and their former chief executive and chief financial officers. + + According to the SEC's complaint, Taronis Tech (from at least January 2019 to March 2020) and Taronis Fuels (from at least February 2020 to November 2020), and their former CEO, Scott Mahoney, issued materially false and misleading press releases touting agreements and relationships with customers that did not exist or were exaggerated. In addition, Mahoney and Taronis Fuels' former CFO, Tyler Wilson, created fake and backdated orders, which resulted in Taronis Fuels improperly recognizing revenue for fake unit sales in the second and third quarters of 2020. From July to November 2020, Taronis Fuels raised approximately $30 million from investors in private placements, while making representations and warranties that its financial statements in SEC filings were prepared in accordance with Generally Accepted Accounting Principles (GAAP). In an April 2021 filing, Taronis Fuels disclosed that its previously issued financial statements for the year ended December 31, 2019 and for each of the interim quarterly periods in fiscal 2020 should not be relied upon, for reasons including errors in revenue recognized from sales and under-reporting of cost of goods sold. + + The SEC's complaint, filed in the U.S. District Court for the Middle District of Florida, charges Taronis Tech, Taronis Fuels, Mahoney, and Wilson with violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. It further charges Taronis Tech and Taronis Fuels with violating Exchange Act Sections 13(a) and Rules 12b-20, 13a-11, and13a-13 thereunder; Taronis Tech with violating Exchange Act Rule 13a-1 thereunder; and Taronis Fuels with violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rule 12b-25 thereunder. The complaint also alleges that Mahoney and Wilson violated Section 17(a) of the Securities Act; aided and abetted Taronis Fuels' violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; and have control person liability under Section 20(a) of the Exchange Act for Taronis Fuels' violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-13 thereunder. Additionally, the complaint charges Mahoney and Wilson with violating Exchange Act Section 13(b)(5) and Rules 13a-14, 13b2-1, and 13b2-2 thereunder, and Section 304 of the Sarbanes-Oxley Act of 2002 (SOX). Finally, the complaint alleges that Mahoney aided and abetted Taronis Tech's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11 thereunder and has control person liability under Section 20(a) of the Exchange Act for Taronis Tech's violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-11 thereunder. + + Taronis Fuels has consented, without admitting or denying the Commission's allegations and subject to court approval, to be permanently enjoined from violating the charged provisions of the federal securities laws and has agreed to pay disgorgement in the amount of $4,876,023, plus prejudgment interest in the amount of $231,877.50, for a total of $5,107,900.50, to be paid within one year pursuant to a payment plan. + + Mahoney has consented to a bifurcated settlement, without admitting or denying the Commission's allegations and subject to court approval, under which he will be enjoined from violating the charged provisions of the federal securities laws, pay a $150,000 civil penalty to be paid within one year pursuant to a payment plan, and be subject to five-year bars prohibiting him from acting as an officer or director of a public company and from participating in an offering of penny stock. The court will determine whether disgorgement and prejudgment interest should be ordered against Mahoney and whether he should reimburse Taronis Fuels pursuant to Section 304(a) of SOX. + + The SEC is seeking permanent injunctions and civil money penalties against Taronis Tech and Wilson. In addition, the SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and an officer-and-director bar against Wilson, and to have Wilson reimburse Taronis Fuels pursuant to Section 304(a) of SOX. + + The SEC's investigation was conducted by Michelle Bosworth with assistance from Lina Fernandez, and supervised by Thierry Olivier Desmet, Fernando Torres, and Glenn S. Gordon in the Miami Regional Office. The SEC's litigation is being led by Christine Nestor and supervised by Teresa Verges. + + + + + + + + SEC Complaint + + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2022/AAER-4329.txt b/raw/aaer/2022/AAER-4329.txt new file mode 100644 index 0000000000000000000000000000000000000000..b134c8a1013dc8f0a4ece6d5f9ed700fdea18864 --- /dev/null +++ b/raw/aaer/2022/AAER-4329.txt @@ -0,0 +1,446 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11096 / August 26, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95612 / August 26, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4329 / August 26, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21009 + + + + +In the Matter of + +MARK C. KELLY, CPA + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Mark C. +Kelly, CPA (“Kelly” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 +(“Securities Act”) and Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + + +2 +Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondent consents to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A +of the Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +1. This case arises out of Kelly’s involvement in improper earnings management +practices during the period from December 2016 through April 2018 (the “relevant period”) while +he was Controller and Chief Accounting Officer of PPG Industries, Inc. (“PPG”), a manufacturer +of paint and other specialty industrial, automotive, and architectural coating materials. During the +relevant period, Kelly was responsible for PPG’s corporate financial planning and analysis +(“FP&A”) as well as its external financial reporting and accounting, with authority over +subordinates in both areas. Kelly had regular access to information about PPG’s projected earnings +and earnings per share (“EPS”) results, and tracked whether there would likely be a gap between +these preliminary results and analysts’ consensus EPS estimates.4 Kelly also had authority during + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +4 For most of the relevant reporting periods, analysts’ EPS estimates used PPG’s Adjusted +EPS, a non-GAAP metric that is based on adjusted income from continuing operations. +Accordingly, PPG used Adjusted EPS in its internal projections and announced it in most of its +earnings releases. + +3 +the relevant period over the staff of the Controller’s division responsible for making accounting +entries that affected PPG’s earnings results. During the relevant period, Kelly instructed certain of +these employees to make, modify or omit certain accounting entries based in part on whether those +entries enabled PPG to meet or come closer to analysts’ consensus EPS estimates. + + 2. Kelly directed his staff to delay recording or not to record certain expense accruals, +and to misclassify certain income as from continuing operations, in a manner inconsistent with +generally accepted accounting principles (“GAAP”). In so doing, Kelly took advantage of PPG’s +insufficient internal accounting controls, and circumvented PPG’s policies and procedures that +were designed to ensure appropriate financial reporting and disclosure. As a result, PPG materially +overstated its income from continuing operations in its published financial results for the years +ended December 31, 2016 and December 31, 2017, and for certain quarters within that period. +PPG included these improper financial results in press releases and its filings with the +Commission. + + 3. Kelly made similar improper accounting decisions in the first quarter of 2018, and, +as a result, PPG’s books and records contained inaccuracies during the closing period for that +quarter. However, PPG initiated an investigation after one of Kelly’s indirect subordinates +submitted a complaint through PPG’s internal hotline, in mid-April 2018. PPG subsequently +recorded adjustments to correct the inaccuracies in its books and records before publicly disclosing +its financials in its earnings release for the first quarter of 2018. + +4. In addition, on June 28, 2018, PPG restated its financial statements for the relevant +period (the “Restatement”). The Restatement disclosed certain of the improper accounting entries +caused by Kelly, as described above, among other unrelated items. PPG also identified a material +weakness in PPG’s internal control over financial reporting. + + 5. Based on the foregoing and the conduct described below, Kelly violated Section +17(a)(3) of the Securities Act and Section 13(b)(5) of the Exchange Act and Rule 13b2-1 +thereunder, and aided and abetted PPG’s violations of Sections 17(a)(2) of the Securities Act and +Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, +and 13a-13 thereunder. + +B. RESPONDENT + +6. Kelly, 62, resides in Prosper, Texas. Beginning in September 2013, Kelly served as +PPG’s Vice President and Controller. Beginning on March 1, 2017, Kelly was also PPG’s +Principal Accounting Officer. Kelly was terminated on May 10, 2018. During the relevant period, +Kelly held an active Certified Public Accountant (“CPA”) license in the Commonwealth of +Pennsylvania, and he is currently a licensed CPA in Utah. +C. RELEVANT ENTITY + + 7. PPG is a Pennsylvania corporation based in Pittsburgh, PA. PPG’s securities are +registered with the Commission under Section 12(b) of the Exchange Act and trade under the +symbol “PPG” on the New York Stock Exchange. PPG files periodic reports, including Forms 10- + +4 +K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and related rules +thereunder. In February 2018, PPG completed two notes offerings totaling $1 billion. The +preliminary prospectus supplement, dated February 22, 2018 and filed with the bond offerings, +noted that the financial information provided therein should be read in conjunction with PPG’s +Form 10-K for 2017, which it incorporated by reference. In addition, during the relevant period, +PPG issued securities to its employees pursuant to several securities-based compensation programs +pursuant to Form S-8, which also incorporated PPG’s filings within the relevant period by +reference. On September 26, 2019, the Commission instituted settled cease-and-desist proceedings +against PPG. In the Matter of PPG Industries, Inc., Rel. No. 33-10701 (Sept. 26, 2019). + +D. FACTS + +Background + +8. During the relevant period, Kelly, along with other senior managers at PPG, +closely monitored PPG’s internal projected earnings and EPS, and analysts’ consensus estimates +of the same, in order to forecast whether PPG’s reported financials would meet or fall short of +analysts’ estimates. Kelly, along with others at PPG, also identified and tracked, throughout the +quarter, certain accounting items that had the potential to move earnings positively or negatively. +In order to assist these tracking efforts throughout the quarter, Kelly supervised his subordinates +in maintaining a document called the “Latest View” report, which included PPG’s projected +EPS, analysts’ consensus estimates, and a running list of “Risks and Opportunities”—certain +open accounting items that, depending on how they were handled, could affect PPG’s earnings, +either positively or negatively. At the end of this Risks and Opportunities list was a line item, +“Gap,” to indicate the earnings difference that remained between PPG’s internal estimates and +analysts’ consensus estimate. Kelly also tasked PPG finance staff with finding “good guys” (i.e., +items that would positively affect earnings) or “bad guys” (i.e., items that would negatively +affect earnings). +9. In certain instances, detailed below, Kelly instructed his subordinates to make or +omit accounting entries for the items on the Risks and Opportunities list or from other sources +based on his awareness that these accruals could impact PPG’s ability to meet or come closer to +consensus estimates. + + +5 +EPS Management in 2016 and 2017 +10. Kelly’s involvement in earnings management began in the fourth quarter of 2016, +but intensified in mid-2017, and continued through early 2018, as PPG was experiencing +sustained pressure on its earnings from a challenging business environment. +11. For example, on May 26, 2017, during the second quarter of 2017, Kelly emailed +a senior PPG officer at his request a copy of the current Latest View report for the quarter. The +report indicated that PPG’s internal EPS projection was $1.76, and that consensus EPS was +$1.85; the Risks and Opportunities list identified the resulting gap between those two figures, as +well as a list of open accounting items that could affect that gap. In his email, Kelly told the +officer that he was “working to close the gap.” Later, in a June 8, 2017 email, Kelly discussed +the second quarter forecast with a subordinate in the FP&A division who had access to both +PPG’s EPS projections and analysts’ consensus projections. After learning from the subordinate +that it was “safe for now to target $1.83 instead of $1.85,” because analysts’ estimates were +decreasing, Kelly stated that they needed to “find” $6 million—the updated gap between PPG’s +earnings projections and current consensus estimates. Kelly gave the subordinate further +instructions for how to close the gap, including to reach out to Kelly’s direct reports in the +Controller’s division. +12. Late in the closing process for the second quarter of 2017, and shortly after the +preliminary business results became available, as a result of Kelly’s involvement, entries related +to four items from the Risks and Opportunities list were improperly made or omitted from +quarterly reporting. Around the same time, Kelly informed a senior PPG officer that he was +continuing to work to meet EPS targets: late in the afternoon of July 7, 2017, Kelly informed a +senior PPG officer that “we can be at either $1.83 or $1.84 for EPS,” and set up a meeting to +discuss the “options.” +13. In total, for the second quarter of 2017, at Kelly’s direction, inappropriate +accounting entries were made for five items that caused PPG to overstate its income from +continuing operations by a total of over $10 million in its Form 10-Q. PPG ultimately filled the +gap Kelly had earlier identified and converted an earnings “miss” of several pennies into an +earnings “make.” + + +6 +14. The contemporaneous impact of the accruals with which Kelly was involved on +PPG’s reporting in the four quarters that are the subject of this Order is shown in the table below: + Q4 2016 Q2 2017 Q3 2017 Q4 2017 +Overstatement of Pre-Tax Income +(millions) $6.85 $10.34 $2.33 $4.7 +Analysts’ Consensus EPS $1.19 $1.83 $1.53 $1.18 +EPS (or Adjusted EPS) as Originally +Announced6 $1.19 $1.83 $1.52 $1.19 +Estimated EPS (or Adjusted EPS) without +entries with which Kelly was involved $1.16 $1.80 $1.51 $1.17 + +EPS Management in the First Quarter of 2018 +15. During the first quarter of 2018, on March 6, 2018, Kelly sent the supervisor +responsible for financial reporting at PPG an email asking him to “chase down” “Q1 Good +Guys,” including any positive adjustments to PPG’s healthcare claims reserve. Later, on March +20, 2018, Kelly, noting that “[w]e are very close to Q1 2018 EPS consensus,” pressed business +managers in an email to make every effort, “no matter how small,” to identify accruals to meet +consensus EPS estimates. +16. As the end of the quarter neared, Kelly, along with others at PPG, closely +monitored PPG’s EPS projections, analysts’ consensus EPS estimates, and the potential gap +between them. On March 27, 2018, Kelly emailed a senior PPG officer stating that PPG’s +projected EPS was four cents short of analysts’ consensus estimates, and noted he would “be +able to find two pennies but four cents will be a challenge.” On March 29, 2018, Kelly informed +a number of staff members, including business unit managers and subordinates in the +Controller’s division, that PPG’s projected earnings were approximately $5 million short of +consensus estimates. He informed some of his subordinates, around the same time, that he was +looking to make up for some of this gap with about $1 million in entries that the Controller’s +division had not yet booked. Kelly also told an officer of one of PPG’s global regions that he was +“[l]ooking for some help of around $1MM from the region” on income for the first quarter, and +asked him to have his business units consider “small accruals ($20,000-$50,000) that could be +recorded” in the following quarter. +17. Consistent with the forgoing, late in the first quarter of 2018 and, in particular, +late in the closing process, as a result of Kelly’s instructions, several accruals that PPG typically + +5 This amount does not include a $3.4 million improper entry which had no impact to pre- +tax income from continuing operations. However, it did impact adjusted income from continuing +operations and, accordingly, the Company’s Adjusted EPS. + +6 For each quarter during the relevant period, except the third quarter of 2017, PPG +announced in its earnings release its Adjusted EPS. In the third quarter of 2017, PPG made no +adjustments to its income from continuing operations and announced only its GAAP EPS. + +7 +made and that were required by GAAP were improperly omitted or reduced, and increased +PPG’s apparent continuing income by $3.18 million. +18. On the afternoon of April 5, 2018, as the quarter closing process continued, Kelly +emailed a senior PPG officer to ask: “Where do you want to land for EPS? I can get to $1.41.” At +the time, Kelly and other PPG senior officers expected consensus EPS would be either $1.39 or +$1.40, and Kelly understood that the current results were showing that PPG would land at $1.41. +The officer responded, “Hitting consensus would be sufficient.” Several hours later, Kelly +instructed his subordinates not to record a $2.2 million positive adjustment to income that +already had been prepared and that, according to PPG’s practices and under the circumstances, +should have been made. +Investigation and Restatement +19. On or about April 16, 2018, shortly before PPG was to release its earnings report +for the first quarter of 2018, certain of the improper entries discussed above were reported to +PPG’s internal hotline system. On April 19, 2018, PPG disclosed in a press release that it had +identified certain understated expenses for the first quarter of 2018, corrected them prior to the +press release, and that it was conducting an internal investigation into the matter. Certain of the +improper accounting entries discussed above were initially included in PPG’s books and records +for the first quarter of 2018, but, as a result of the investigation, were ultimately correctly booked +and reflected in PPG’s Form 10-Q for that quarter. +20. On June 28, 2018, PPG filed its Form 10-Q for the first quarter of 2018 and an +amended Form 10-K for 2017 (the “Restatement”), which restated, among other things, PPG’s +previously issued financial statements for 2016 and 2017 and quarterly results for the fourth +quarter of 2016 through the fourth quarter of 2017. The Restatement disclosed the misstatements +described above and certain inadvertent errors detected over the course of the internal +investigation. + 21. PPG also disclosed in its Restatement that its internal control over financial +reporting suffered from a material weakness because the Company did not maintain effective +controls within its financial close process. PPG stated that Kelly directed his subordinates to +improperly override PPG’s internal controls, and that these actions were not disclosed to others in +senior management or PPG’s auditor. PPG stated further that these actions often occurred during +the financial closing process and tended to have a positive impact on earnings for the relevant +reporting period. + +Findings + + 22. Based on the foregoing, the Commission finds that: + +a. Kelly willfully aided and abetted and caused PPG’s violations of Section +17(a)(2) of the Securities Act which proscribes, in the offer or sale of a security, +obtaining “money or property by means of any untrue statement of a material fact + +8 +or any omission to state a material fact necessary in order to make the statements +made, in light of the circumstances under which they were made, not misleading.”7 + +b. Kelly willfully violated Section 17(a)(3) of the Securities Act which +proscribes, in the offer or sale of a security, engaging “in any transaction, practice, +or course of business which operates or would operate as a fraud or deceit upon the +purchaser.” + +c. Kelly willfully violated Section 13(b)(5) of the Exchange Act, which +provides: “No person shall knowingly circumvent or knowingly fail to implement a +system of internal accounting controls or knowingly falsify any book, record, or +account described in paragraph (2)” of Section 13(b). + +d. Kelly willfully violated Rule 13b2-1 under the Exchange Act, which +prohibits any person from directly or indirectly falsifying or causing to be falsified, +any book, record, or account subject to Section 13(b)(2)(A). + +e. Kelly willfully aided and abetted and caused PPG’s violations of Section +13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 thereunder, +which require every issuer of a security registered pursuant to Section 12 of the +Exchange Act to file with the Commission information, documents, and annual +and quarterly reports as the Commission may require, and mandate that periodic +reports contain such further material information as may be necessary to make the +required statements not misleading. + +f. Kelly willfully aided and abetted and caused PPG’s violations of Section +13(b)(2)(A) of the Exchange Act, which requires issuers with securities registered +under Section 12 of the Exchange Act to make and keep books, records and +accounts which, in reasonable detail, accurately and fairly reflect the transactions +and dispositions of assets of the issuer; and + +g. Kelly willfully aided and abetted and caused PPG’s violations of Section +13(b)(2)(B) of the Exchange Act, which requires issuers with securities registered +under Section 12 of the Exchange Act to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles. + + +7 “Willfully,” for purposes of imposing relief under Section 4C(a)(3) of the Exchange Act +and Rule 102(e)(1)(iii), “‘means no more than that the person charged with the duty knows what +he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, +174 F.2d 969, 977 (D.C. Cir. 1949)). + +9 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Kelly’s Offer. + + Accordingly, it is hereby ORDERED, pursuant to Section 8A of the Securities Act, +Sections 4C and 21C of the Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, +effective immediately, that: + + A. Kelly shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), +13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a- +13, and 13b2-1 promulgated thereunder. + + B. Kelly is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. Kelly shall pay civil penalties of $100,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury subject to Exchange Act +Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. § 3717. + + Payment shall be made in the following installments: (1) Within ten (10) days of the entry +of this Order, Respondent will pay $50,000; (2) Within ninety (90) days of the entry of this Order, +Respondent will pay $12,500; (3) Within one hundred and eighty (180) days of the entry of this +Order, Respondent will pay $12,500; (4) Within two hundred and seventy (270) days of the entry +of this Order, Respondent will pay $12,500; and (5) Within three hundred and sixty (360) days of +the entry of this Order, Respondent will pay the remainder due, as described below. + + Payments shall be applied first to post-Order interest, which accrues pursuant to 31 U.S.C. +§ 3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-Order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application to +the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + +10 +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Mark C. Kelly as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Thomas P. Smith, Jr., Division +of Enforcement, Securities and Exchange Commission, 100 Pearl Street, Suite 20-100 New York, +New York 10004-2616. + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, he +shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree + + +11 +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4330.txt b/raw/aaer/2022/AAER-4330.txt new file mode 100644 index 0000000000000000000000000000000000000000..959054e668f2cf13b6cb310f81003ca381640e88 --- /dev/null +++ b/raw/aaer/2022/AAER-4330.txt @@ -0,0 +1,192 @@ + +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95663 / September 2, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4330 / September 2, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21022 + + +In the Matter of + +CHS Inc., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against CHS Inc. (“CHS,” “the company,” or +“Respondent”). +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +2 + +Summary +1. This matter concerns violations of the reporting, books and records, and internal +accounting controls provisions of the Exchange Act by CHS. As part of its business, the company +enters into contracts with railroads to transport commodities throughout North America. From at +least 2014 through 2018, a CHS employee manipulated the quantities and values of these rail +freight contracts. He was able to do this because of CHS’s insufficient internal accounting controls. +For example, CHS allowed the employee to both execute trades and determine their valuations. As +a result of the employee’s misconduct, CHS filed materially false financial statements with the +Commission on Forms 10-K, 10-Q, and 8-K. CHS later restated its net income for its fiscal years +2014 through 2018. +Respondent +2. CHS Inc., a Minnesota corporation headquartered in Inver Grove Heights, +Minnesota, is an agricultural cooperative that provides grain, food, agronomy, and energy +resources to businesses and consumers on a global scale. Its classes of preferred stock are +registered pursuant to Section 12(b) of the Exchange Act and trade on the NASDAQ Global Select +Market as CHSCP, CHSCO, CHSCN, CHSCM, and CHSCL. +Other Relevant Individual +3. Rail Freight Trader was a CHS senior freight merchandiser during the relevant +time period. +FACTS +CHS’s Structure and Background Information +4. CHS has issued preferred stock, but not common stock. The company is a +cooperative whose equity is 70% owned by approximately 950 local cooperatives that are, in turn, +owned by half a million farmers and ranchers. The balance of CHS’s equity is owned by roughly +75,000 individual agricultural producers. + +5. CHS operates in three reportable segments—Energy, Nitrogen Production, and Ag. +Within the Ag segment resides the company’s North American grain marketing operations, which +is the business unit most relevant to this matter. Rail Freight Trader’s trading desk was charged +with buying and selling rail freight capacity to support North American grain operations. CHS’s +rail freight capacity requirements were often met by entering into shuttle loader train contracts with +railroads. These contracts typically provided for the right and obligation of CHS to continuously +operate a 110-car train, from one origin to one destination, for one year. Rail Freight Trader +obtained shuttle contracts primarily by participating in auctions conducted by railroads. + +6. Prior to its December 2018 restatement, CHS accounted for its auction and +secondary market shuttle transactions as derivatives. Accordingly, the company carried the net +value of the derivatives as an asset on its balance sheet and valued its shuttle capacity on a mark- +to-market basis. Rail Freight Trader was solely responsible for providing the shuttle contract + +3 + +quantities and values the company used for derivative accounting purposes. No CHS employees +were tasked with confirming the accuracy of the information provided by Rail Freight Trader. + +Rail Freight Trader’s Fraud +7. During August 2018, a CHS vice president reviewed Rail Freight Trader’s most +recent bid sheet. When he and another CHS employee, who was knowledgeable about shuttle +values as a consumer of rail freight, examined the document, both immediately recognized that the +values provided by Rail Freight Trader were grossly overstated. The divergence was so extreme +that the vice president initially thought that perhaps he misunderstood what the bid sheet reflected. + +8. In early September, CHS management held a series of meetings in an attempt to +understand the reasons behind the discrepancy. It quickly became apparent that Rail Freight Trader +did not have a legitimate basis for his inflated values. Instead of providing objective, market-based +prices to CHS’s accounting group, Rail Freight Trader had reported values that he claimed were +supported by his personal view of what the shuttle contracts would eventually be worth. + +9. On September 7, 2018, CHS commenced an internal investigation. In addition to +confirming widespread valuation problems, the investigation discovered numerous fictitious rail +freight contracts that Rail Freight Trader had added to the company’s books and records. +The Fraud’s Impact +10. Because of Rail Freight Trader’s fraud, CHS’s fiscal year 2014 through 2018 +Forms 10-K and 10-Q contained materially false financial statements. For the same reason, the +company’s Forms 8-K filed with the Commission on June 14, 2017, December 8, 2017, and May +17, 2018, were also inaccurate. On December 3, 2018, CHS filed a Form 10-K in which it restated +its audited financial statements for fiscal years 2016 and 2017, as well as select financial +information for fiscal years 2014 and 2015. The company also restated its unaudited financial +statements for the first three quarters of fiscal years 2017 and 2018. While there were also +unrelated issues included in the restatement, the bulk of the restatement was attributable to Rail +Freight Trader’s fraud. + +Violations +Reporting Violations +11. As a result of the conduct described above, CHS violated Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder, which require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission +information, documents, and annual, quarterly, and current reports as the Commission may +require, and mandate that periodic reports contain such further material information as may be +necessary to make the required statements not misleading. + + + +4 + +Books and Records Violations +12. Also as a result of the conduct described above, CHS violated Section 13(b)(2)(A) +of the Exchange Act, which requires reporting companies to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions +of their assets. +Internal Accounting Controls Violations +13. Lastly, as a result of the conduct described above, CHS violated Section +13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that transactions +are recorded as necessary to permit preparation of financial statements in accordance with +generally accepted accounting principles. +CHS’s Cooperation and Remedial Efforts +14. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +15. Among other things, CHS identified the improper conduct, initiated an internal +investigation, and promptly notified the Commission staff. CHS provided relevant documents, +made employees available for interviews, provided assistance in obtaining relevant information +from third parties, and presented findings from its internal investigation. + +16. CHS also engaged in remediation efforts, including the creation of an internal +controls remediation steering committee and retention of outside experts to analyze and correct its +control failures; the hiring of additional personnel to bolster its internal controls processes; and +adopting policies, procedures, controls, and training to prevent the recurrence of similar events. + +17. CHS promptly terminated Rail Freight Trader and later terminated, demoted, or +placed on performance improvement plans additional employees for their insufficient oversight of +the rail freight desk. In addition, without the staff’s prompting or involvement, CHS pursued and +clawed back incentive compensation from 26 current or former CHS officers and directors due to +CHS’s false financial statements. + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent CHS’s Offer. + + + + + + + + +5 + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent CHS cease and desist +from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4333.txt b/raw/aaer/2022/AAER-4333.txt new file mode 100644 index 0000000000000000000000000000000000000000..f8884ff3b1cf7c958fc0495deb0cf91d97e668dd --- /dev/null +++ b/raw/aaer/2022/AAER-4333.txt @@ -0,0 +1,434 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11099 / September 12, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95744 / September 12, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4333 / September 12, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21065 + + +In the Matter of + +VMWARE, INC., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against VMware, Inc. (“VMware” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section +21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist +Order (“Order”), as set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter concerns VMware’s omission of material information in its disclosures +concerning its order “backlog” and revenue management, in quarterly and annual Exchange Act +reports, on earnings calls, and in earnings releases, during its 2019 and 2020 fiscal years (the +“relevant period”).2 This information was necessary in order to make such statements, in light of +the circumstances under which they were made, not misleading. Beginning with the adoption of a +new accounting standard for its FY2019, VMware began discretionarily holding back some sales +orders, which were otherwise ready to be booked and recorded as revenue in the current quarter, in +an effort to delay revenue and control the timing of revenue recognition, which was important to +the company. These discretionary holds, which VMware referred to internally as “managed +pipeline” or “MPL,” delayed the delivery of license keys to customers and thus, according to +VMware’s revenue recognition policy, delayed the recognition of license revenue to the next +quarter or service revenue to future quarters as services were performed. As a result, VMware +shifted tens of millions of dollars in revenue into future quarters. + +2. VMware utilized discretionary holds if the company was on track to meet its +financial guidance to securities analysts and investors. The holds then would be released shortly +after the end of the quarter. This had the effect of increasing the amount of backlog that VMware +reported in its Forms 10-Q and 10-K and delaying revenue recognition into future +quarters. Beginning with its Form 10-Q filed for Q1 FY19, VMware began disclosing in its filings +that “[t]he amount and composition of [VMware’s] backlog will fluctuate period to period, and +backlog is managed based upon multiple considerations, including product and geography,” but the +disclosure omitted material information regarding the discretionary nature of VMware’s backlog, +the extent to which VMware controlled the amount of its backlog, and how backlog was used to +manage the timing of the company’s recognition of total and license revenue. In actuality, +VMware’s backlog practices during the relevant period were controlled for the purpose of +determining in which quarters revenue would be recognized, and had the effect of obscuring the +company’s financial results and avoiding revenue shortfalls versus company financial guidance +and analysts’ estimates in at least three quarters during FY20, as well as full-year FY20. + + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + +2 VMware’s fiscal-year numbering runs nearly a full year ahead of the calendar year. The FY19- +FY20 period at issue herein ran from February 3, 2018 through January 31, 2020. As a result, +the Forms 10-Q and 10-K at issue herein relate to the quarters Q1 FY19 (Form 10-Q filed on +June 11, 2018) through Q4 FY20 (Form 10-K filed on March 26, 2020). + 3 + +Respondent + +3. VMware, Inc. is a Delaware corporation based in Palo Alto, California. Its +common stock has been registered pursuant to Exchange Act Section 12(b) and listed on the New +York Stock Exchange since 2007. VMware primarily engages in the sale of cloud-storage +software and services, in areas including hybrid cloud, multi-cloud, modern applications, +networking and security, and digital workspaces. + +Facts +Background + + 4. During the relevant period, VMware’s backlog at the end of each reporting period +consisted of the company’s unfulfilled orders for software, maintenance, and related professional +services. Under U.S. generally accepted accounting principles (“GAAP”), revenue is recognized +upon transfer of control. VMware recognizes revenue upon delivery to customers of license keys +to access on-premises or cloud-based software, or through delivery of services – such as +technology support and consulting work – as such services are performed. + + 5. During FY19 and FY20, VMware controlled the timing of its revenue recognition +by placing discretionary holds on selected sales orders, which delayed the delivery of license keys. +VMware employed discretionary holds when business objectives – including those for “bookings”3 +and revenue – had been achieved, in order not to exceed the company’s revenue guidance by too +much and as a way, in the words of VMware personnel, to start the next quarter with a buffer or +more momentum than it might have had otherwise. + + 6. Through the use of discretionary holds, MPL orders were entered into VMware’s +system, but order booking – and the coincident, automated email delivery of license keys – was +suspended until just after quarter-end, at which point the hold was released, the order booked, and +revenue subsequently recognized. + +VMware’s Backlog Disclosures and Practices + + 7. During the relevant period, VMware disclosed a backlog metric in its quarterly and +annual reports. That backlog metric included orders withheld from booking for both +nondiscretionary and discretionary reasons, but did not disclose this. The largest category of +nondiscretionary backlog consisted of orders held for regulatory export compliance reasons, but +the great majority of backlog during the relevant period consisted of discretionarily held orders, or +MPL. + + +3 VMware’s bookings are, essentially, non-cancellable customer orders that have been fully +processed or “booked” within VMware’s order management system. When an order is fully +processed, the order management system automatically generates and delivers license keys for +the software components of the order. + 4 + 8. Beginning with Q1 FY19 (i.e., the company’s June 11, 2018 Form 10-Q), the +Management’s Discussion and Analysis of Financial Condition and Results of Operations +(“MD&A”) section of VMware’s quarterly and annual reports disclosed, inter alia, that “[t]he +amount and composition of [VMware’s] backlog will fluctuate period to period, and backlog is +managed based upon multiple considerations, including product and geography.” This disclosure +(the “managed backlog disclosure”) was formulated by VMware senior finance and accounting +personnel with review and opportunity for input from others, including senior management, the +audit committee, and VMware’s independent auditor, shortly before the Q1 FY19 Form 10-Q was +filed. An earlier, filed version of the MD&A backlog disclosure first appeared in the Business +section of VMware’s FY16 Form 10-K, although without the “managed” language. The FY19 and +FY20 Forms 10-K included the managed backlog disclosure in both the Business and MD&A +sections of each report, while the Forms 10-Q during that time, which did not have a Business +section, included the disclosure in MD&A. + + 9. Beginning in Q3 FY19 (i.e., fall 2018), VMware formalized its internal MPL +processes into a written “Bookings Finalization Process & Backlog” policy, which was drafted by +VMware finance and accounting personnel. The written policy formally required the participation +of VMware senior management in the managed pipeline process, through a regularly-scheduled +meeting at or around Week 9 of each 13-week quarter. The policy further required that +discretionary holds were to be discussed at the meeting and could be “value-based, product-based, +geo[graphy]-based or any combination,” and stated that such holds would be placed on or after +Week 9. Decisions whether to release and book any discretionary holds for particular MPL orders +were made in the final weeks, days, and hours of the quarter by VMware senior finance and +accounting personnel. Preliminary quarterly-bookings and quarterly-MPL summaries were shared, +essentially in real time, among VMware senior management. + + 10. License orders that were still in MPL at quarter-end were typically booked, and the +license revenue recognized, within the first few days of the next quarter. Non-license, quarter-end +MPL orders were also typically booked in the first week of the next quarter, with associated +revenue recognition occurring based on the product in accordance with VMware’s revenue +recognition policy, potentially over multiple quarters, as services were performed. + +MPL Increases and Reductions: Fiscal Years 2019 and 2020 + + 11. Over the course of FY19, VMware’s quarter-end MPL increased by approximately +50%, from roughly $273 million at the beginning of Q1 to about $409 million at the end of Q4, +with license-related MPL orders (“license MPL”), in particular, increasing by approximately 32%, +from nearly $94 million at the beginning of Q1 to nearly $124 million at the end of Q4. VMware’s +license revenue, license bookings, and license backlog were a particular focus of securities analysts +during the relevant period because software licenses had historically been seen as the key driver of +VMware’s entire business. At the end of FY19, approximately 91% of VMware’s reported total +backlog of $449 million consisted of MPL, i.e., discretionarily held orders, and roughly 84% of +reported license backlog consisted of license MPL. The approximately $409 million in MPL at the +end of Q4 represented approximately 10% of all completed, ready-to-book VMware orders at the +end of Q4 – the rest of which were in fact booked in Q4. + 5 + + 12. During the course of FY20, however, VMware’s business continually slowed +versus the expectations quantified in the company’s own guidance and in analysts’ revenue +estimates. This occurred partially because of macro factors but also because VMware had +accelerated its move to subscription-based software sales, which slowed the company’s license +revenue growth and shifted revenue from on-premises licenses with upfront revenue recognition +upon delivery to cloud-based, subscription software requiring ratable revenue recognition over the +term of the contract. However, VMware’s quarter-over-quarter net reductions in the large end-of- +quarter backlog numbers that it had initially carried into FY20 from FY19 obscured this shift. The +existence and net (i.e., quarter over quarter) reduction of that backlog throughout FY20 resulted in +more revenue being recognized in each quarter than would otherwise have been recognized, +allowing VMware to meet analyst estimates it would otherwise have missed. Internal FY20 emails +at VMware noted the company’s ongoing “use” or “burn[ing]” of MPL.4 + + 13. Analysts who inquired about the continued trend in backlog reduction – with +VMware’s investor relations (“IR”) staff or with VMware executives at organized IR events – +were told that “[b]acklog only represents a small subset of our future revenues,” without any +disclosure regarding the largely discretionary nature of VMware’s backlog and VMware’s use of +backlog to manage its quarterly total and license revenue. + +Revenue Impact of FY20 MPL Reductions + + 14. VMware’s net reduction in quarter-end license MPL was material to reported +license revenue in Q1 FY20, enabling VMware to boost reported license revenue by approximately +11%. VMware’s continual MPL reductions over the course of FY20 were likewise material, +enabling the company to meet guidance and analyst estimates, or reducing the amount by which it +missed guidance and/or estimates, during multiple quarters, for both total and license revenue. + + 15. In all, the MPL or discretionary component of VMware’s total backlog fell each +quarter during FY20, by a total of nearly 99% over the course of the entire fiscal year, from +roughly $409 million at the end of Q4 FY19 to only, approximately, $4 million at the end of Q4 +FY20, as the company essentially “used” or “burned” the entirety of its MPL. Moreover, +VMware’s license MPL fell in three of four quarters during FY20, by a total of nearly 100% over +the course of the fiscal year, from nearly $124 million to approximately $0.1 million. By FY20 +year-end, VMware’s business had slowed to such an extent versus expectations that it was +essentially no longer generating any perceived excess sales to “hold” as MPL. In parallel, +VMware’s stock price fell by approximately 37% from its closing price during trading on May 30, +2019, prior to the company’s after-the-close announcement of Q1 FY20 results, to its closing price + +4 VMware effectively “used” discretionary backlog to increase revenue in a given quarter by +choosing, at quarter’s end, to carry over less MPL into the next quarter than it had carried into +the current quarter, for a net reduction in quarterly MPL. VMware’s net reductions in quarterly +MPL during FY20, and its prior net increases in MPL during FY19, were undertaken to manage +revenue to meet company guidance and analysts’ expectations. + 6 +on February 28, 2020, the day following VMware’s after-the-close announcement of Q4 FY20 and +full-year FY20 results. + +Quarterly Earnings Calls + +16. VMware’s earnings calls largely were scripted. Call scripts, including sample +question-and-answer (“Q&A”) scripts, were drafted by the IR department and reviewed in advance +by VMware executives and the legal department. + + 17. VMware’s Q1 FY20 earnings call cited the company’s “consistency” and assured +investors and analysts that the company was “seeing strong execution by our teams” and was +“feeling quite good about the momentum that we see going into Q2 and for the second half.” In +the second quarter, VMware continued the narrative of strong growth, stating on its earnings call, +“[W]e demonstrated strong performance … in all 3 geographies.” All the while, VMware’s +internal Q&A preparation for the earnings calls anticipated analysts’ concern with the “continued +… decline” in total and license backlog numbers. Reports from analysts indicated that some of +them had calculated and understood the revenue impact of VMware’s backlog declines, but when +asked about these declines subsequent to the Q1 and Q2 earnings calls, VMware provided only +scripted replies, such as “[w]e are pleased with the performance of the quarter,” and “[b]acklog is +only one part of our overall sales pipeline.” + + 18. On its Q3 FY20 earnings call, VMware dismissed questions from analysts +regarding the apparent “gap” or “delta” between the “strong growth that VMware is seeing” and +weak or mixed results seen from hardware vendors, citing “the ongoing strength of [VMware’s] +business” and affirming, “So yes, we feel good about the [Q4] guide. We feel good about our +pipeline heading into Q4 … and the solid guide for the [fiscal] year.” For its fourth quarter and +full-year FY20 results, VMware changed the presentation of its financial results to account for a +merger and to add a “subscription” revenue line item reflective of the increase in VMware’s +subscription-based software sales. Reconciliation with the prior presentation, provided in +VMware’s slides for its fourth quarter earnings call, showed substantial misses to guidance and +analyst estimates for quarterly and full-year revenue despite the company’s nearly total net +depletion of quarter-end MPL. VMware acknowledged on the earnings call only that “for the +quarter and year, revenue came in a bit short of expectations” and attributed the miss to “a higher +mix of SaaS [i.e., subscription] as well as … deal execution challenges … at the end of the +quarter.” + +VMware’s Statements Were Misleading + + 19. In making public statements regarding its backlog, VMware omitted material +information regarding the extent to which the company controlled its quarter-end total and license +backlog numbers through its use of discretionary holds, and the extent to which it used backlog to +control the timing of revenue recognition generally. The managed backlog disclosure did not +convey to investors the material information that backlog was used by VMware to manage the +timing of revenue recognition based upon factors such as the company’s financial guidance and + 7 +analysts’ estimates. This information was necessary in order to make VMware’s statements +regarding its backlog, in light of the circumstances under which they were made, not misleading. + + 20. In each quarter during FY20, VMware’s practice of managing the timing of +revenue recognition through its use of backlog enabled it to more closely match guidance and +analyst estimates for its total and license revenue. Without disclosure regarding all material +aspects of the backlog, investors lacked necessary information to meaningfully evaluate VMware’s +reported financial results and the extent to which those results might be indicative of future results. +VMware thus made materially misleading disclosures regarding its backlog practices in its FY19 +and FY20 periodic reports. + +21. Additionally, during FY20, VMware misleadingly reassured investors on quarterly +earnings calls and in earnings-related press releases and other earnings materials furnished as Form +8-K attachments or made available on its website, that its revenue growth was meeting +expectations, when revenue actually would not have met expectations or would have missed +expectations by a larger amount without VMware’s continual net reductions in its discretionary +backlog. These statements were misleading by virtue of VMware’s omission of material +information regarding the full extent of its backlog practices. + +22. Furthermore, FY20 year-over-year percentage increase figures provided by +VMware on a quarterly basis for total and license revenue, on earnings calls and in the +aforementioned materials, as well as in periodic filings, misleadingly portrayed the company’s +revenue growth. This was the case not only because the FY20 results were almost always higher +than they would have been without VMware’s quarter-end backlog reductions but also because the +prior fiscal year’s results had been generally held back by VMware’s quarter-end backlog +increases during FY19 – meaning FY19 orders that otherwise could have been booked had instead +been discretionarily held in order to more closely track revenue to VMware’s FY19 quarterly +guidance and analysts’ estimates. + +23. The year-over-year percentage increase figures and disclosure omissions were +material. As the company was aware, VMware’s ability to meet guidance and analysts’ estimates +was material to its stock price. In fact, VMware specifically cited this as a “risk factor” in its +Forms 10-K and 10-Q throughout the relevant period, as follows: “If our revenue or operating +results fall below the expectations of investors or securities analysts or below any guidance we +may provide to the market, the price of our Class A common stock would likely decline +substantially.” License revenue, in particular, was a specific focus of securities analysts who + 8 +covered VMware’s stock and was reported by VMware as a separate revenue line item in its +financial statements. Without its FY20 quarter-end backlog reductions: + + VMware, in Q1, would have missed rather than met guidance and analyst consensus estimates +for total revenue, and guidance for license revenue; + VMware, in Q2, would have missed rather than met guidance for license revenue; + VMware, in Q2 and Q3, may have missed guidance and analyst consensus estimates for total +revenues, rather than meeting them; and + VMware, in Q4 and full-year FY20, would have missed guidance and analyst consensus +estimates for total revenue and guidance for license revenue, by substantially larger +percentages than disclosed. + +VMware’s statements and omissions regarding its quarterly revenue and revenue growth, without +disclosing the impact that the company’s discretionary backlog practices and revenue management +had on reported revenue, materially concealed a substantial FY20 slowing in the company’s +recognized revenue growth versus expectations. + + 24. Reasonable investors would have considered the foregoing information to have +been important in deciding whether to purchase VMware securities during the relevant period. In +addition, this was important information to analysts, who began questioning VMware’s backlog +“drawdown” following the company’s Q1 earnings call and continued to question the continual +reductions in quarter-end backlog numbers throughout the remainder of the fiscal year. VMware +recognized the materiality of the issue when preparing its Q&A scripts. + +VMware Offered and Sold Securities During the Relevant Period + + 25. During the relevant period, VMware offered and sold securities, including selling +shares under the company’s employee stock purchase plan, issuing restricted stock as +compensation to certain employees under its employee incentive plan, and selling notes. + +Violations + + 26. As a result of the conduct described above, VMware violated Sections 17(a)(2) and +(3) of the Securities Act, which prohibit any person from directly or indirectly obtaining money or +property by means of any untrue statement of a material fact or any omission to state a material +fact necessary in order to make the statements made, in light of the circumstances under which +they were made, not misleading, or engaging in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser, in the offer or sales of +securities. A violation of these provisions does not require scienter and may rest on a finding of +negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-02 (1980). + +27. Also as a result of the conduct described above, VMware violated Section 13(a) of +the Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 thereunder, which require every +issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission information, documents, and annual, current, and quarterly reports as the + 9 +Commission may require – including information required by Regulation S-K Item 101(c) to be +contained in annual reports – and mandate that periodic reports contain such further material +information as may be necessary to make the required statements not misleading. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent VMware’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent shall cease and desist from committing or causing any violations and any future +violations of Section 17(a)(2) and (a)(3) of the Securities Act and Section 13(a) of the Exchange Act +and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder. + + B. Respondent shall, within 14 days of the entry of this Order, pay a civil money penalty +in the amount of $8,000,000 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is +not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + + Payment must be made in one of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which + will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov + through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United States + postal money order, made payable to the Securities and Exchange + Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + Payments by check or money order must be accompanied by a cover letter identifying +VMware as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Jeffrey P. Weiss, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + + 10 + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4335.txt b/raw/aaer/2022/AAER-4335.txt new file mode 100644 index 0000000000000000000000000000000000000000..8dae85aa759027eed3c28fdd423fc047b140248f --- /dev/null +++ b/raw/aaer/2022/AAER-4335.txt @@ -0,0 +1,473 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95833 / September 19, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4335 / September 19, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21111 + + + +In the Matter of + +MATTHEW W. DREYER, +CPA, + + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS, +PURSUANT TO SECTION 4C OF +THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Matthew W. Dreyer +(“Respondent” or “Dreyer”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii)2 of the Commission’s Rules of Practice. + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to be lacking in character or integrity or to +have engaged in unethical or improper professional conduct. + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) that the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Public Administrative +Proceedings, Pursuant to Section 4C of the Exchange Act and Rule 102(e) of the Commission’s +Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY +1. This matter involves the lack of integrity and improper professional conduct by +Respondent Dreyer, a certified public accountant, relating to an engagement to verify client funds +and securities of which an SEC-registered investment adviser, Arcadia Wealth Management, Inc. +(“Arcadia”), had custody pursuant to Section 206(4) of the Investment Advisers Act of 1940 +(“Advisers Act”) and Rule 206(4)-2 thereunder (the “Custody Rule”). +2. For more than two years after Dreyer agreed to accept the surprise examination +engagement by Arcadia in March 2018, Dreyer failed to take meaningful steps to acquire the +knowledge necessary to perform and complete the engagement and did not withdraw from the +engagement. After Arcadia contacted Dreyer in late March 2020 to explain that Arcadia was +undergoing an SEC examination and to ask him if he had any documentation of his work, in April +2020 Dreyer issued an undated report to Arcadia which contained numerous misrepresentations +regarding procedures Dreyer claimed he had performed during the examination but never actually +carried out. Moreover, when told by Arcadia that SEC examination staff asked for the report’s +date, Dreyer misrepresented that the report was drafted and should have been dated on July 31, +2018. Dreyer understood when he provided the report and the false date of completion to Arcadia +that this information would be provided to the SEC examination staff. As a result, Respondent +failed to act with integrity and engaged in unethical and improper professional conduct that +provides a basis to impose remedies pursuant to Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +RESPONDENT +3. Matthew W. Dreyer, age 43, resides in South Setauket, NY. Dreyer has been a +certified public accountant licensed in New York since 2005 and is a sole practitioner. +OTHER RELEVANT ENTITY +4. Arcadia is a New York corporation with its principal office and place of business +in Smithtown, New York. Arcadia has been registered with the Commission as an investment +adviser since 2012. + +FACTS +5. The Custody Rule is designed to protect investment advisory clients from the +misuse or misappropriation of their funds and securities. The surprise examination requirement +is a key means of achieving this objective. Under the Custody Rule, an investment adviser who +has custody of client funds and securities must, among other things, enter into a written agreement +with an independent public accountant to obtain an independent verification of those assets at least +once during each calendar year at a time chosen by the accountant without prior notice to the +adviser and require that the accountant file with the Commission a certificate on Form ADV-E +within 120 days of the date that the accountant chose to perform the examination as of (the +“surprise examination” requirement). See Rule 206(4)-2(a)(4). +6. In March 2018, Arcadia asked Dreyer to perform its annual surprise examination +pursuant to the Custody Rule of the funds and securities of two client trusts over which Arcadia +had custody as a result of Arcadia’s CEO and principal owner’s position as trustee of those +trusts. Prior to this time, Dreyer had never performed a surprise examination engagement, was +not familiar with the Custody Rule, and did not possess the knowledge and skills to complete the +engagement. There was no written agreement for Dreyer’s engagement with Arcadia. +7. After Dreyer accepted the engagement, he sought and obtained certain +documentation from Arcadia regarding two client trust accounts. However, over the next two +years Dreyer did not complete the examination and issue a report or file a certificate with the +Commission on Form ADV-E. During that time, Arcadia periodically contacted Dreyer to inquire +as to the status of his examination and offered informational resources. Nevertheless, Dreyer +neither completed the surprise examination nor withdrew from the engagement. +8. Following the commencement of a March 2020 examination of Arcadia by the +SEC’s Division of Examinations staff, Arcadia contacted Dreyer. Specifically, on March 30, +2020, Arcadia’s Chief Compliance Officer (“CCO”) emailed Dreyer: “We are currently +undergoing an SEC examination. Do you have anything to show that you reviewed the trust +accounts that we are trustee for, back in 2018? I don't think you ever filed the ADV-E, but any +documentation that you might have will be helpful. All documents are due back to them by +Wednesday. I know you are busy, but a quick response would be great, if possible.” +9. On April 7, 2020, Arcadia’s CCO again emailed Dreyer, writing, “Just checking +in-we heard back from the SEC and he just wanted to follow up on when we might have a +response regarding the audit you conducted. Hopefully you'll be able to get to it this week!” +4 + +10. That same day, Dreyer replied by email attaching his accountant’s surprise +examination report and a management statement regarding compliance with the Custody Rule +asserting that Arcadia was in compliance with certain specified custody and books and records +provisions for the period January 1, 2017 to July 24, 2018, which he indicated would need to be +signed by Arcadia. Dreyer’s surprise examination report represented he had conducted the +examination in accordance with the attestation standards established by the American Institute of +Certified Public Accountants (“AICPA”) and had examined management’s assertions regarding its +compliance with the specified provisions during that time period, and specified a number of +procedures purportedly performed. +11. Dreyer’s report was undated and included numerous misrepresentations about +procedures Dreyer claimed to have performed but which he did not actually do. For example, in +the report, Dreyer claimed to have conducted a “[c]ount and inspection of securities located in the +vault of the Company in Smithtown, NY.” Yet Dreyer did not – and could not – have performed +these procedures because Arcadia did not hold physical securities in a vault in its Smithtown, NY +offices (or anywhere else). As another example, the report made representations concerning +confirmations made with qualified custodians and clients, which was also not a procedure +performed. In fact, Dreyer did not prepare or retain any documentation of procedures performed +in connection with the engagement. +12. On May 9, 2020, Arcadia’s CCO emailed Dreyer, stating: “The SEC is +requesting the date of the document that you provided to us, . . ., Can you confirm when this was +completed?” In a follow up email on May 12, 2020, Arcadia’s CCO wrote to Dreyer again: “I +need to get back to the SEC today on when you completed the [report]. Can you confirm?” Later +that day, Dreyer replied by email, stating: “My apologies for not having a date on the audit +report. It was drafted and should have been dated back on 7/31/2018.” Dreyer’s representation +regarding the date of the report was false, which he understood Arcadia would provide to the SEC. +Violations4 +Respondent Failed to Act with Integrity +13. The AICPA’s Code of Professional Conduct’s5 (the “AICPA CPC”) “Integrity +Principle” provides that “members should perform all professional responsibilities with the + +4 References to the American Institute of Certified Public Accountants’ (“AICPA”) Clarified Statements on +Standards for Attestation Engagements are to those standards that were in effect at the time of the relevant conduct. + +5 Surprise examinations must be performed in accordance with AICPA AT-C § 315 (Compliance +Attestation). AT-C § 315.04, in turn, requires a practitioner to apply the requirements of AT -C § 105A and § 205A. +AT-C § 105A (Concepts Common to All Attestation Engagements) establishes the connection between the +Attestation Standards and Quality Control standards of the AICPA. In particular, AT -C § 105A.06 provides for “an +obligation to establish and maintain a system of quality control to provide . . . reasonable assurance that . . . the firm +and its personnel comply with professional standards and applicable legal and regulatory requirements.” The +AICPA’s Statements on Quality Control Standards, at QC § 10 provides that the system of quality control should +provide reasonable assurance that the firm and its personnel comply with relevant ethical requirements, which +include the AICPA’s Code of Professional Conduct (AICPA QC § 10.13; QC § 10.17; QC § 10.21). + +5 + +highest sense of integrity.” (AICPA CPC § 0.300.040.01). “Integrity requires a member to be, +among other things, honest and candid within the constraints of client confidentiality,” and while +“[i]ntegrity can accommodate the inadvertent error and honest difference of opinion; it cannot +accommodate deceit or subordination of principle.” (AICPA CPC § 0.300.040.03). Specifically, +the “Integrity and Objectivity Rule” requires that “[i]n the performance of any professional +service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, +and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”6 +(AICPA CPC § 1.100.001.01). Further, a practitioner performing an engagement “would be +considered to have knowingly misrepresented facts in violation of the ‘Integrity and Objectivity +Rule,’ if the member . . . signs, or permits or directs another to sign, a document containing +materially false and misleading information.” (AICPA CPC § 1.130.010.01). +14. Respondent failed to perform the surprise examination with honesty and integrity. +Respondent’s report of the surprise examination misrepresented that Respondent performed +procedures that he never actually did and he misrepresented the date of his report. Finally, +Respondent made these misrepresentations knowing that Arcadia would provide his documents +and responses to the SEC staff. +Respondent Failed to Exercise Due Care +15. The AICPA CPC principle of “due care” requires that “[a] member should observe +the profession’s technical and ethical standards, strive continually to improve competence and the +quality of services, and discharge professional responsibility to the best of the member’s ability.” +(AICPA CPC § 0.300.060.01). Further, “[d]ue care requires a member to discharge professional +responsibilities with competence and diligence.” (AICPA CPC § 0.300.060.02). In the +performance of an engagement, “each member should undertake to achieve a level of competence +that will assure that the quality of the member’s services meets the high level of professionalism. . +.” (AICPA CPC § 0.300.060.03). The principle provides further that “competence” represents not +only “the attainment and maintenance of a level of understanding and knowledge that enables a +member to render services with facility and acumen” but “[i]t also establishes the limitations of a +member’s capabilities by dictating that consultation or referral may be required when a +professional engagement exceeds the personal competence of a member or a member’s firm. Each +member is responsible for assessing his or her own competence of evaluating whether education, +experience, and judgment are adequate for the responsibility to be assumed.” (AICPA CPC § +0.300.060.04). Finally, “[m]embers should be diligent in discharging responsibilities to clients, +employers, and the public. Diligence imposes the responsibility to render services promptly and +carefully, to be thorough, and to observe applicable technical and ethical standards.” (AICPA CPC +§ 0.300.060.05). +16. In addition to the Code of Professional Conduct, AICPA’s Concepts Common to +All Attestation Engagements (AT-C § 105A) provides that a “practitioner should accept an +attestation engagement only when the practitioner . . . (b) is satisfied that those persons who are + +6 “Professional services” includes “all services requiring accountancy or related skills performed by a +member for a client, an employer, or on a volunteer basis. These services include, but are not limited to accounting, +audit and other attest services, . . .” AICPA CPC § 0.400.40. + +6 + +to perform the engagement collectively have the appropriate competence and capabilities. ” and +“(d) has reached a common understanding with the engaging party of the terms of the +engagement, including the practitioner’s reporting responsibilities.” (AT-C § 105A.27). Further, +“[i]f it is discovered after the engagement has been accepted that one or more of the +preconditions for an attestation engagement is not present, the practitioner should discuss the +matter with the appropriate party and should determine, (a) whether the matter can be resolved; +(b) whether it is appropriate to continue with the engagement; and (c) if the matter cannot be +resolved but it is still appropriate to continue with the engagement, whether, and if so how, to +communicate the matter in the practitioner's report, and if the matter is to be communicated in +the practitioner's report, how to do so.” (AT-C § 105A.28). The practitioner should be satisfied +that he or she has “the appropriate competence, including knowledge of the subject matter, and +capabilities to . . . (i) perform the engagement in accordance with the professional standards and +applicable legal and regulatory requirements and (ii) enable the issuance of the practitioner’s +report that is appropriate in the circumstances.” (AT-C § 105A.32). +17. Respondent failed to exercise due care in performing the surprise examination. +Respondent agreed to the engagement despite having no experience or training in surprise +examinations, and Respondent took no meaningful steps to acquire the training, knowledge or skill +necessary to perform the engagement in a manner consistent with his professional obligations after +accepting the engagement. Respondent also never withdrew from the engagement or referred the +examination to another practitioner. As a result, Respondent failed to act in accordance with these +standards in accepting and performing the surprise examination. +Respondent Failed to Obtain, Prepare and Maintain Appropriate Engagement Documentation +18. AT-C Section 205A (Examination Engagements) requires that “[t]he practitioner +should agree upon the terms of the engagement with the engaging party. The agreed-upon terms of +the engagement should be specified in sufficient detail in an engagement letter or other suitable +form of written agreement.” AT-C § 205A.07. See also Rule 206(4)-2(a)(4). In addition, AT-C +Section 105A requires the practitioner to maintain “[a]ppropriate engagement documentation . . . +to provide evidence of achievement of the practitioner’s objectives and that the engagement was +performed in accordance with the attestation standards and relevant legal and regulatory +requirements.” AT-C § 105A.33. Further, “[t]he practitioner should prepare engagement +documentation that is sufficient to determine . . . [t]he nature, timing, and extent of the procedures +performed to comply with relevant AT-C sections and applicable legal and regulatory +requirements. . .” and “[t]he results of the procedures performed and the evidence obtained.” AT- +C § 205A.87. Finally, “[t]he practitioner's report should include the following, . . ., (d) An +identification of the criteria against which the subject matter was measured or evaluated., . . ., (l) +The date of the report.” AT-C § 205A.63. +19. Respondent failed to obtain, prepare and maintain appropriate engagement +documentation as required by AT-C Sections 105A and 205A which was also inconsistent with +the requirements of the Custody Rule that the accountant perform the examination pursuant to a +written agreement and file a certificate on form ADV-E within 120 days of the date of the +examination describing the nature and extent of the examination. Respondent accepted the +engagement without a written agreement or engagement letter. Respondent also failed to prepare +7 + +or maintain work papers evidencing procedures he performed for the surprise examination. +Finally, Respondent also falsified the date of his report. +FINDINGS + +20. Based on the foregoing, the Commission finds that Dreyer lacked integrity and +engaged in improper professional conduct that provides a basis to impose remedies pursuant to +Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Dreyer’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: +A. Dreyer is denied the privilege of appearing or practicing before the Commission as +an accountant. +B. After five years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are +filed with the Commission, Respondent shall submit a statement prepared by the audit +committee(s) with which Respondent will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +8 + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That Respondent undertakes to notify the Commission immediately in writing if +any information submitted in support of the application for reinstatement +9 + +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a basis +for a forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +10 + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. + +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + +I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. +11 + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4338.txt b/raw/aaer/2022/AAER-4338.txt new file mode 100644 index 0000000000000000000000000000000000000000..a04a12693becc0fe72a043d130ac154b013e2bb5 --- /dev/null +++ b/raw/aaer/2022/AAER-4338.txt @@ -0,0 +1,494 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95884 / September 22, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4338 / September 22, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21139 + + +In the Matter of + +Ira S. Viener, CPA, + +Respondent. + + + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE +102(e) OF THE COMMISSION’S +RULES OF PRACTICE, AND NOTICE +OF HEARING + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted +pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) +and Rule 102(e) of the Commission’s Rules of Practice against Ira S. Viener, CPA +(“Respondent” or “Viener”). + +II. + +After an investigation, the Division of Enforcement alleges that: + +SUMMARY + +1. These proceedings arise out of Viener’s willful violations of the federal +securities laws and his improper professional conduct. Punch TV Studios, Inc. (“Punch +TV”) retained Viener to audit Punch TV’s financial statements for fiscal years 2015 +through 2019 in connection with its Regulation A filings with the Commission. Another +commonly controlled company (“Company A”) likewise retained Viener to audit its +financial statements for fiscal year 2018 in connection with its own Regulation A filings +with the Commission. All of Viener’s audit reports stated that the audits had been + + 2 +conducted in accordance with generally accepted auditing standards (“GAAS”)1 when, in +fact, they had not been conducted in accordance with GAAS. Viener failed to adhere to +GAAS in his audits because he failed to satisfy the Commission’s independence standards +by preparing the very financial statements he later audited for Punch, for fiscal years 2017- +2019, and for Company A. In addition, Viener engaged in improper professional conduct +in all of his audits by failing to (1) properly plan the audits, (2) consider fraud, (3) obtain +sufficient appropriate audit evidence, (4) prepare adequate documentation, (5) obtain +written representations from management, (6) review the filings containing his audit +reports, and (7) exercise professional judgement and maintain professional skepticism. + +RESPONDENT + +2. Viener, age 69, is a resident of Fort Lee, New Jersey. He has been licensed +as a Certified Public Accountant in New Jersey since 1990 and is not registered with the +Public Company Accounting Oversight Board (“PCAOB”). He consented to an indefinite +suspension from practice before the Internal Revenue Service beginning August 1, 2006. +Since 2021, he has been the chief financial officer of a corporation which files information +reports with OTC Markets. + +OTHER RELEVANT PERSON AND ENTITIES + +3. Joseph Collins (“Collins”) controls and owns the majority shares of the +company for which Viener acts as chief financial officer, as well as Punch TV Studios, +Inc., and Company A. + +4. Punch TV is a Delaware corporation formed in May 2014, with its principal +place of business in Santa Fe Springs, California. In April 2016, Punch TV conducted a +Tier 2 offering under Regulation A. From April 2016 to August 31, 2017, Punch TV raised +over $4 million from about 6,600 investors in an offering purportedly pursuant to +Regulation A. Punch TV has one class of securities outstanding, which is not registered +with the Commission or actively traded. Punch TV previously settled charges of violating +Regulation A with the Commission. See Order Making Findings, Specifying Procedures, +and Temporarily Suspending Exemptions Pursuant to Section 3(b) of the Securities Act of +1933 and Regulation A Thereunder (Jan. 9, 2018). The California Department of Business +Oversight issued a Consent Order against Punch TV and Joseph Collins, chief executive +officer of Punch TV, on September 18, 2020, ordering Punch TV and Collins to desist and +refrain from selling securities in violation of California law. On September 30, 2021, the +Commission filed a litigated civil action against Punch TV and Collins for violations of +Section 5(a) and 5(c) of the Securities Act of 1933. + +5. Company A is a Delaware corporation formed in September 2018, with its +principal place of business in Santa Fe Springs, California. Collins is also the chief +executive officer of Company A. During the period October 2018 through July 2019, + +1 GAAS refers to the standards established by the American Institute of Certified Public +Accountants (“AICPA”). + + 3 +Collins and Company A filed offering statements and amendments for two Regulation A +offerings, neither of which were qualified by the Division of Corporation Finance. +Company A has no current operations, and its Delaware status is forfeited. + +FACTUAL ALLEGATIONS + +A. Viener’s Audits of Punch TV’s and Company A’s Financial Statements + +6. Viener is a solo practitioner whose practice consists mostly of preparing tax +returns for companies and individuals, some financial consulting, preparing financial +statements or reports, and conducting minor audit work. His clients are mostly individuals +and small companies, with about a third of his clients in the entertainment field. + +7. In March 2017, Viener became Punch TV’s independent auditor. At that +time, in connection with its Regulation A offering, Punch TV retained Viener to audit its +financial statements. Viener issued audit reports that were included in the Punch TV Forms +1-A for fiscal year 2015, 1-K for fiscal years 2016-2019, and 1-K/A for fiscal year 2019 +that Punch TV filed with the Commission. Those audit reports stated that that the audits +had been conducted in accordance with GAAS. + +8. In late 2018, Viener became Company A’s auditor. Viener issued audit +reports that were included in Company A’s Form 1-A and numerous amended Forms 1-A +that Company A filed with the Commission from April through September 2019.2 As with +Punch TV, Company A’s audit reports stated that they had been conducted in accordance +with GAAS. + +9. Viener admitted that he both prepared and audited Punch TV’s and +Company A’s financial statements. As Viener put it, “part of preparing the audit was +preparing the financial statements. I gathered the financial information and prepared the +financial statements.” When asked whether he considered any issues relating to auditor +independence, Viener stated he considered himself independent because he had “no +financial interest in either Company.” + +10. Viener signed the Punch TV and Company A audit reports and knew that +they would be filed with the Commission. + +11. Viener gave Collins permission to use his electronic signature with regard to +Commission filings. Viener has not taken any steps to withdraw any of his opinions. + + +2 Viener testified that he only performed one audit for Company A. It is unclear if he +performed one or more than one audit for the numerous Company A filings because they +contain audit reports with different dates. For simplicity, we refer to Viener’s audit work +for Company A as “audits.” + + 4 +B. Viener’s Failure to Conduct Audits in Accordance with Generally +Accepted Auditing Standards +12. Rule 2-02(b) of Regulation S-X states that “[t]he accountant's report . . . +[s]hall state the applicable professional standards under which the audit was conducted.” +See 17 CFR 210.2 02(b)(1). + +13. Viener issued audit reports for Punch TV and Company A that falsely stated +that the audits were performed “in accordance with generally accepted auditing standards.” +As described below, contrary to GAAS, Viener failed to (1) properly plan the audit, (2) +consider fraud, (3) obtain sufficient appropriate audit evidence, (4) prepare adequate +documentation, (5) obtain written representations from management, (6) review the filings +containing his audit reports, and (7) exercise professional judgement and maintain +professional skepticism. Moreover, as discussed below in Paragraphs 34 - 40, Viener +failed to satisfy auditor independence standards because he prepared the same financial +statements he later audited. + +14. Viener’s false statement that the audits were conducted in accordance with +GAAS was willful. + +1. Failure to Properly Plan the Audits, Assess Materiality, and +Identify and Assess Risks of Material Misstatement +15. AU-C 300,3 Planning an Audit, at .07 and .09, provides that the auditor +should establish an overall audit strategy that sets the scope, timing, and direction of the +audit and that guides the development of the audit plan, and develop an audit plan that +includes a description of the nature and extent of planned risk assessment procedures. AU- +C 320, Materiality in Planning and Performing an Audit, at .10, provides that, when +establishing the overall audit strategy, the auditor should determine materiality for the +financial statements as a whole. AU-C 315, Understanding the Entity and Its Environment +and Assessing the Risks of Material Misstatement, at .05, provides that the auditor should +perform risk assessment procedures to provide a basis for the identification and assessment +of risks of material misstatement at the financial statement and relevant assertion levels. + +16. Viener’s workpapers did not contain any audit strategy, assessment of risks +of material misstatement, or determination of materiality in accordance with GAAS with +respect to any of the audits. Although Viener claimed to have performed some planning +and risks assessments, he produced no planning or risk assessment workpapers. He also +failed to perform any materiality assessments. + +2. Failure to Properly Consider Fraud in a Financial Statement Audit +17. AU-C 240, Consideration of Fraud in a Financial Statement Audit, at .16- +.18, provides that the auditor should perform procedures to obtain information for use in +identifying the risks of material misstatement due to fraud, including making inquiries of + +3 “AU-C” refers to the AICPA professional standards. + + 5 +management regarding management’s assessment of the risk that the financial statements +may be materially misstated due to fraud, management’s process for identifying the risks of +fraud in the entity, and to determine whether they have knowledge of any actual, suspected, +or alleged fraud affecting the entity. + +18. In connection with all of the audits, Viener failed to make, or document in +his workpapers, any inquiries of management regarding fraud. + +3. Failure to Obtain Sufficient Appropriate Audit Evidence +19. AU-C 330, Performing Audit Procedures in Response to Assessed Risks and +Evaluating the Audit Evidence Obtained, at .05 and .28, provides that the auditor should +design and implement overall responses to address the assessed risks of material +misstatement at the financial statement level, and conclude whether sufficient appropriate +audit evidence has been obtained. AU-C 500A, Audit Evidence, at .06, provides that the +auditor should design and perform audit procedures that are appropriate for the purpose of +obtaining sufficient appropriate audit evidence. + +20. Viener failed to perform appropriate audit procedures, obtain sufficient +appropriate audit evidence, and conduct any evidence evaluations or reach any conclusions +regarding such evidence in support of his audit opinions. Viener’s audit procedures mainly +entailed obtaining copies of bank statements, credit card statements, invoices, and +preparing workpapers and worksheets to compile the financial statements. His workpapers +primarily consist of documents, such as bank documents, invoices, and spreadsheets with +no documented audit procedures performed or conclusions reached. + +4. Failure to Prepare Adequate Audit Documentation +21. AU-C 230, Audit Documentation. at .08, provides that an auditor should +prepare audit documentation that is sufficient to enable an experienced auditor, having no +previous connection with the audit, to understand the nature, timing, and extent of the audit +procedures performed, the results of the audit procedures performed, the audit evidence +obtained, significant findings or issues arising during the audit, the conclusions reached +thereon, and significant professional judgements made in reaching those conclusions. + +22. With respect to all the audits, Viener’s workpapers lack sufficient +documentation to determine what, if any, audit procedures were conducted as they do not +describe the nature, timing, or extent of any procedures performed. There is no +documentation regarding the results of procedures performed, significant findings or issues, +conclusions reached, or significant professional judgments made. + +5. Failure to Obtain Written Representations +23. AU-C 580, Written Representations, at .09-.11, provides that the auditor +should request written representations from management with responsibilities for the fair +presentation of the financial statements and for the information provided and completeness +of transactions. + + 6 + +24. Viener’s workpapers contain no management representation letters or any +indication that Viener requested written representations from management for Punch TV or +Company A. + +6. Failure to Review Filings with the Commission +25. AU-C 720A, Other Information In Documents Containing Audited +Financial Statements, at .01-.02, and .06, provides that the auditor has a responsibility to +read other information of which the auditor is aware in documents containing audited +financial statements and the auditor’s report thereon, in order to identify material +inconsistencies, if any, with the audited financial statements. Documents containing audited +financial statements include annual reports (or similar documents) that are issued to owners +(or similar stakeholders). + +26. Viener signed audit reports for Punch TV and Company A, which he +understood would be filed with the Commission, but he admitted that he never reviewed +any of the Punch TV or Company A filings. + +7. Failure to Exercise Professional Judgment and Maintain +Professional Skepticism +27. As stated in AU-C 200.01, AU-C 200 addresses the independent auditor’s +overall responsibilities when conducting an audit of financial statements in accordance with +GAAS. AU-C 200.A19 provides that due care requires the auditor to discharge professional +responsibilities with competence and to have the appropriate capabilities to perform the +audit and enable an appropriate auditor’s report to be issued. AU-C 200.17-.18 provides +that the auditor should plan and perform an audit with professional skepticism, recognizing +that circumstances may exist that cause the financial statements to be materially misstated +and should exercise professional judgment in planning and performing an audit of financial +statements. AU-C 200.14 provides that an attitude of professional skepticism includes a +questioning mind and a critical assessment of audit evidence. + +28. In addition, the auditor must be independent when performing an +engagement in accordance with GAAS, unless circumstances exist that are not present +here. See AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an +Audit in Accordance with Generally Accepted Auditing Standards, at .15. + +29. Viener failed to exercise due care, professional judgment, and professional +skepticism for each of the Punch TV and Company A audits. Viener deviated from GAAS +since he did not conduct planning, identify and assess risks of material misstatement, +consider materiality, properly consider fraud, evaluate and assess audit evidence, prepare +adequate audit documentation, review the filings, or obtain written representations. + +30. As a result of the conduct described above, the 2015-2019 Punch TV audits +and the 2018 Company A audit were not conducted in in accordance with GAAS. + + + 7 +VIOLATIONS + +A. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice – Improper Professional Conduct +31. Rule 102(e) of the Commission's Rules of Practice allows the Commission +to censure a person or deny the privilege of appearing or practicing before it to any person +if it finds that such person has engaged in “improper professional conduct.” Exchange Act +§ 4C(a)(2); Rule 102(e)(1)(ii). Section 4C(b) of the Exchange Act and Rule 102(e)(1)(iv) +of the Commission’s Rules of Practice define “improper professional conduct” as one of +three classes of conduct: (1) intentional or knowing conduct, including reckless conduct, +that results in a violation of applicable professional standards; (2) a single instance of +highly unreasonable conduct that results in a violation of applicable professional standards +in circumstances in which an accountant knows, or should know, that heightened scrutiny +is warranted; or (3) repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, that indicate a lack of competence to practice +before the Commission. + +32. As a result of the conduct described above, Viener engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice by engaging in repeated instances of +unreasonable conduct and/or a single instance of highly unreasonable conduct that resulted +in a violation of applicable professional standards in circumstances in which an accountant +knows, or should know, that heightened scrutiny is warranted. + +33. Because he failed to comply with GAAS as set forth above, Viener engaged +in improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange +Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +B. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice - Willful Violation of Rule 2-02(b)(1) of +Regulation S-X +34. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice authorize the Commission to censure or deny, temporarily +or permanently, the privilege of appearing or practicing before the Commission to “any +person” who is found to have “willfully violated, or willfully aided and abetted the +violation of” any provision of the Federal securities laws or the rules and regulations +thereunder. + +35. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +the applicable professional standards under which the audit was conducted. + +36. Viener violated Rule 2-02(b)(1) by issuing audit reports for each of the +2015-2019 Punch TV audits and the 2018 Company A audits stating that he had conducted +the audits in accordance with GAAS when he had not. As detailed above, Viener failed to +comply with GAAS by failing to (1) plan the audits, (2) consider fraud, (3) obtain sufficient + + 8 +appropriate evidence, (4) prepare adequate audit documentation, (5) obtain written +representations from management, (6) review the filings containing his audit reports, and +(7) exercise professional judgement and maintain professional skepticism. + +37. In addition, Viener failed to comply with GAAS because he failed to +maintain independence. Form 1-A requires that an offering statement for Tier 2 offerings +contain audited financial statements. The audit must be conducted in accordance with either +GAAS or the standards of the PCAOB, and the report and qualifications of the independent +accountant must comply with the requirements of Article 2 of Regulation S-X. + +38. Rule 2-01(b) of Regulation S-X states that the “Commission will not +recognize an accountant as independent, with respect to an audit client, if the accountant is +not, or a reasonable investor with knowledge of all relevant facts and circumstances, would +conclude that the accountant is not, capable of exercising objective and impartial judgment +on all issues encompassed within the accountant’s engagement.” Rule 2-01(c) of +Regulation S-X sets forth a non-exclusive list of circumstances resulting in a lack of auditor +independence. Under Rule 2-01(c)(4)(i), an accountant is not independent if he provides +certain bookkeeping or other services, including preparing the audit client’s financial +statements that are filed with the Commission or that form the basis of financial statements +filed with the Commission, unless it is reasonable to conclude that the results of those +services will not be subject to audit procedures during the audit of the audit client’s +financial statements. + +39. As set forth above, Viener admitted that both prepared and audited the +Punch TV and Company A financial statements. Viener therefore failed to comply with +the independence standards set forth in Rules 2-01(b) and (c) of Regulation S-X for at least +the 2017-2019 Punch TV audits and all the Company A audits. + +40. Accordingly, Viener’s statements that the audits were conducted in +accordance with GAAS were false, and he willfully violated Rule 2-02(b)(1) of Regulation +S-X in connection with these audits. + +III. + +In view of the allegations made by the Division of Enforcement, the Commission +deems it necessary and appropriate in the public interest that public administrative and +cease-and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford Respondent an opportunity to establish any defenses to such +allegations; + +B. What, if any, remedial action is appropriate in the public interest against +Respondent pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, including, but not limited to, disgorgement and civil +penalties pursuant to Section 21B of the Exchange Act; + + 9 + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondent should +be ordered to cease and desist from committing or causing violations of and any future +violations of Rule 2-02(b)(1) of Regulation S-X, whether Respondent should be ordered to +pay a civil penalty pursuant to Section 21B(a) of the Exchange Act, and whether +Respondent should be ordered to pay disgorgement pursuant to Sections 21B(e) and 21C(e) +of the Exchange Act. + + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of +taking evidence on the questions set forth in Section III hereof shall be convened not earlier +than 30 days and not later than 60 days from service of this Order at a time and place to be +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules +of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by +Rule 220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondent +shall conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The +parties may meet in person or participate by telephone or other remote means; following +the conference, they shall file a statement with the Office of the Secretary advising the +Commission of any agreements reached at said conference. If a prehearing conference was +not held, a statement shall be filed with the Office of the Secretary advising the +Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fails to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the +proceedings may be determined against him upon consideration of this Order, the +allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) +and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), +201.221(f), and 201.310. + +This Order shall be served forthwith upon Viener by any means permitted by the +Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to service of paper copies, service to the Division of Enforcement of all +opinions, orders, and decisions described in Rule 141, 17 C.F.R. § 201.141, and all papers +described in Rule 150(a), 17 C.F.R. § 201.150(a), in these proceedings shall be by email to + + 10 +the attorneys who enter an appearance on behalf of the Division, and not by paper +service. + +Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is +set before the Commission, all papers (including those listed in the following paragraph) +shall be filed electronically in administrative proceedings using the Commission’s +Electronic Filings in Administrative Proceedings (eFAP) system access through the +Commission’s website, www.sec.gov, at http://www.sec.gov/eFAP. Respondent also must +serve and accept service of documents electronically. All motions, objections, or +applications will be decided by the Commission. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to filing with or disposition by a hearing officer, all filings, including those +under Rules 210, 221, 222, 230, 231, 232, 233, and 250 of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, and 250, shall be directed to +and, as appropriate, decided by the Commission. This proceeding shall be deemed to be +one under the 120-day timeframe specified in Rule of Practice 360(a)(2)(i), 17 C.F.R. § +201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and 250, 17 C.F.R. §§ +201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that the Commission shall issue a decision on the basis of +the record in this proceeding, which shall consist of the items listed at Rule 350(a) of the +Commission’s Rules of Practice, 17 C.F.R. § 201.350(a), and any other document or item +filed with the Office of the Secretary and accepted into the record by the Commission. The +provisions of Rule 351 of the Commission’s Rules of Practice, 17 C.F.R. § 201.351, +relating to preparation and certification of a record index by the Office of the Secretary or +the hearing officer are not applicable to this proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public +hearing has been completed; (B) The completion of briefing on a motion for a ruling on the +pleadings or a motion for summary disposition pursuant to Rule 250 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.250, where the Commission has determined that no +public hearing is necessary; or (C) The determination that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155, and no public +hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, +except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is + + 11 +not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it +is not deemed subject to the provisions of Section 553 delaying the effective date of any +final Commission action. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4340.txt b/raw/aaer/2022/AAER-4340.txt new file mode 100644 index 0000000000000000000000000000000000000000..6f79a9f80056aaf68e03e89487f8ec48ce4a979a --- /dev/null +++ b/raw/aaer/2022/AAER-4340.txt @@ -0,0 +1,655 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11107 / September 23, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95889 / September 23, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4340 / September 23, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21145 + +In the Matter of + +COMPASS MINERALS +INTERNATIONAL, INC. + +Respondent. + + + + + + +ORDER INSTITUTING CEASE-AND- +PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES +ACT OF 1933 AND SECTION 21C OF +THE SECURITIES EXCHANGE ACT OF +1934, MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST +ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Compass Minerals International, Inc. (“Compass” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This case involves various disclosure violations by Compass Minerals. From 2017 +to 2018, Compass made repeated misrepresentations about its plans to reduce costs and about the +production levels at its Goderich salt mine. These misrepresentations were the consequence of a +deficient disclosure process at the company in which statements to investors were not reviewed by +personnel who were sufficiently knowledgeable about both Compass’s operations and its +disclosure obligations. The failures in Compass’s disclosure controls and procedures resulted not +only in material misstatements about the mine, but in the company’s senior management not +having sufficient information about environmental issues caused by a facility it owned in Brazil to +make appropriate determinations about disclosures. +2. Compass calls its Goderich salt mine in Canada the “crown jewel” of its asset +portfolio. Goderich is the biggest underground salt mine in the world and the largest single +contributor to Compass’s financial results, accounting for about one-third of the company’s +earnings. Between 2015 and 2019, Compass upgraded its mining system at Goderich from +drilling-and-blasting to continuous mining and continuous haulage (“CMCH”) primarily in an +effort to reduce costs. +3. In 2017, Compass told investors this upgrade was “progressing on plan” and that it +would generate $30 million in annual savings for the company beginning in 2018—equivalent to +about a 17% increase in the company’s operating income. These statements were materially +misleading. Goderich’s new mining system was unable to produce enough salt during this period +to save the company money. To the contrary, the production shortfalls caused by the upgrade +required the company to incur additional expenses that substantially increased costs for Compass, +and the company’s experience implementing the upgrade showed this would continue. Compass +did not disclose these facts, which substantially undermined Compass’s statements about the +upgrade. +4. In early 2018, Compass told investors the upgrade had already saved the company +$5 million in 2017. This was not true. While the upgrade had reduced certain expenses by about +$1 million, overall in 2017, the upgrade had instead increased costs that year. +5. During this period, Compass also misrepresented the amount of salt it was mining +and that it was able to produce at Goderich using the installed CMCH equipment, and failed to +disclose as required how the known and ongoing production shortfalls it was experiencing were +reasonably expected to reduce its future operating income. After Compass disclosed in October + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on +any other person or entity in this or any other proceeding. +3 + +2018 that continuing production shortfalls at the Goderich mine were significantly impacting its +financial results, the company’s share price declined significantly. +6. In addition to these violations involving Goderich, from the fourth quarter of 2017 +to the first quarter of 2022, Compass failed to adequately assess the financial consequences of a +recently-acquired subsidiary’s failures to comply with environmental regulations in Brazil. A +chemical plant owned by the subsidiary discharged mercury above permitted levels on certain +occasions, some of which reached near the Botafogo River. This resulted in potential financial +risks for Compass. For example, the Brazilian government may have imposed regulatory penalties +or suspended the facility’s operating permit. In addition, Compass’s Brazilian subsidiary may have +been subject to liability from third parties impacted by any contamination. Because of its deficient +disclosures controls and procedures, however, Compass did not adequately analyze whether these +uncertainties were required to be disclosed. +7. In addition to these disclosure violations, Compass filed materially misstated +financials due to its use of a salt interim inventory accounting methodology that did not comply +with Generally Accepted Accounting Principles (GAAP). +Respondent + +8. Compass Minerals International, Inc. is a Delaware corporation headquartered in +Overland Park, Kansas. Compass’s stock is registered with the Commission pursuant to Section +12(b) of the Securities Exchange Act (“Exchange Act”) and trades on the New York Stock +Exchange. Compass files periodic reports, including Forms 10-K and 10-Q, with the Commission +pursuant to Section 13(a) of the Exchange Act and related rules thereunder. +Background + +Compass’s Plans to Reduce Costs by Upgrading Its Technology +9. In late-2014, Compass’s then-Board of Directors approved a multi-year project +primarily to reduce the unit cost (cost per ton) of salt mined at Goderich by upgrading its +equipment. Compass’s plan was to convert from a traditional drill-and-blast operation to a CMCH +system that uses complex machines to cut salt and transport it for processing on flexible conveyor +trains. +10. At that time, Compass forecasted the project would cost $70-80 million and, after it +was fully implemented, reduce the unit cost at Goderich by over 23%, saving the company about +$27 million annually beginning in 2018. +11. These projections assumed CMCH mining at Goderich would produce 7.5 million +tons of salt per year. Because of the economics of salt mining, unit cost increases as volume +declines (all other things being equal). Thus, the production volume was a key variable in +Compass’s ability to reduce its unit cost, and thereby achieve its expected cost savings. +4 + +12. During an earnings call in April 2015, Compass’s then-CEO told investors +Compass would save “roughly about” $30 million annually beginning in 2018 from its $70-80 +million upgrade to CMCH. +CMCH Fails to Meet Compass’s Expectations +13. However in 2016 and 2017, various issues, including challenges with the +implementation of the new CMCH machines and the geology of the Goderich mine, caused the +CMCH project to fall far short of the company’s production assumptions.2 In 2016, the CMCH +equipment Compass had installed to-date produced only about 1.4 million tons of salt, significantly +underperforming what the company had expected at that time. +14. Compass’s difficulties implementing CMCH as planned and other operating +challenges at the mine required the company to incur significant unplanned expenses at Goderich +during this period. For example, in late 2016 and early 2017, Compass purchased about 250,000 +tons of salt from third parties at significant price premiums to meet its contractual commitments to +its customers. Compass also had to pay shipping and logistics expenses to transport salt from one +of its other salt mines in Louisiana to Northern markets typically served by Goderich. +15. Goderich production shortfalls resulted in significant increases in unit cost. +Whereas Compass had projected internally that Goderich’s unit cost would remain stable through +mid-2016 then begin to decline by the end of the first quarter of 2017, the unit cost at Goderich +instead increased by over 42% during that period. Most of this increase was due to the mine’s +inability to implement CMCH as planned and unanticipated expenses associated with the upgrade. +16. An internal presentation sent to Compass’s then-CEO in April 2017 explained that +management changes at Goderich were necessary because “the move to [CMCH] has not met +expectations and forecasts” and that Goderich “has not been able to maintain consistent +production.” Two days later, the then-CEO informed Compass’s then-Board of Directors of the +management changes at Goderich, explaining, “[w]e have not made the progress required on +safety, continuous mining, and production reliability.” +17. In April 2017, Compass revisited its CMCH cost savings projections. When it did +so, it concluded that many of the assumptions in its original calculations had proved unreliable. +Compass’s new projections for the project showed that even if the CMCH equipment could +produce 7.5 million tons annually, it would not directly save the company about $30 million as + +2 In 2016, Compass encountered an unprecedented change in the geology of the area in which it +was conducting mining operations. Increasing levels of rock and other impurities in the salt deposit +slowed mining operations and contributed to the underperformance of the CMCH system. +5 + +Compass had told investors.3 Instead, the direct annual savings from CMCH would only be about +$18 million. +18. To support a $30 million savings forecast, Compass executives developed a new +model that included other Goderich mine cost reduction initiatives that were not directly related to +CMCH, as well as some future initiatives that had not yet been identified.4 Compass finance and +operations employees, together with the company’s then-CEO, then-CFO, and then-General +Counsel, reviewed the new forecast and determined that Compass would continue to tell investors +it expected CMCH to generate $30 million in cost savings. +Compass’s Misleading Statements About Goderich in May 2017 +19. Despite these issues, Compass’s then-CEO told investors during the scripted +portion of the company’s May 4, 2017 earnings call, “our major investments at Goderich are +progressing on plan.” Later on that call, an analyst asked Compass’s management whether the +company was “sticking with” its $30 million cost savings forecast. Compass’s then-CFO replied, +“yes, absolutely, we’re sticking to the $30 million coming out in 2018.”5 This response created the +impression that Compass’s cost savings forecast continued to be supported by the information +available to the company about how CMCH was progressing. +20. These statements were misleadingly incomplete because they did not fairly align +with the information Compass had at the time.6 Compass knew of undisclosed material facts that +substantially undermined those assertions. +21. As described above, the foundation of Compass’s cost savings model was that +CMCH would produce 7.5 million tons of salt per year. However CMCH was not close to +producing 7.5 million tons of salt annually. In the first three full operating months of 2017 (as +Goderich was transitioning from drill-and-blast to only CMCH), the CMCH system at Goderich + +3 Compass, working with an external third party consultant, had included certain assumptions in its +original projected cost savings calculations that turned out to be faulty. For example, Compass and its +consultant had underestimated the amount of electricity needed to run the continuous mining systems. +Compass also underestimated maintenance and repair expenses for the continuous mining systems, which +were breaking down more often than Compass and its consultant had expected. +4 For example, Compass added to its revised model expected savings from separate “continuous +improvement projects” at the Goderich mine that included a longstanding project pre-dating CMCH to +reduce the number of conveyor belt stops at Goderich. Compass also included in its revised model an +amount for “operational excellence” projects the company had not yet identified. +5 The company’s statements about CMCH in May 2017 and in subsequent periods as discussed +below were scripted and repeated numerous times. Reasonable investors would expect Compass’s +statements about cost savings from CMCH would have followed a careful assessment of what CMCH +could achieve and taken into consideration all of the issues described in this Order. +6 See Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 189 +(2015) (discussing that reasonable investors expect that an issuer’s publicly-stated opinion “fairly aligns +with the information in the issuer’s possession at the time”). +6 + +produced an average of less than 260,000 tons of salt per month – substantially below the +company’s internal expectations and well less than one-half of the salt it needed to produce to +generate $30 million in savings. Goderich was working to complete its installation of the CMCH +system by bringing an additional CMCH machine online to increase production. However that +installation was significantly behind schedule. Compass did not expect that machine to be fully +installed until November 2017 – about nine months late. Compass’s experience from the +equipment Goderich had already installed was that the CMCH machines were likely to take +significantly longer to “ramp up” than Compass had originally assumed. In the meantime, +Goderich’s production shortfalls were continuing to require Compass to incur significant +unplanned expenses that were resulting in substantial increases to unit cost at Goderich. Until the +ramp up was complete, Goderich’s experience showed that the production shortfalls would +continue to result in significantly higher unit cost for the company. +22. In making these statements to investors, the record reflects that the then-CEO and +then-CFO’s focus was on saying what they believed was justified and supported by their +subordinates. The issues at Goderich were well-understood by Compass’s most senior +management, business unit leaders, and then-Board of Directors. However, statements to investors +were not reviewed by personnel who were sufficiently knowledgeable about both Compass’s +operations and disclosure obligations. This resulted in Compass’s then-CEO and then-CFO +making statements to investors that addressed the potential benefits of the mine’s upgrade without +also fully taking into account the actual, and likely continuing, costs. +Compass Repeats Misleading Statements that It Expects CMCH to Save $30 Million in 2018 +23. In August, September, and October 2017, Compass’s executives provided reports to +the then-CEO and then-CFO reflecting that Compass would save $27 million at Goderich – though +the expected savings directly from CMCH by then had declined to $13 million. +24. Throughout this period, Compass’s executives also provided reports to the then- +CEO, then-CFO, and the then-Board of Directors showing Goderich continuing to fall far short of +the production expectations underlying these cost savings models. While Goderich’s salt +production improved over this period, the mine remained far off its production goals. From April +to October 2017, CMCH produced an average of only 310,000 tons of salt per month, still well less +than one-half of what would be necessary to achieve these savings. Compass’s executives also +provided reports to management showing that unit cost at Goderich continued to be much higher +than expected. +25. Nevertheless, in calls with investors following each of these reports in August, +September, and October 2017, Compass continued to tell investors the CMCH project would save +Compass about $30 million annually beginning in 2018 without adequately disclosing to investors +that the forecast required a level of salt production that Goderich was far from achieving, and that +7 + +continued production shortfalls would continue to result in unit cost increasing, rather than +decreasing.7 +Compass’s Misrepresentations About Realized Cost Savings +26. By the end of 2017, Compass had made multiple statements to investors that +CMCH would save the company $30 million per year beginning in 2018. In a February 2018 +earnings call, Compass told investors, “[w]e already achieved about $5 million of savings in 2017 +when we finished installing the [CMCH] system.” +27. This conveyed that CMCH had already begun generating a significant amount of +the cost savings the company had said CMCH would produce. In fact, Compass’s internal +documents showed that CMCH allowed Compass to reduce costs by only $1.1 million in 2017 – +primarily from no longer having to purchase explosives to conduct drill-and-blast mining +operations. The remaining $3.9 million in savings were generated by other projects at Goderich +that were not directly related to CMCH. +28. Even these savings were substantially offset by larger expenses at Goderich that +Compass did not take into consideration in touting the savings it “already achieved.” For example, +in 2017, Compass had to pay over $4 million in maintenance and repair expenses at the site and +also incurred penalties to customers relating to salt quality.8 In addition, Compass incurred about +$5 million in price premiums to purchase salt from third parties to cover Goderich production +shortfalls. Also in 2017, Compass began a $9 million project to improve the quality of the salt at +Goderich in order to meet customer product specifications.9 +Compass Misrepresented Reasons for Its Increased Costs in Q1 2018 +29. During Compass’s first quarter earnings call in May 2018, Compass discussed that +its costs had increased. However, it misrepresented the basis for that increase. Reading from a +script that had been vetted by other executives including the then-General Counsel, Compass’s +then-CFO told investors the company’s earnings in that period had been depressed by $20 million +because of a “ceiling fall” incident at Goderich that interrupted mining operations in September +2017. + +7 As with the statements in May 2017, numerous executives vetted these statements and did not +suggest any potential problems with making them. +8 The CMCH equipment in Goderich produced salt that was more fine than the specifications +required by its customers (“fines”) than the traditional drill-and-blast method. Compass can be required +to pay penalties to customers for delivering salt that is not within customer specifications. In 2017, these +penalties totaled $600,000. +9 To address issues related to the geology of the mine and the increase in “fines” caused by the +CMCH equipment, Compass installed a filtering system that, among other things, reduced impurities +from the salt. In mid-2017, Compass determined that this new filtering system would reduce output at the +mine by about 400,000 tons per year. +8 + +30. That statement was false. The direct costs related to the incident the then-CFO +described reduced Compass’s earnings by only $3 million in the first quarter of 2018. The other +$17 million in increased costs resulted from the continuing operational issues at Goderich +throughout 2017, only a small portion of which stemmed from the ceiling fall. The statement was +material because it communicated that costs had increased as a result of a one-off natural event, +rather than because the CMCH upgrade, which was important to investors, was not performing as +expected. +Compass’s Misrepresentations Regarding Goderich’s Annual Production Capacity +31. Compass also misrepresented the Goderich mine’s production capacity. In its +Forms 10-K for the fiscal years ended December 31, 2016 through December 31, 2018, Compass +told investors that the Goderich mine had the capacity to produce 8 million tons of salt annually. +Compass defined annual production capacity in its Forms 10-K as “our estimate of the tons that +can be produced assuming a normal amount of scheduled down time and operation of [the mine] +under normal working conditions, including staffing levels, based on actual historical production +rates.” +32. These representations were materially false because they exaggerated Compass’s +ability to generate additional production using CMCH if warranted by product demand during the +transition period to CMCH. Though Goderich had been able to produce nearly 8 million tons of +salt annually using drill-and-blast mining, Goderich was discontinuing that method of producing +salt, and Compass’s CMCH system was not capable of mining close to that level of salt during this +period.10 +Compass’s Misrepresentation Regarding Current Salt Production Levels +33. In September 2018, Compass’s then-Senior Vice President in charge of the +company’s salt business gave a presentation at an investor conference about Goderich’s salt +production during which he displayed and discussed a slide entitled “Progress on Goderich +Investments Continues.” In the slide, Compass said it had completed its installation of the CMCH +system in 2017 and that production was “currently ramping up” following a labor strike at the +mine. The slide contained a graph showing Goderich’s “Production Plan” that compared the +mine’s “current production rate” to a target rate of 600,000 tons per month. + +10 Through December 2018, the CMCH system had yet to produce more than 450,000 tons of salt +per month. In 2019, Compass began to increase annual production capacity at Goderich by installing +additional and larger CMCH machines. +9 + + +34. While displaying that graph, the then-Senior Vice President told the conference +attendees, “As you can see on this chart, we’re about 75% of the way to our target rates.” This +indicated that the Goderich mine was currently producing about 450,000 tons of salt per month. +35. This was materially false. Though Goderich had produced about 438,000 tons of +salt eight months earlier in January 2018, Compass’s internal production reports at that time +showed that Goderich was currently producing far less than 450,000 tons of salt per month. +During the period April through July, when mining operations also were impacted by a 12-week +labor strike, the Goderich mine averaged only about 314,000 tons of salt per month. In August, +Goderich had produced only 332,000 tons. When the then-Senior Vice President made the +representation in mid-September 2018, Goderich was on pace to produce less than 225,000 tons of +salt that month.11 +Compass Pre-Announces Unfavorable Third Quarter Results Due to Goderich Shortfalls +36. On October 23, 2018, Compass pre-announced third quarter 2018 financial results +that were significantly below expectations and lowered its outlook for the remainder of that year. +The company attributed the miss to production shortfalls at Goderich due to the slower than +expected ramp-up of the CMCH system following a labor strike. Compass’s stock price fell more +than 32% over the next two days, as financial analysts and investors expressed frustration with the +company’s failure to communicate production issues or deliver the expected benefits at Goderich.12 + +11 Ultimately, the Goderich mine produced 346,000 tons of salt in September. +12 For example, on October 23, a large shareholder told Compass, “take a serious look at your +original 2018 targets, and how you communicated and clung and ‘aspired’ since that day, and then look at +the stock performance since that day and seriously ask yourself, is this any way to run a public +company?” On October 24, a financial analyst wrote, “Persistent execution and guidance issues, which +caused Compass Minerals to reduce 3Q18 and FY2018 guidance, are highly disappointing.” That same +day, a large bondholder complained that “bondholders’ reliance on the Goderich mine and steady +production levels seemed assured by management up until yesterday,” observing that “proper +communication or maybe timely understanding of production issues is very controllable by management +and that is where the issues lie with [Compass].” + +10 + +37. The Goderich mine produced less than four million tons of salt in 2018, at a unit +cost that was more than double what they were before Compass began the CMCH project four +years earlier. +Compass’s Failures to Disclose Material Trends Relating to Its Salt Production +38. From 2016 through 2018, Goderich failed to produce the quantity of salt Compass’s +business required by increasingly large amounts. In 2016, Goderich produced 800,000 less tons +than the company planned to produce. In 2017, the shortfall was 1.5 million tons13, and, in 2018, +the shortfall exceeded 2.4 million tons.14 Compass did not disclose this known trend to investors in +its 2016, 2017, or 2018 Forms 10-K or Forms 10-Q despite the fact that these production shortfalls +resulted in higher unit cost that materially reduced the company’s earnings.15 Disclosure of this +information was also necessary to make other required statements in Compass’s filings, including +the statements about Goderich’s annual production capacity, not materially misleading.16 +39. In 2016, 2017, and 2018, increased costs at Goderich reduced Compass’s income +from continuing operations by about 8%, 15%, and 41%, respectively. +Compass’s Failures to Analyze Uncertainties Regarding Environmental Issues in Brazil +40. Following an ethics hotline complaint in 2017, Compass’s management and then- +Board of Directors learned that a chemical plant its subsidiary owned in Brazil had been +discharging mercury above permitted levels on certain occasions, some of which reached near the +Botafogo River, and covering up the misconduct by inaccurately reporting the amount of mercury +to the environmental authorities.17 At the direction of the plant’s then-manager, lab technicians had +been cherry-picking mercury testing results – basing the regulatory submissions on the results that +showed mercury levels within the permitted limit, and omitting the samples above the limit. +Compass determined that this activity had been going on for at least several years and that the +facility’s lab testing practices may also have resulted in inaccurate testing results. + +13 While most of the 2017 annual shortfall was due to the CMCH system underperforming +Compass’s expectations, the September 2017 ceiling fall caused about 300,000 tons (20%) of the +shortfall. +14 While most of the 2018 annual shortfall was due to the CMCH system underperforming +Compass’s expectations, the labor strike caused about 750,000 tons (31%) of the shortfall. +15 Among other things, during the relevant period, Regulation S-K Item 303(a)(3)(ii) required +issuers to “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably +expects will have a material … unfavorable impact on … income from continuing operations.” Item +303(b) required discussion of any material changes in known trends or uncertainties in quarterly reports +filed on Form 10-Q. +16 See Exchange Act Rule 12b-20. +17 Compass completed its acquisition of that plant in 2016. +11 + +41. When confronted by Compass executives, the then-plant manager acknowledged +his misconduct, and indicated that the environmental regulators could have closed down the facility +if he had submitted reports showing elevated levels of mercury. Compass fired the then-plant +manager and began to submit accurate reports to the environmental regulators. The company also +took steps to remediate the mercury contamination and improve lab testing practices. +42. This misconduct created uncertainties for Compass. For example, it was possible +that Brazil could have suspended the facility’s operating permit, or that third parties who may have +been impacted by the mercury above permitted levels that had reached near the river could have +brought civil claims against Compass’s Brazilian subsidiary. However, Compass did not +adequately assess the probability of these risks coming to fruition nor did the company attempt to +quantify their financial impacts if they were to occur. 18 +43. Compass did not have adequate controls and procedures in place to ensure that all +potentially material risks and uncertainties were adequately analyzed by the employees at the +company responsible for advising Compass’s management of the company’s disclosures +obligations so that Compass’s principal executive and financial officers could make appropriate +determinations about disclosures. +Compass’s Accounting Violations +44. In addition to the disclosure issues described above, Compass materially misstated +its interim financial results by using a salt interim inventory accounting methodology that did not +comply with GAAP. In July 2021, the company determined that, from at least 2005 through the +third quarter of 2021, it had improperly valued its salt inventory at interim periods using forecasted +cost per ton rather than actual costs as required by GAAP.19 The error had a material impact on +certain interim periods but did not affect Compass’s annual financial results. +45. In August 2021, Compass announced it had identified a material weakness in its +internal control over financial reporting. Compass subsequently restated its quarterly segment +results for the first quarter of 2019 through the first quarter of 2021. +Compass’s Remedial Acts +46. In determining to accept Compass’s Offer, the Commission considered remedial +acts undertaken by Compass in response to the Commission staff’s investigation. Among other +things, Compass created the new role of Chief Accounting Officer; developed new internal +controls and procedures regarding disclosure and created a Board-chartered Disclosure Committee; +and added to its Board of Directors several new directors with industry experience in finance and +accounting, as well as safety and sustainability. + + +18 Such an assessment was required pursuant to Regulation S-K Item 303(a)(3)(ii). +19 See ASC 330-10-30-1. +12 + +Violations + +47. As a result of the conduct described above, Compass violated Section 17(a)(2) and +(3) of the Securities Act, which prohibit any person from directly or indirectly obtaining money or +property by means of any untrue statement of a material fact or any omission to state a material +fact necessary in order to make the statements made, in light of the circumstances under which +they were made, not misleading, or engaging in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser, in the offer or sale of +securities.20 +48. Compass violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder, which require that every issuer of a security registered pursuant to Exchange Act +Section 12 file with the Commission, among other things, annual and quarterly reports as the +Commission may require. Compass also violated Rule 12b-20 of the Exchange Act, which +requires an issuer to include in a statement or report filed with the Commission any information +necessary to make the required statements in the filing not materially misleading. +49. Compass violated Exchange Act Section 13(b)(2)(A), which requires reporting +companies to make and keep books, records and accounts which, in reasonable detail, accurately +and fairly reflect their transactions and dispositions of their assets. Compass also violated Section +13(b)(2)(B), which requires all reporting companies to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that, among other things, +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. +50. Compass violated Exchange Act Rule 13a-15, which requires that every issuer of a +security registered pursuant to Exchange Act Section 12 maintain disclosure controls and +procedures as defined in Exchange Act Rule 13a-15(e), and, for issuers required to file an annual +report pursuant to Section 13(a) or 15(d) for the prior fiscal year, internal control over financial +reporting as defined in Rule 13a-15(f). +Undertakings +51. Respondent has undertaken to complete the following actions: +a. Retention of Independent Compliance Consultant. Within 30 days of the issuance of +this Order, Respondent shall retain the services of an Independent Compliance + +20 Violations of Sections 17(a)(2) and (3) of the Securities Act do not require scienter. See Aaron v. +SEC, 446 U.S. 686, 691 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). During the relevant +period, Compass offered and sold stock to its employees through an Incentive Award Plan for which a +Form S-8 was filed with the Commission on May 6, 2015. The S-8 incorporated by reference all +subsequent filings by Compass under the Exchange Act, including the filings containing statements and +omissions at issue herein. Compass also offered and sold stock to employees through a Savings Plan in +which its common stock was one of the investment options. +13 + +Consultant (“Independent Consultant”) not unacceptable to the staff of the +Commission and provide a copy of this Order to the Independent Consultant. +Respondent shall provide the Commission staff with a copy of the engagement letter +detailing the Independent Consultant’s responsibilities, which shall include the +reviews and reports to be made by the Independent Consultant as set forth in this +Order. The Independent Consultant’s compensation and expenses shall be borne +exclusively by Respondent. +b. Independent Consultant’s Reviews. Respondent shall require the Independent +Consultant to: +i. Review the company’s practices and procedures relating to: its salt inventory +revaluation process and its disclosure controls and procedures, including but +not limited to controls and procedures relating to collection and assessment of +information concerning potential risks, contingencies, operating events, +trends, and uncertainties. +ii. At the end of the review, but no later than 365 days after the entry of this +Order, submit a written report to Respondent and the Commission staff that +shall include a description of the review performed, the names of the +individuals who performed the review, the Independent Consultant’s findings +and recommendations for changes or improvements to the disclosures, +policies, and procedures, and a procedure for implementing the recommended +changes and improvements; +c. Respondent shall, within 60 days of receipt of the Independent Consultant’s report, +adopt all recommendations contained in the report, provided, however, that within 45 +days after the date of the report, Respondent shall in writing advise the Independent +Consultant and the Commission staff of any recommendations that it considers to be +unduly burdensome, impractical, or inappropriate. With respect to any +recommendation that Respondent considers to be unduly burdensome, impractical, or +inappropriate, Respondent need not adopt that recommendation at that time but +Respondent shall instead propose in writing to the Independent Consultant and +Commission staff an alternative policy or procedure designed to achieve the same +objective or purpose as that recommended by the Independent Consultant, or a +different timeline for implementation in light of the recommendation. Respondent +shall attempt in good faith to reach an agreement with the Independent Consultant on +any recommendations objected to by Respondent. Within 15 days after the +conclusion of the discussion and evaluation by Respondent and the Independent +Consultant, Respondent shall require that the Independent Consultant inform +Respondent and the Commission staff in writing of the Independent Consultant’s +final determination concerning any recommendation. At the same time, Respondent +may seek approval from the Commission staff to not adopt the recommendations that +Respondent can demonstrate to be unduly burdensome, impractical, or inappropriate. +In the event that Respondent and the Independent Consultant are unable to agree on +14 + +an alternative proposal within 30 days and the Commission staff does not agree that +any proposed recommendations are unduly burdensome, impractical, or +inappropriate, Respondent shall abide by the determinations of the Independent +Consultant. +d. Within 30 days of Respondent’s adoption and implementation of all of the +recommendations in the Independent Consultant’s report that the Independent +Consultant deems appropriate, as determined pursuant to the procedures set forth +herein, Respondent shall certify in writing to the Independent Consultant and the +Commission staff that Respondent has adopted and implemented all +recommendations in the applicable report. The Commission staff may make +reasonable requests for further evidence of compliance, and Respondent agrees to +provide such evidence. +e. Respondent shall cooperate fully with the Independent Consultant and shall provide +the Independent Consultant with access to such of its files, books, records, and +personnel as reasonably requested for the Independent Consultant’s review, including +access by on-site inspection. To ensure the independence of the Independent +Consultant, Respondent (1) shall not have the authority to terminate the Independent +Consultant or substitute another independent consultant for the initial Independent +Consultant without prior written approval of the Commission staff; and (2) shall +compensate the Independent Consultant and persons engaged to assist the +Independent Consultant for services rendered pursuant to this Order at their +reasonable and customary rates. +f. The deadlines in this Undertaking shall be counted in calendar days, except that if the +last day falls on a weekend or federal holiday, the next business day shall be +considered the last day. +g. Respondent shall require the Independent Consultant to enter into an agreement that +provides that for the period of engagement and for a period of two years from +completion of the engagement, the Independent Consultant shall not enter into any +employment, consultant, attorney-client, auditing or other professional relationship with +Compass, or any of its present or former affiliates, directors, officers, employees, or +agents acting in their capacity. The agreement will also provide that the Independent +Consultant will require that any firm with which he/she is affiliated or of which he/she +is a member, and any person engaged to assist the Independent Consultant in +performance of his/her duties under this Order shall not, without prior written consent +of the Commission staff, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with Compass, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their capacity as such for +the period of the engagement and for a period of two years after the engagement. +h. Respondent shall not be in, and shall not have an attorney-client relationship with the +Independent Consultant and shall not seek to invoke the attorney-client privilege or any +15 + +other doctrine of privilege to prevent the Independent Consultant from transmitting any +information, reports, or documents to the Commission. +i. The reports by the Independent Consultant will likely include confidential financial, +proprietary, competitive business or commercial information. Public disclosure of the +reports could discourage cooperation, impede pending or potential government +investigations or undermine the objectives of the reporting requirement. For these +reasons, among others, the reports and the contents thereof are intended to remain and +shall remain non-public, except (1) pursuant to court order, (2) as agreed to by the +parties in writing, (3) to the extent that the Commission determines in its sole discretion +that disclosure would be in furtherance of the Commission’s discharge of its duties and +responsibilities, or (4) as otherwise required by law. +j. Respondent shall certify, in writing, compliance with the undertaking(s) set forth +above. The certification shall identify the undertaking(s), provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for +further evidence of compliance, and Respondent agrees to provide such evidence. The +certification and supporting material shall be submitted to Melissa Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +NE, Washington, DC 20549, with a copy to the Office of Chief Counsel of the +Enforcement Division, 100 F St., NE, Washington, DC 20549, no later than sixty (60) +days from the date of the completion of the undertakings. +Respondent may apply to the Commission staff for an extension of the deadlines described above +before their expiration, and upon a showing of good cause by the Respondent, the Commission +staff may, in its sole discretion, grant such extensions for whatever time period it deems +appropriate. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: +A. Respondent shall cease and desist from committing or causing any violations and +future violations of Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-13, and 13a-15 promulgated +thereunder. +B. Respondent shall pay a civil money penalty in the amount of $12 million to the +Securities and Exchange Commission. Payment shall be made in the following installments: $2 +million due within 10 days of entry of this Order and $10 million due no later than September 30, +16 + +2023. Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. +3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application to +the Commission. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Compass as Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Melissa R. Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalty and interest referenced in paragraph B above. Amounts ordered to be paid as civil +money penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any +part of Respondent’s payment of a civil penalty in this action ("Penalty Offset"). If the court in any +Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. Such +a payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related +Investor Action" means a private damages action brought against Respondent by or on behalf of +17 + +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +D. Respondent shall comply with the undertakings enumerated in paragraph 51 above. + + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4341.txt b/raw/aaer/2022/AAER-4341.txt new file mode 100644 index 0000000000000000000000000000000000000000..8bfe419b41c89ebe5318004e66e8b20f1b2fc656 --- /dev/null +++ b/raw/aaer/2022/AAER-4341.txt @@ -0,0 +1,1399 @@ + + + + + + + + + + + + + + + + SEC.gov | James R. 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Thompson, et al. + + + + + + + + + + + + James R. Thompson, et al. + + + + + + + + + + + + + + + + + + + + + --> + + SEC Charges Executives and Director with Lying to Auditors + + Litigation Release No. 25517 / September 23, 2022 + + Accounting and Auditing Enforcement Release No. 4341 / September 23, 2022 + + Securities and Exchange Commission v. James R. Thompson, et al. , No. 2:22-cv-01609 (D. Nev. filed September 22, 2022) + + + + + + + + + On September 22, 2022, the Securities and Exchange Commission filed charges against the former Chief Executive Officer of Spyr, Inc., James R. Thompson, the company's former Chief Financial Officer, Barry D. Loveless, and director, James A. Mylock, Jr., for making false and misleading statements to Spyr's auditors. The SEC also charged Thompson and Loveless for filing periodic reports with the SEC that failed to include required information in the financial statements. + + According to the SEC's complaint, filed in the United States District Court for the District of Nevada, Thompson, Loveless, and Mylock provided Spyr's auditors with false and misleading information about an SEC investigation into Spyr's investment in a biotechnology company. The SEC alleges that the defendants told Spyr's auditors that they were not aware of "any situations where the company may not be in compliance with any federal or state laws or government or other regulatory body regulations," even after Spyr had received a Wells notice, settlement discussions with SEC staff had broken down, and management believed that an SEC action would be filed soon. The complaint also alleges that Thompson and Loveless signed Spyr's 2017 Form 10-K and 2018 first quarter Form 10-Q, neither of which disclosed the potential SEC enforcement action. According to the complaint, Spyr was required by generally accepted accounting principles to disclose the potential SEC enforcement action because it was reasonably possible that it could lead to a material loss for the company. + + The SEC's complaint charges each of the defendants with lying to auditors and thereby violating Rule 13b2-2 of the Securities Exchange Act of 1934, and charges Thompson and Loveless with violating the antifraud provisions of Section 17(a)(2) and (3) of the Securities Act of 1933, and aiding and abetting Spyr's violations of the reporting provisions of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, and 13a-13 thereunder. Without admitting or denying the SEC's allegations, Thompson, Loveless, and Mylock consented to the entry of final judgments, subject to court approval, permanently enjoining them from violating the charged provisions; requiring Thompson, Loveless, and Mylock to pay civil penalties of $50,000, $75,000, and $10,000, respectively; and barring Thompson and Loveless from acting as an officer or director of any public company for three years. + + The SEC's investigation was conducted by Matthew L. Skidmore and Michael F. D'Angelo with the assistance of Christopher E. Martin. The investigation was supervised by Mary S. Brady and Jason J. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2022/AAER-4342.txt b/raw/aaer/2022/AAER-4342.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4ebc006b29a2c1f9ae897b1bb006c8bc6329c79 --- /dev/null +++ b/raw/aaer/2022/AAER-4342.txt @@ -0,0 +1,563 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95938 / September 29, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4342 / September 29, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21178 + + +In the Matter of + +DELOITTE TOUCHE +TOHMATSU CERTIFIED +PUBLIC ACCOUNTANTS, +LLP + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Deloitte +Touche Tohmatsu Certified Public Accountants, LLP (“Deloitte-China” or “Respondent”) pursuant +to Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules +102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . (1) +not to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity, +or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and +regulations issued thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found . . . to be lacking in character or integrity or to have engaged +in unethical or improper professional conduct. +2 + +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as +set forth below. +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves failures to comply with fundamental U.S. auditing +requirements by Deloitte-China audit personnel. In failing to perform certain basic tasks +required by professional standards, Deloitte-China audit personnel failed to meet their +obligations to their clients, as well as to investors, whose confidence in the integrity of public +company audits is vital to the proper functioning of our capital markets. + +2. An integral component of public company audits is inspecting and assessing the +support for entries in clients’ general ledgers to ensure those transactions were appropriately +recorded. Completing this work is essential for an auditor to credibly opine on whether clients’ +financial statements fairly present, in all material respects, the clients’ financial position and +whether their internal control over financial reporting (ICFR) is effective. + +3. In numerous instances, however, Deloitte-China audit personnel failed to perform +audit procedures as required. This occurred in two ways. + +4. First, engagement teams improperly concluded that certain client account +balances and transactions were appropriately recorded without obtaining, or in some cases +documenting that they obtained, supporting audit evidence. Deloitte-China audit personnel were +required to document the work they performed to review the support for their clients’ balances +and transactions. This documentation would show that the engagement teams had conducted the + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found . . . to have willfully violated, or willfull y aided and abetted +the violation of any provision of the Federal securities laws or the rules and regulations thereunder. +3 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or +entity in this or any other proceeding. +3 + +necessary testing. In various audits, engagement teams asked their clients to complete this +required documentation instead. This created the appearance that the Deloitte-China audit +personnel had conducted the necessary testing when there was no evidence in the audit file that +they had in fact done so. + +5. Second, Deloitte-China audit personnel on certain audits failed to select and test +samples properly. When sampling, auditors are required to do so using their own professional +judgment. Deloitte-China audit personnel on these audits failed in their responsibility to select +these samples. Instead, they asked the clients to select samples for testing. This fundamentally +flawed practice defeated the purpose of audit sampling by creating the risk that clients could +strategically choose only supported samples, thereby impairing the reliability of the testing. + +6. And on certain audits, Deloitte-China audit personnel asked clients both to select +samples of balances and transactions for testing and to prepare documentation purporting to +support the required testing of those samples. The inclusion of that documentation in the audit +workpapers created the appearance that the engagement teams had inspected and assessed the +supporting evidence for those items when the audit file did not evidence that they had in fact +done so. + +7. Deloitte-China engagement partners and senior members of the impacted audit +engagement teams failed to appropriately supervise the audit personnel who engaged in these +inappropriate practices. The improper audit procedures described above demonstrate +deficiencies in Deloitte-China’s system of quality control over PCAOB engagements to provide +reasonable assurance that the work performed by engagement personnel meets applicable U.S. +professional standards. +8. Deloitte-China conducted an investigation that identified the audit failures +described in this Order in multiple engagements that it reviewed. Of the engagements included +in that review, Deloitte-China found the deficiencies described in this Order in nine component +audits conducted for Deloitte-U.S. and in three audits of foreign private issuers for which +Deloitte-China was the principal auditor. +9. These practices violated numerous elementary auditing standards of the Public +Company Accounting Oversight Board (“PCAOB”) and created a significant threat to U.S. +investors, who rely on the opinions of independent auditors in making investment decisions.4 +Deloitte & Touche LLP, the U.S.-based audit firm that engaged Deloitte-China to audit its +clients’ Chinese operations, relied on these deficient “component audits” in issuing its audit +opinions. Deloitte-China is also the principal independent auditor for various foreign private +issuers whose securities are registered on U.S. exchanges and who include Deloitte-China’s audit +opinions in their filings with the Commission. In all the impacted audit engagements, Deloitte- + +4 “The SEC requires the filing of audited financial statements in order to obviate the fear of loss from +reliance on inaccurate information, thereby encouraging public investment in the Nation’s industries. ” U.S. v. +Arthur Young, 465 U.S. 805, 819 (1984). + +4 + +China incorrectly asserted that it had complied with PCAOB standards when it had not, +threatening the reliability of the resulting audit opinions.5 +RESPONDENT +10. Deloitte Touche Tohmatsu Certified Public Accountants, LLP (“Deloitte- +China”) is an accounting firm registered in Shanghai, China. Referred to in the People’s +Republic of China as “Deloitte Hua Yong,” Deloitte-China is an affiliate of a member of Deloitte +Touche Tohmatsu Limited, a UK private company limited by guarantee (“Deloitte-Global”) and +part of the Deloitte network of firms. Deloitte-China is registered with the PCAOB. Among +other things, Deloitte-China provides audit services upon which Deloitte & Touche LLP +(“Deloitte-U.S.”) relies in connection with the audits of certain U.S. issuers that conduct business +in China and is the independent auditor to various foreign private issuers whose securities are +registered on U.S. exchanges (“FPIs”). +FACTS +Deloitte-China’s Role in the Audits of U.S. Registrants +11. Deloitte-U.S. is the independent auditor for various U.S. issuers that conduct +business in China. For some of these clients, Deloitte-U.S. has concluded that it is necessary to +audit the clients’ operations in China in order to issue its audit opinions. Deloitte-U.S. engages +Deloitte-China to conduct this audit work. In doing so, Deloitte-U.S. instructs Deloitte-China on +the audit scope and procedures to be performed. +12. Deloitte-U.S. expressly requires Deloitte-China to perform this work in +accordance with PCAOB standards. This is because Deloitte-U.S. relies on the results of these +“component audits” to opine on whether its clients’ financial statements are fairly presented in +all material respects in accordance with U.S. Generally Accepted Accounting Principles and, +where applicable, whether its clients’ ICFR is effective. +13. Separately, Deloitte-China is the principal independent auditor for various FPIs +whose securities are listed on U.S. exchanges. In this role, Deloitte-China assumes responsibility +for the entire audit and issues its own audit opinions on the FPIs’ financial statements and, when +applicable, on the effectiveness of the FPIs’ ICFR. Deloitte-China is required to perform these +audits in accordance with PCAOB standards. These FPIs file Deloitte-China’s audit opinions +with their annual reports on Form 20-F. +14. In both its component audits and its audits of FPIs, Deloitte-China asserts that it +has conducted its testing in accordance with PCAOB standards. As described below, for +multiple U.S. issuers and FPIs, these assertions were not accurate. + +Deloitte-China’s Deficient Audit Procedures + +5 After learning of the audit problems described herein, Deloitte-China, at times working with Deloitte-U.S. +as the principal auditor, remediated and re-performed the deficient and incomplete testing and did not identify any +material errors or significant control deficiencies. +5 + + +15. Among other things, PCAOB standards require auditors to exercise due +professional care and skepticism in conducting their audit work,6 obtain sufficient appropriate +evidence to support their audit opinions,7 and prepare appropriate audit documentation to support +the work performed.8 When auditors select samples of account balances and transactions to test, +PCAOB standards require them to select those samples using their own independent professional +judgment and in a way that the sample can be expected to be representative of the population as a +whole (i.e. without any bias).9 Auditors should10 also comply with professional standards +relating to supervision, and audit firms must establish and maintain appropriate systems of +quality control.11 +16. To assess the propriety of entries in clients’ general ledgers, Deloitte-China audit +personnel were required to inspect and assess supporting evidence for those entries. In numerous +audits, however, there is no evidence in the audit workpapers that Deloitte-China did so. Indeed, +during Deloitte-China’s investigation of this matter, some audit personnel acknowledged that +they did not review the supporting documentation. +17. Instead, Deloitte-China audit personnel asked clients to complete documentation +that the engagement teams were required to prepare to show they had inspected and assessed the +support for the general ledger entries. Engagement teams included this documentation in the +firm’s workpapers as though it had been prepared by Deloitte-China personnel. +18. Based on the information provided by its impacted clients, these engagement +teams concluded that the clients’ balances and transactions for the relevant accounts were not +materially misstated when there is no reliable evidence in the audit workpapers that the +engagement teams knew whether those balances were materially misstated or not. +19. In addition, Deloitte-China audit personnel violated the PCAOB standard that +requires auditors to select audit samples using their own independent professional judgment. As +is customary in PCAOB audits, Deloitte-China often selects and tests samples of client account +balances and transactions, rather than testing all items within the relevant populations. This is + +6 See AS 1015 (Due Professional Care in the Performance of Work). + +7 See AS 1105 (Audit Evidence). + +8 See AS 1215 (Audit Documentation). + +9 See AS 2315 (Audit Sampling). + +10 As used in PCAOB Rules, “the word ‘should’ indicates responsibilities that are presumptively mandatory. +The auditor must comply with requirements of this type … unless the auditor demonstrates that alternative actions +he or she followed in the circumstances were sufficient to achieve the objectives of the standard.” PCAOB Rule +3101. “Failure to discharge a presumptively mandatory responsibility is a violation of the relevant standard and +Rule 3100 unless the auditor demonstrates that, in the circumstances, compliance with the specified responsibility +was not necessary to achieve the objectives of the standard.” Id. + +11 See AS 1201 (Supervision of the Audit Engagement) and QC 20 (System of Quality Control). + +6 + +consistent with PCAOB standards. However, on certain impacted audits, rather than using the +firm’s independent professional judgment to select samples, Deloitte-China audit personnel +asked employees of the companies they were auditing to select the samples to be tested. +20. This fundamentally flawed audit practice defeated the very purpose of sample +testing because it created a risk that clients could avoid selection of account balances and +transactions that may have been improperly recorded, and instead select samples the clients +believed to be supported. +21. On certain audits, Deloitte-China audit personnel violated PCAOB standards in +both ways: they asked client employees (i) to select samples of balances and transactions for +testing, and (ii) to complete the documentation the audit teams were required to prepare to show +they had performed the required tests. +22. These practices undermined the purpose of an independent audit and threatened +the reliability of the resulting audit opinions. +23. The failures of Deloitte-China audit personnel on impacted audits to comply with +PCAOB standards involved multiple audit areas, and involved the testing of various accounts on +clients’ balance sheets and income statements, as well as clients’ ICFR, including their control +for ensuring compliance with the Foreign Corrupt Practices Act. +24. In these impacted audits, Deloitte-China’s senior engagement team members +failed to properly supervise the conduct of junior audit personnel. Senior audit staff failed to +properly evaluate whether the audit work was actually performed, and whether the firm had +evidence sufficient to provide reasonable assurance for its audit conclusions. +25. Deloitte-China audit personnel engaged in these improper practices in both +component audits it conducted for Deloitte-U.S., as well as in audits of FPIs for which Deloitte- +China was the principal auditor. +26. Deloitte-China’s quality control policies and procedures did not provide +reasonable assurance that its audits were conducted in accordance with PCAOB standards as +demonstrated by the improper practices described above. For example, Deloitte-China did not +have in place sufficient policies and procedures to ensure that audits were adequately staffed +with professionals who were properly trained in PCAOB standards, and that engagement teams +had sufficient resources to complete the audit work they were required to do in the time frames +demanded of them. The failure to establish and maintain adequate policies and procedures in +such fundamental areas left Deloitte-China without reasonable assurance that its audits were +being conducted in accordance with PCAOB standards. +7 + +Example of Deloitte-China’s Deficient Audit Procedures on a Component Audit +27. In connection with its fiscal year 2018 audit of a U.S. issuer (Client A), Deloitte- +U.S. instructed Deloitte-China to test certain account balances at Client A’s China business. +Deloitte-U.S. also instructed Deloitte-China to test Client A’s ICFR in China. Deloitte-U.S. +instructed Deloitte-China to conduct this testing in accordance with PCAOB standards, and +Deloitte-China agreed to do so. + +28. In this component audit alone, Deloitte-China audit personnel asked Client A +employees on at least twenty-one separate occasions to complete audit procedures that Deloitte- +China was itself obligated to perform. This involved eighteen different accounts of Client A, +including testing for sales; cash and cash equivalents; accounts receivable; inventory; accounts +payable; cost of sales; and selling, general and administrative expenses. + +29. For example, in January 2019, Deloitte-China’s Auditor-in-Charge12 for this +engagement emailed an excel spreadsheet to Client A in connection with the firm’s testing of +fixed assets, asking the client to provide detailed information about fixed asset sales and +purchases. The spreadsheet included instructions to provide the voucher numbers, invoice +numbers and disposal dates of three samples – which Deloitte-China had not selected – of fixed +assets that Client A no longer held. The spreadsheet also included instructions to provide certain +detailed information regarding fixed asset purchases. One week later, Client A returned the +spreadsheet to Deloitte-China with samples the client had selected and the requested information +regarding three fixed asset disposals and purchases. +30. There is no evidence, however, that anyone on the Deloitte-China engagement +team assessed whether any of the information that Client A provided in the spreadsheet was +accurate. Nevertheless, the final workpapers related to the audit work included this information +from Client A. +31. The improper conduct on this engagement involved both junior and senior audit +staff. Supervisory members of the audit team – including audit managers and the Auditor-in- +Charge – were copied on some of the improper requests. Although the managers claimed they +expected the junior staff to review the supporting documents, neither the managers nor anyone +else on the engagement properly evaluated whether the required audit work had, in fact, been +performed, and whether the firm had support for its audit conclusions. The failure of senior +engagement team members to properly supervise junior auditors’ work in this example is +representative of Deloitte-China’s approach in the deficient engagements. +32. The Auditor-in-Charge confirmed that staff sent spreadsheets for clients to +complete without performing the required audit procedures themselves. She attributed this +improper practice to tight deadlines and insufficient staff for an audit of that size. She believed +managers were aware and had approved of the practice. However, neither the managers nor the +Auditor-in-Charge raised these issues to the engagement partner. + +12 “Auditor-in-Charge” is a Deloitte-China term for the audit staff member with at least three years of +experience who coordinates the work of more junior audit staff members, under the supervision of managers and +partners on the engagement. +8 + +33. Deloitte-China issued a “clearance memorandum” to Deloitte-U.S. in February +2019. The clearance memorandum incorrectly asserted that Deloitte-China had conducted its +testing in accordance with PCAOB standards despite the improper audit procedures described +above.13 +Example of Deloitte-China’s Deficient Audit Procedures on a FPI Audit +34. Deloitte-China was engaged as the principal auditor to perform the fiscal year +2018 audit of both the financial statements and ICFR of a China-based FPI (Client B). In +connection with this audit, Deloitte-China failed to conduct required audit procedures on at least +eight occasions across twelve audit areas. +35. For example, Deloitte-China’s audit plan required the engagement team to test a +sample of large bank transactions as part of the firm’s testing of significant non-recurring items. +In October 2018, a Deloitte-China Senior14 on the engagement team sent several Client B +employees a list of outstanding items required in connection with the audit, including a blank +spreadsheet called “Q3 large bank transaction[s],” which was intended to document the firm’s +work to test a sample of those transactions. The October 2018 email was copied to three +additional members of the engagement team, including the Auditor-in-Charge and another +Deloitte-China Senior. +36. The Deloitte-China Senior asked the Client B employees to complete the +spreadsheet by selecting their own sample of bank transactions over five million Chinese Yuan +Renminbi, and then, for each transaction they selected, filling in various data fields, including +bank name, transaction date, and credit or debit amount. +37. After Deloitte-China sent additional outstanding item lists with the same blank +spreadsheet attached, in November 2018 a Client B employee sent an email to a member of the +Deloitte-China engagement team attaching a completed copy of the spreadsheet that included +fifteen large bank transactions and related information in the previously blank data fields in the +spreadsheet. +38. There is no evidence in the audit workpapers, however, that anyone on the +Deloitte-China engagement team ever obtained or reviewed the source documents supporting the +information Client B provided, or otherwise assessed whether that information supported the +entries. +39. The fifteen large bank transactions selected by Client B were used in the final +Deloitte-China work papers. +40. As with the audit of Client A described above, a Manager on the audit and the +Auditor-in-Charge explained the use of the deficient audit procedures by stating that the + +13 After learning of the audit problems described above, Deloitte-China worked with Deloitte-U.S., as the +principal auditors, in connection with the re-performance of the deficient testing. No material errors or significant +control deficiencies in the financial statements were identified as a result of this work. + +14 Deloitte-China auditors follow a career progression from Associate to Senior to Manager to Partner. +9 + +engagement team did not have sufficient resources to complete the audit properly. The Auditor- +in-Charge admitted that the engagement team’s conduct was inappropriate, and impaired the +integrity of the testing. The supervisory personnel on the audit failed to properly evaluate +whether the required audit work had, in fact, been performed, and whether the firm had support +for its audit conclusions. +41. Despite these and other audit failings, Deloitte-China issued an audit report for +Client B incorrectly attesting that it had conducted this audit in accordance with PCAOB +standards despite the improper audit procedures described above.15 +VIOLATIONS +42. AS 1015 (Due Professional Care in the Performance of Work) requires auditors to +conduct their audit work with reasonable care and diligence, and to exercise professional +skepticism — an attitude that includes a questioning mind and a critical assessment of audit +evidence. Deloitte-China violated AS 1015 by failing to conduct independent testing of client +accounts and transactions. +43. AS 1105 (Audit Evidence) requires auditors to “perform audit procedures to +obtain sufficient appropriate audit evidence” and specifies that “the auditor should determine the +means of selecting items for testing to obtain evidence that, in combination with other relevant +evidence, is sufficient to meet the objective of the audit procedure.” Deloitte-China violated AS +1105 by failing to obtain appropriate audit evidence sufficient to support the opinions expressed +in its audit reports. +44. AS 1215 (Audit Documentation) requires auditors to document the procedures +performed, evidence obtained, and conclusions reached with respect to relevant financial +statement assertions. Audit documentation must “clearly demonstrate that the work was in fact +performed.” Deloitte-China violated AS 1215 by failing to maintain written records establishing +that its audit personnel had performed the testing they were required to complete in support of +the firm’s audit opinions. +45. AS 2201 (Integrated Internal Control and Financial Statement Audit) requires +that, when an auditor conducts an audit of an issuer’s ICFR, the auditor must “plan and perform +the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about +whether material weaknesses exist as of the date specified in management's assessment.” +Deloitte-China violated AS 2201 by failing to obtain appropriate evidence sufficient to obtain +reasonable assurance about the existence of material weaknesses in impacted issuers’ ICFR. +46. AS 2315 (Audit Sampling) requires auditors to “use professional judgment in +planning, performing, and evaluating a sample.” Where an auditor is unable to apply the planned +audit procedures because supporting documentation is missing, AS 2315 outlines specific steps +the auditor should take to address the impact of the missing documentation. In this case, + +15 After learning of the audit problems described above, Deloitte-China re-performed the deficient and +incomplete testing from the fiscal year 2018 audit of Client B. Deloitte-China did not identify any material errors or +significant control deficiencies as a result of the re-performed work. + +10 + +Deloitte-China violated AS 2315 by failing to independently select and evaluate audit samples. +In addition, in at least one instance, where audit documentation was missing, Deloitte-China +improperly had the client substitute other audit samples, instead of evaluating the impact of the +missing documentation on the audit. +47. AS 1201 (Supervision of the Audit Engagement) requires auditors to supervise +the work of engagement team members so that the work is performed as directed and supports +the conclusions reached. Deloitte-China violated AS 1201 when partners and other supervisory +staff on the deficient audits failed to supervise the work of engagement team members +sufficiently to ensure the work required was properly performed and supported the conclusions +reached. +48. PCAOB Quality Control Standards require an audit firm to effectively design, +implement, and maintain a system of quality control for the firm’s accounting and auditing +practice. QC 20.01. A system of quality control is “broadly defined as a process to provide the +firm with reasonable assurance that its personnel comply with applicable professional standards +and the firm’s standards of quality.” QC 20.03. The quality control practices and procedures +relevant to a firm’s auditing practice include hiring, assigning personnel with appropriate +technical training and proficiency to engagements, professional education and development, and +engagement performance. QC 20.13 and 20.17. +49. Deloitte-China violated QC 20 by failing to establish policies and procedures +sufficient to provide reasonable assurance that the work required to be performed by audit +personnel met applicable professional standards and regulatory requirements. Among other +things, Deloitte-China’s personnel management policies and procedures failed to ensure audit +staffing at sufficient levels of seniority to allow audit personnel on impacted audits to complete +the audit work in a timely and competent manner. Moreover, certain of Deloitte-China’s policies +and procedures for PCAOB audits relating to engagement performance failed to provide +reasonable assurance that the work performed by the audit teams would satisfy the applicable +professional standards in their component audits and FPI audits. +50. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “the +applicable professional standards under which the audit was conducted.” An auditor violates +Regulation S-X Rule 2-02(b)(1) when it issues a report stating that it has conducted its audit in +accordance with PCAOB standards when it has not. In its audit opinions issued for FPIs, +Deloitte-China willfully16 violated Regulation S-X Rule 2-02(b)(1) when it issued audit opinions +for impacted audits stating that it had conducted its audits in accordance with PCAOB standards +when in fact it had not. + + +16 “Willfully,” for purposes of imposing relief under Exchange Act Section 4C and Rule 102(e) of the +Commission’s Rules of Practice “means no more than that the person charged with the duty knows what he is +doing.” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. +Cir. 1949)) (holding that “willfulness” does not require a knowing violation of the law). There is no requirement +that the actor “also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. +1965). + +11 + +FINDINGS + +51. Based on the foregoing, the Commission finds that Deloitte-China engaged in +improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. +52. Based on the foregoing, the Commission finds that Deloitte-China willfully +violated Regulation S-X Rule 2-02(b)(1) pursuant to Exchange Act Section 4C(a)(3) and Rule +102(e)(1)(iii). +COOPERATION AND REMEDIAL EFFORTS +53. In determining whether to accept the Offer, the Commission considered Deloitte- +China’s cooperation and remedial efforts. Deloitte-China cooperated extensively with the +Commission staff. After Deloitte-China became aware of allegations of misconduct, it +conducted an investigation through an international law firm that identified certain violative +conduct and informed the PCAOB of the conduct. After the Commission learned of the matter +through the PCAOB, Deloitte-China provided the Commission staff with prompt updates of its +findings throughout its investigation. Deloitte-China notified impacted audit clients. The firm’s +audit personnel, at times working with Deloitte-U.S., re-performed the deficient testing it had +found and did not identify any material errors or significant control deficiencies. Deloitte-China +has also undertaken significant remedial efforts to improve its audit practice, including +instituting enhanced procedures to improve the quality of its audits, its workload and personnel +management, and its monitoring and communications of auditing standards. +54. The Commission also considered Deloitte-China’s ongoing remedial efforts to +assess the improvements the firm has made to its audit practice and to determine whether +additional improvements to its policies and procedures relating to compliance with PCAOB +auditing standards are warranted. In connection with these efforts, Deloitte-China is +participating in an independent review of its policies and procedures that is being monitored by +Deloitte-Global. Deloitte-China has committed to adopting, as soon as practicable, all of the +recommendations arising from this independent review. Deloitte-China has committed to +developing and implementing a plan, approved and overseen by Deloitte-Global, to address any +deficiencies in its policies and procedures related to Deloitte-China’s system of quality control, +and will certify, through its Chief Executive Officer, to Deloitte-Global that it has adopted all of +the recommendations from this independent review. Deloitte-China has committed, thereafter, to +participating in three annual reviews overseen by Deloitte-Global to determine whether its +policies and procedures are adequate and sufficient to provide reasonable assurance of +compliance with all PCAOB auditing standards identified in this Order. Deloitte-China has +committed to documenting these reviews and its improvements in reports certified by its Chief +Executive Officer to Deloitte-Global that describe the nature and scope of the reviews; the Chief +Executive Officer’s review and evaluation of the firm’s assessment and testing process; and +whether, based on belief and after reasonable inquiry, the Chief Executive Officer believes that +Deloitte-China’s policies and procedures are adequate and sufficient to provide reasonable +assurance of compliance with PCAOB auditing standards. Based on the findings of each of these +annual reviews, Deloitte-China has committed to developing and implementing plans, approved +12 + +and monitored by Deloitte-Global, to address any deficiencies in its policies and procedures +related to Deloitte-China’s system of quality control. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Deloitte-China shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X. +B. Deloitte-China be, and hereby is, censured. + +C. For the next 36 months, each Deloitte-China audit professional serving U.S. +public company audit clients shall complete a minimum of 16 training hours annually in topics +covering all of the professional standards described in paragraphs 42 to 49 above in addition to +any required continuing professional education credits. For audit professionals with supervisory +responsibilities over such professionals, the training shall, in addition, include 8 training hours +annually over the same 36-month period in topics covering paragraph 47 above. +D. Deloitte-China shall complete all remedial efforts identified in paragraph 54. +E. Respondent shall, within 60 days of the entry of this Order, pay a civil money +penalty in the amount of $20,000,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +13 + +Payments by check or money order must be accompanied by a cover letter identifying +Deloitte Touche Tohmatsu Certified Public Accountants, LLP as a Respondent in these +proceedings, and the file number of these proceedings; a copy of the cover letter and check or +money order must be sent to Melissa Hodgman, Division of Enforcement, Securities and +Exchange Commission, 100 F St., NE, Washington, DC 20549. +F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +By the Commission. + + + + Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4343.txt b/raw/aaer/2022/AAER-4343.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf21eab60d8c37733d12d42cece86c039144814d --- /dev/null +++ b/raw/aaer/2022/AAER-4343.txt @@ -0,0 +1,324 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95943 / September 29, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4343 / September 29, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21180 + + +In the Matter of + +Tupperware Brands +Corporation, + +Respondent. +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF +1934, MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST +ORDER + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), against Tupperware Brands Corporation +(“Tupperware” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that: +2 + + +Summary + +1. These proceedings arise out of failures by Respondent to devise and maintain a +sufficient system of internal accounting controls and to maintain accurate books and records from at +least 2016 through 2020 (the “Relevant Period”). + +2. Specifically, Tupperware’s failures relate to its House of Fuller Mexico reporting +unit (“Fuller Mexico”), which Tupperware acquired as part of the Fuller Cosmetics beauty products +business. Instead of fully integrating Fuller Mexico post-acquisition, and implementing appropriate +policies and procedures, Tupperware retained certain legacy policies and practices, failing to +recognize the risk that these policies and practices may not adequately address that unit’s direct +sales model and, over time, lagging financial performance. As a result, Fuller Mexico’s +management was able to override controls and inaccurately record financial results from at least +2016 through 2020 by: improperly increasing sales via the shipment of unordered products, without +purchase orders (“Non-PO Sales”); and improperly reserving for various other expenses at Fuller +Mexico. + +3. During the Relevant Period, Fuller Mexico increasingly shipped Non-PO Sales to +its independent sales representatives (known as “Fullerettes”). At certain points, Fuller Mexico +sent more product via Non-PO Sales than the Fullerettes could reasonably sell, and a number of +Fuller Mexico’s Non-PO Sales were made at the end of financial reporting periods. + +4. As Non-PO Sales from Fuller Mexico increased over time, so did product returns. +Tupperware failed to adequately reserve for the increased returns, as Fuller Mexico continued to +apply a more lenient legacy practice for determining reserves arising from Fuller Mexico sales. +Furthermore, Tupperware continued to rely on Fuller Mexico’s legacy information technology +system and failed to respond to red flags indicating that Fuller Mexico was improperly using Non- +PO Sales to attempt to meet its financial targets. Fuller Mexico’s management also overrode +existing internal accounting controls by failing to book various required reserves in an attempt to +show better results for the unit. + +5. In August 2021, as a result of the activities at Fuller Mexico, Tupperware disclosed +in its amended annual report on Form 10-K/A that, from 2016 through the first quarter of 2020, it had +misstated its net sales, accounts receivable, inventories, and accrued liabilities in its annual and +interim financial statements. Tupperware disclosed that approximately $5.2 million of reserves, +including those related to Non-PO Sales, were erroneously recorded and should have been reflected +in prior periods. Additionally, Tupperware also disclosed that approximately $2.4 million of other +accruals were erroneously excluded from prior periods. + +6. As a result of the conduct described herein, the Commission finds that Tupperware +violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +Respondent + +7. Tupperware Brands Corporation, incorporated in Delaware with its principal +place of business in Orlando, Florida, is a consumer products company. Tupperware’s common +stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and trades on +3 + + +the New York Stock Exchange under the symbol “TUP.” + +Facts + +8. In 2005, Tupperware acquired the Fuller Cosmetics beauty products and other +direct selling businesses from Sara Lee Corporation. Following the acquisition, Tupperware did +not fully integrate these businesses into its existing policies and procedures. Instead, Tupperware +allowed Fuller Mexico to retain certain legacy policies and procedures, as well as legacy sales +practices. + +9. In particular, Tupperware continued to utilize Non-PO Sales at Fuller Mexico. +Historically, Fuller Mexico’s Non-PO Sales were automatic shipments several times a year of new +or promotional items, like a new lipstick shade. Fuller Mexico added the items to Fullerettes’ +orders, typically at a discount or a special price, with the option to be returned. As a result, Fuller +Mexico calculated reserves for returns for Non-PO Sales as part of its sales returns allowance. + +10. Until the fourth quarter of 2019, Tupperware used a legacy practice from Fuller +Mexico to estimate the returns reserve based on the average returns that occurred over the prior +twelve-month period. By contrast, Tupperware’s general practice at the time for other units would +have estimated this reserve based on the average returns that occurred over the prior six-month +period, resulting in a higher, more conservative return reserve than Fuller Mexico’s legacy +practice. + +11. Fuller Mexico’s business performance waned in the years following its acquisition. +As Fuller Mexico’s sales failed to meet targets between 2017 and 2019, Tupperware management +at the Worldwide and Latin America regional levels heightened pressure on Fuller Mexico to meet +unrealistic sales expectations. + +12. In response, Fuller Mexico increased its use of, and reliance upon, Non-PO Sales, +through escalation of the frequency, type, and number of products shipped. This included the +initiation of certain Non-PO Sales at the end of financial reporting periods. At least as early as +2018, the number of Non-PO Sales began to increase and shifted towards products with a higher +profit margin, such as perfume, and away from the intended purpose of providing new or +promotional products at a discount. Additionally, beginning in at least mid-2018, red flags should +have made Tupperware aware of Fuller Mexico’s misuse of, and failure to properly account for, +Non-PO Sales. + +13. As part of its increasing use of Non-PO Sales, Fuller Mexico employed several +other strategies in an attempt to meet targets. One example of these aggressive strategies was +referred to as a “reactivation order,” or “suggested order,” whereby Fullerette supervisors +identified Fullerettes who were close to becoming inactive in Fuller Mexico’s system, and used +unsolicited “reactivation orders” to try to reengage those Fullerettes in the business and prevent the +Fullerettes from becoming inactive in Fuller Mexico’s system. Once a Fullerette was inactive, +Fuller Mexico’s policy required bad debt for that Fullerette’s sales to be reserved at a higher rate. + +14. Another strategy was known as “director sampling” or the “red button,” in which +Fuller Mexico divisional directors who were at risk of not meeting sales targets could add Non-PO +4 + + +Sales to Fullerettes’ orders. The Non-PO Sales here included products that were not offered at a +discount. Fuller Mexico formalized this practice in 2018 as part of an IT update, with a software +tool that made it more efficient for divisional directors to add unordered products to existing +Fullerette orders in their division, once approved at higher levels within Fuller Mexico. + +15. Following an inquiry into Fuller Mexico’s trial balances for the first quarter of 2019, +Tupperware’s internal audit team, as part of a regularly scheduled financial audit of Fuller Mexico +in the third quarter of 2019, conducted a review of certain Non-PO Sales practices at Fuller +Mexico in response to elevated returns. This review led to the commencement in October 2019 of +an internal investigation into Fuller Mexico’s sales order and returns process. Ultimately, +Tupperware management concluded an adjustment was required for calculating Fuller Mexico’s +returns reserve, but incorrectly concluded the adjustment was a change in accounting estimate, +instead of a correction of an accounting error. + +16. Under Generally Accepted Accounting Principles (“GAAP”), a change in +accounting estimate results from new information and should be accounted for prospectively; by +contrast, an accounting error may result from mistakes in the application of GAAP or oversight or +misuse of facts that existed at the time the financial statements were prepared and may require +restatement of previously-issued financial statements. + +17. In the third quarter of 2019, Tupperware adjusted its reserves by $10 million, as +reflected in Tupperware’s quarterly report, filed with the Commission in November 2019. +Tupperware initially attributed the change in accounting estimate determination for calculating +Fuller Mexico’s returns reserve and other related reserves, including accounts receivable and +inventory, to current trends and external factors, such as slower consumer spending. Tupperware +maintained that it was a change based on new information, and therefore did not represent an +accounting error. + +18. A subsequent investigation uncovered, however, (i) unrealistic sales expectations +from Tupperware’s Latin America regional leadership, (ii) sales strategies designed by Fuller +management to help meet sales targets, along with promotions or incentives to make the product +more attractive to the Fullerettes, and (iii) Fullerettes received more product than they could +realistically sell. + +19. As a result of this investigation, Tupperware terminated several members of Fuller +Mexico and regional management for “loss of confidence.” In late 2019, Tupperware stopped the +use of “director sampling” and directed the phase-out of Non-PO Sales at Fuller Mexico, which +was completed in early 2020. + +20. After further concerns were raised internally about Fuller Mexico, Tupperware +conducted an additional internal investigation, and determined that Fuller Mexico failed to book +various other expenses in order to show better performance. To address these expenses, +Tupperware then recorded an adjustment in the fourth quarter of 2019 of approximately $9 million, +of which approximately $2.4 million related to prior periods. + +21. In February 2020, Tupperware disclosed it would delay the filing of its 2019 annual +report on Form 10-K as it probed “the accounting for accounts payable and accrued liabilities at its +Fuller Mexico beauty business.” Tupperware made a number of other announcements, including +5 + + +that it estimated total 2019 impairments related to Fuller Mexico of approximately $31 million. + +22. Ultimately, Tupperware filed its 2019 annual report with the Commission on March +12, 2020 and represented that the investigation into Fuller Mexico was completed, that the impact +of out of period adjustments was immaterial, that the system of internal control over financial +reporting (“ICFR”) was effective, and that there were no material weaknesses in ICFR. + +23. In 2021, Tupperware conducted an additional investigation and determined that it +had not accounted for all forms of Non-PO Sales at Fuller Mexico, and that certain amounts related +to Non-PO Sales were accounting errors, rather than merely changes in estimates. Tupperware +again concluded again in 2021 that the conduct was not material to the financial statements. + +24. Of the original $10 million in adjustments to reserves booked in the third quarter of +2019, Tupperware ultimately determined in 2021 that $5.2 million was an out-of-period error, +comprised of understated reserves and overstated inventory. Tupperware simultaneously +concluded that revenue associated with the Non-PO Sales had not been recorded in accordance +with GAAP. + +25. In August 2021, Tupperware filed an amended annual report for 2020, disclosing +the existence of a Commission investigation and restating its report on ICFR to identify a new +material weakness relating to the override of internal accounting controls by Fuller Mexico +management. The errors identified for Non-PO Sales and other expenses in Tupperware’s 2020 +amended annual report include adjustments for 2016 through 2020, as follows: + + Adjustment +Amount +Recorded +Amount of +Adjustment Deemed +an Error +Reserves Including Non-PO Sales +(Change in Estimate recorded Q3 2019) +$10M $5.2M +Various Accruals (Recorded Q4 2019) $2.4M $2.4M +Total $12.4M $7.6M + +26. Tupperware acknowledged that historically, it was unable to track the volume of +Fuller Mexico’s Non-PO Sales in a sufficient level of detail and, as a result, was unable to monitor +the use of this type of sale, which should have been limited in nature. Information systems in place +at Fuller Mexico were not configured to sufficiently identify, summarize, and report Non-PO Sales. + +27. As a result of the conduct described above, Respondent violated Section +13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, +records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and +dispositions of their assets. + +28. Lastly, as a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires all reporting companies to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that transactions +are recorded as necessary to permit preparation of financial statements in accordance with GAAP. + +6 + + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Tupperware’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Tupperware cease and +desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + +B. Respondent Tupperware shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $900,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§ 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Tupperware +Brands Corporation as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Stacy Bogert, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5012. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it +shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in +7 + + +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4344.txt b/raw/aaer/2022/AAER-4344.txt new file mode 100644 index 0000000000000000000000000000000000000000..c352cb381109bdad639524622b1052f57faf31aa --- /dev/null +++ b/raw/aaer/2022/AAER-4344.txt @@ -0,0 +1,570 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11110 / September 29, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95944 / September 29, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4344 / September 29, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21181 + + +In the Matter of + +BARCLAYS PLC and +BARCLAYS BANK PLC + +Respondents. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) against Barclays PLC (“BPLC”) and Barclays Bank PLC (“BBPLC”) (together, +“Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. +2 +III. + + On the basis of this Order and Respondents’ Offer, the Commission finds1 that + +Summary + +1. This matter arises from BBPLC’s failure to put into place any internal control +around the real-time tracking of securities being offered or sold off of its Commission-registered +shelf registration statement. As a result of this failure, BBPLC offered and sold an unprecedented +amount of securities—cumulatively totaling approximately $17.7 billion—in excess of what it had +registered with the Commission, in violation of Sections 5(a) and (c) of the Securities Act. And, in +connection with the over-issuances and internal control failure, BPLC and BBPLC restated their +year-end 2021 audited financial statements filed with the Commission. + +2. In May 2017, BPLC and BBPLC lost their status as well-known seasoned issuers +(“WKSI”). On February 22, 2018, BBPLC filed an amended registration statement to convert its +prior WKSI shelf to a non-WKSI shelf (“2018 Shelf”), for the approximately 18 months remaining +until its expiration. The 2018 Shelf was declared effective on March 30, 2018, and included a +specification of the maximum aggregate offering price of securities available to be offered or sold +from the 2018 Shelf. + +3. On June 14, 2019, BBPLC filed a registration statement for a new non-WKSI shelf +(“2019 Shelf”) to replace the 2018 Shelf. The 2019 Shelf was declared effective on August 1, +2019, and included a specification of the maximum aggregate offering price of securities available +to be offered or sold from the 2019 Shelf. + +4. As it was nearing expiration, the 2018 Shelf still had securities remaining for +additional offers or sales. Therefore, as part of internal considerations around the registration of +the 2019 Shelf, BBPLC personnel completed an exercise (“Carry-Over Calculations”), whereby +they calculated (1) the amount of securities needed for offers or sales from the 2018 Shelf during +the period between BBPLC’s filing of its shelf registration statement for the 2019 Shelf and the +date when the 2019 Shelf became effective (“Gap Period”), and (2) the amount of securities left +over on the 2018 Shelf after accounting for the projected Gap Period offers or sales, which were to +be de-registered, with the registration fees originally assessed on those securities to be used to +offset a portion of the registration fees associated with the 2019 Shelf. + +5. At the time of the registration of both the 2018 Shelf and the 2019 Shelf, certain +BBPLC personnel recognized the need to accurately record relevant information about securities +that were offered or sold so as to be able to track the aggregate amount of securities that were +cumulatively offered and sold from each respective Shelf on a real-time basis, thereby ensuring +that BBPLC did not offer or sell any securities in excess of what had been registered. No internal + +1 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not + binding on any other person or entity in this or any other proceeding. +3 +control was established to address this issue, and the amount of securities that were offered and +sold was not tracked. + +6. As a result, the Carry-Over Calculations were incorrect, so that during some of the +Gap Period, beginning on or around June 26, 2019, BBPLC offered and sold securities in excess of +the amount remaining on the 2018 Shelf, ultimately leading to BBPLC offering and selling +approximately $1.3 billion of securities in excess of what was registered with the Commission on +the 2018 Shelf. + +7. In addition, due to its failure to establish any internal control to track the amount of +securities that were offered or sold on a real-time basis, beginning on or around January 28, 2021, +BBPLC offered and sold securities in excess of what was registered on the 2019 Shelf. These +over-issuances continued until on or around March 9, 2022, when BBPLC discovered this issue. +Over the 14-month period of over-issuance, BBPLC offered and sold approximately $16.37 billion +of securities in excess of what was registered with the Commission on the 2019 Shelf. + +8. On March 14, 2022, BBPLC reported the issue to regulators and disclosed to the +market that BBPLC did not have sufficient issuance capacity to support further sales from +inventory and any further issuances of certain exchange-traded notes (“ETN”). On March 28, +2022, BPLC publicly disclosed details concerning the internal control issues related to, and the +potential financial impact of, the over-issuance by BBPLC. Also on that date, BPLC announced +BBPLC’s intent to offer rescission to investors who had purchased securities from BBPLC in +relevant unregistered transactions. + +9. The over-issuance impacted both BPLC’s and BBPLC’s year-end 2021 financial +statements. On May 23, 2022, both BPLC and BBPLC filed amendments to their annual reports +on Forms 20-F with the Commission, restating their financial statements, by recording a provision +and contingent liability relating to the over-issuances and disclosing management’s conclusions as +to the ineffectiveness of internal control over financial reporting (“ICFR”) and disclosure controls +and procedures (“DCP”) due to a material weakness identified in ICFR. + +10. On August 1, 2022, BBPLC commenced the rescission offer, which expired on +September 12, 2022. + +Respondents + +11. BPLC is a bank holding company, headquartered in London, United Kingdom. +Through its subsidiaries, BPLC provides various financial services, including investment banking, +wealth management, and the offer and sale of securities. BPLC has registered the common shares +underlying its American Depository Receipts (“ADR”) with the Commission pursuant to Section +12(b) of the Exchange Act, and its ADRs trade on the New York Stock Exchange under the ticker +symbol “BCS.” BPLC has an obligation to file periodic reports with the Commission pursuant to +Section 13(a) of the Exchange Act. + +4 +12. BBPLC is a global bank, headquartered in London, United Kingdom and a wholly- +owned subsidiary of BPLC. BBPLC provides various financial services, including the offer and +sale of securities. BBPLC has listed a series of corporate debt securities on U.S. exchanges, each +class of which has been registered with the Commission pursuant to Section 12(b) of the Exchange +Act. BBPLC has an obligation to file periodic reports with the Commission pursuant to Section +13(a) of the Exchange Act. + +Facts + +A. Section 5 of Securities Act +13. A foundational principle of the federal securities laws is that securities offerings +must either be registered or exempt from registration. + +14. Section 5(a) of the Securities Act prohibits the direct or indirect sale of securities +through the mail or interstate commerce unless a registration statement has been filed and is in +effect. Section 5(c) prohibits the offer to sell securities through the mail or interstate commerce +unless a registration statement has been filed. Offers and sales must either be registered or meet the +requirements of an exemption from registration. + +B. BBPLC Shelf +15. Historically, BBPLC has offered and sold securities pursuant to an effective shelf +registration statement,2 on Form F-3. + +16. The BBPLC shelf registration statement is largely used by BBPLC’s Structured +Products Group for the offer or sale of structured notes3 and ETNs.4 In addition, on occasion, the +Group Treasury function for Respondents and related entities (“Group Treasury”) also uses the shelf +registration statement to sell corporate debt securities.5 + + +2 A shelf registration statement is a filing to register a public offering of securities which + permits an issuer to make multiple offerings based on the same registration statement. + +3 Structured notes are securities issued by financial institutions whose returns are linked + to the performance of reference assets or indices. Structured notes have a fixed + maturity and include two components—a bond component and an embedded derivative. + +4 ETNs are unsecured debt obligations of financial institutions that trade on a securities + exchange. ETN payment terms are linked to the performance of a reference index or + benchmark, representing the ETN’s investment objective. + +5 Corporate debt securities are debt obligations issued by companies, which are used to + raise money for a variety of corporate purposes. Companies promise to return the face + value of the bond, also known as principal, on a specified maturity date. Until that date, + companies usually pay a stated rate of interest. +5 +C. Loss of WKSI Status + +17. On May 10, 2017, the Commission instituted settled public administrative and +cease-and-desist proceedings against Barclays Capital Inc.—a subsidiary of BBPLC—arising out of +its former wealth and investment management business. In the Matter of Barclays Capital Inc., +Adm. Proc. File No. 3-17978 (May 10, 2017). + +18. As a result of that action, BPLC and BBPLC became ineligible issuers under +Securities Act Rule 405, thereby losing their status as WKSIs. Loss of WKSI status meant that, +among other things, BPLC and BBPLC would be unable to file automatic shelf registration +statements, which allow WKSIs to register unspecified amounts of different specified types of +securities on immediately effective registration statements. A WKSI using an automatic shelf +registration statement also is permitted to pay filing fees on a “pay-as-you-go” basis at the time of +each takedown off the shelf. Practically, for any new shelf registration statement on Form F-3 being +utilized, BPLC and BBPLC would, among other things, need to quantify the total amount of +securities that they anticipated offering and selling over the duration of the shelf and pay the +registration fees for those securities in advance. + +19. Following the loss of WKSI status, certain personnel from BBPLC understood the +consequences of this status change, including that they should consider implementing a mechanism +to track offers and sales of securities off any shelf, relative to the registered amount of securities +available to be offered or sold off that shelf, in order to ensure that no securities in excess of the +amount registered were offered or sold. + +D. BBPLC Working Group + +1. Conversion of WKSI Shelf to 2018 Shelf + +20. BBPLC needed to address its loss of WKSI status with respect to its ongoing +securities offerings. As a result, in or around January 2018, BBPLC formed a working group +(“Working Group”) that included trading desk heads from the Structured Products Group, personnel +from an administrative support function called business management, personnel from the product +origination group, a member of the compliance department, and a member of the legal department. + +21. Initially, the Working Group focused on two issues. First, the Working Group +considered whether (1) to amend the existing registration statement to convert BBPLC’s existing +WKSI shelf into a non-WKSI shelf for approximately 18 months, or (2) to file a new registration +statement to register a new, non-WKSI shelf for three years. The Working Group concluded that +BBPLC should convert the WKSI shelf into what eventually became the 2018 Shelf. + +22. Second, the Working Group worked with the trading desks that would be using the +2018 Shelf in their business, as well as Group Treasury, to calculate the total amount of securities +that they anticipated offering and selling over the next approximately 18 months, given that BBPLC +sought to register the total amount of securities that it anticipated offering and selling during that +period and pay the registration fees for that amount of securities in advance. As part of these +6 +calculations, the Working Group also determined an initial allocation of fees among the trading +desks accessing the 2018 Shelf, with the expectation that these allocations would be revisited as data +regarding actual offers and sales off of the 2018 Shelf became available. + +23. On February 22, 2018, BBPLC filed a post-effective amendment, which amended its +prior registration statement on Form F-3 (File No. 333-212571), and on March 30, 2018, BBPLC’s +post-effective amendment was declared effective. The filing fees for the 2018 Shelf covered the +offer or sale of approximately $21.3 billion of securities, for a period of approximately 18 months. + +24. During the pendency of the Working Group’s efforts, the need to track actual offers +and sales of securities against the amount of registered securities on a real-time basis was +understood by and discussed among members of the Working Group. Nevertheless, no internal +control was established to track offers and sales of securities, nor was any member of the Working +Group or other BBPLC personnel performing that task. + + 2. Registration of 2019 Shelf + +25. As the 2018 Shelf approached its expiration, the Working Group was reconstituted, +with largely the same membership as in 2018. The Working Group undertook a similar approach as +previously—including, calculating the total amount of securities that they anticipated offering or +selling during the three-year duration of what would become the 2019 Shelf and determining an +initial allocation of fees among the trading desks accessing the 2019 Shelf—but the Working Group +also needed to perform the Carry-Over Calculations. + +26. Specifically, because the 2018 Shelf had excess securities still available to offer or +sell, the Working Group needed to determine two amounts. First, it needed to determine how +much was needed for offers or sales of securities from the 2018 Shelf during the Gap Period. +Second, it needed to determine how many securities would be left over on the 2018 Shelf after +accounting for the anticipated Gap Period offers or sales. BBPLC de-registered those remaining +securities and used the fees that were originally assessed on those securities to offset a portion of +its registration fees due for the 2019 Shelf. + +27. On August 1, 2019, BBPLC’s registration statement on Form F-3 (File No. 333- +232144) was declared effective. The filing fees for the 2019 Shelf covered the offer or sale of +approximately $20.8 billion of securities, for a period of three years. + +28. Despite the labor intensive work to manually calculate the Carry-Over Calculations +and the payment of registration fees related to the 2019 Shelf, again no internal control was +established to track offers and sales of securities on a real-time basis, nor was any member of the +Working Group or other BBPLC personnel performing that task. + +E. Over-Issuances +29. On March 8, 2022, a member of Group Treasury reached out to the member of the +legal department who had been part of the Working Group, inquiring as to how many securities +7 +remained available to be offered and sold off of the 2019 Shelf because Group Treasury was +planning on doing a sale of corporate debt securities. + +30. Over the course of that day and the next, various BBPLC personnel attempted to +calculate the cumulative amount of securities offered and sold from the 2019 Shelf in order to +determine the amount of securities that remained available for sale. Over the course of these efforts, +it became clear to all involved that there was no internal control in place to track in real time the +amount of securities offered and sold against the amount of securities registered. + +31. On or around March 9, 2022, BBPLC personnel concluded that securities had been +offered and sold in excess of what had been registered on the 2019 Shelf. Shortly thereafter, +BBPLC halted new offers and sales of securities from the 2019 Shelf and, on March 14, 2022, +alerted regulators about the over-issuance and disclosed to the market that BBPLC did not have +sufficient issuance capacity to support further sales from inventory and any further issuances of +certain ETNs. + +32. On March 28, 2022, BPLC publicly disclosed details around the internal control +issues and potential financial impact of BBPLC’s over-issuance from the 2019 Shelf. + +33. In early June 2022, in connection with an internal investigation into the over- +issuance from the 2019 Shelf, BBPLC discovered that the Carry-Over Calculations were incorrect. +In fact, BBPLC had de-registered too large an amount of securities from the 2018 Shelf. As a +result, during some of the Gap Period, beginning on June 26, 2019, BBPLC offered and sold +approximately $1.3 billion of securities in excess of what had remained on the 2018 Shelf. + +34. These miscalculations also elongated the time period and increased the amount of +the over-issuance from the 2019 Shelf from what BBPLC had originally calculated. In the end, the +first over-issuance occurred on or around January 28, 2021, and BBPLC offered and sold +approximately $16.37 billion of securities in excess of the amount registered with the Commission +from the 2019 Shelf. + +F. BPLC and BBPLC Restatements +35. On April 28, 2022, in connection with its first quarter 2022 results announcement, +BPLC disclosed that, as a result of BBPLC’s over-issuance, it was in discussions with the +Commission about filing a restatement of its year-end 2021 audited financial statements previously +filed with the Commission and that BBPLC was in the process of preparing a restatement for its +year-end 2021 audited financial statements previously filed with the Commission. On May 16, +2022, BPLC announced that its Board of Directors determined that BPLC would restate its year-end +2021 audited financial statements filed with the Commission. + +36. On May 23, 2022, both BPLC and BBPLC filed amendments to their 2021 annual +reports on Forms 20-F with the Commission including the restatements. The restatements reflected +a £220 million litigation and conduct provision and an associated income statement charge as of +year-end 2021 and a contingent liability disclosure, all with respect to the potential impact of the +over-issuance from the 2019 Shelf. The restatements also amended disclosures to reflect +8 +management’s conclusions that ICFR and DCP were not effective as of year-end 2021, due to a +material weakness in ICFR identified after the original filing date as a result of the over-issuance +from the 2019 Shelf. + + G. Rescission Offer + +37. Section 12(a)(1) of the Securities Act provides for civil liability for “[a]ny person +who . . . offers or sells a security in violation” of Section 5 of the Securities Act. The remedy +available under Section 12(a)(1) is rescission. Section 13 of the Securities Act prohibits actions to +enforce liability under Section 12(a)(1) unless brought within one year after the violation upon +which it is based. + +38. On March 28, 2022, BBPLC announced its intent to conduct a rescission offer with +respect to the over-issuance. And, on August 1, BBPLC commenced its rescission offer, as +described in a Prospectus Supplement to the Prospectus dated May 23, 2022, in connection with its +registration statement on Form F-3 (File No. 333-265158).6 The rescission offer expired on +September 12, 2022. + +39. BBPLC included as eligible securities for purposes of its rescission offer all of those +securities that were offered or sold in excess of what was registered on the 2018 Shelf and the 2019 +Shelf, including over-issuances for which an action otherwise would have been barred under +Section 12(a)(1). + + H. Respondents’ Cooperation and Remedial Efforts + +40. In determining to accept the Offer, the Commission considered cooperation afforded +the Commission staff and remedial acts promptly undertaken by Respondents. + +41. Among other things, Respondents identified the over-issuance from the 2019 Shelf, +later identified the over-issuance from the 2018 Shelf, self-reported both over-issuances to +regulators, and initiated an internal investigation. Respondents presented interim findings to +Commission staff throughout the internal investigation, as well as conclusions to Commission staff +upon substantial completion of the investigation. Respondents also voluntarily provided relevant +documents, made personnel available for voluntary testimony, and provided assistance in obtaining +relevant information from third parties. + +42. BBPLC also initiated a rescission offer to provide compensation to investors by +either repurchasing relevant securities from current holders or by paying equivalent rescissory +damages to former holders and included as eligible securities for purposes of its rescission offer all +securities that were offered or sold in unregistered transactions, including those for which actions +would otherwise be barred under Section 12(a)(1) of the Securities Act. + + +6 BBPLC amended its rescission offer on August 12, 2022, to include certain additional + eligible securities. +9 +43. Respondents also initiated a review of policies and procedures and internal controls +relating to BBPLC’s Commission-registered shelves (“BBPLC Shelf Review”) soon after +identification of the over-issuance, which included (1) an assessment of end-to-end processes to +identify any significant control gaps related to the offers and sales off of BBPLC’s Commission- +registered shelves, and (2) recommendations for enhancements designed to effect compliance with +Section 5 of the Securities Act. + +Violations + +44. As a result of the conduct described above, BBPLC violated Section 5(a) of the +Securities Act, which states that “[u]nless a registration statement is in effect as to a security, it shall +be unlawful for any person, directly or indirectly, (1) to make use of any means or instruments of +transportation or communication in interstate commerce or of the mails to sell such security through +the use or medium of any prospectus or otherwise, or (2) to carry or cause to be carried through the +mails or in interstate commerce, by any means or instruments of transportation, any such security +for the purpose of sale or for delivery after sale.” + +45. As a result of the conduct described above, BBPLC violated Section 5(c) of the +Securities Act, which states that “[i]t shall be unlawful for any person, directly or indirectly, to +make use of any means or instruments of transportation or communication in interstate commerce +or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or +otherwise any security, unless a registration statement has been filed as to such security.” + +46. As a result of the conduct described above, Respondents violated Section 13(a) of +the Exchange Act and Rules 12b-20 and 13a-1 thereunder, which, among other things, require every +issuer of a security registered pursuant to Section 12 of the Exchange Act to file accurate annual +reports with the Commission, and that such reports contain all material information necessary to +make the required statements in the reports not misleading. + +47. As a result of the conduct described above, Respondents violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers with securities registered under Section 12 +of the Exchange Act or which are required to file reports pursuant to Section 15(d) of the Exchange +Act to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly +reflect the transactions and dispositions of assets of the issuer. + +48. As a result of the conduct described above, Respondents violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers with securities registered under Section 12 +of the Exchange Act or which is required to file reports pursuant to Section 15(d) of the Exchange +Act to devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurance that, among other things, transactions are recorded as necessary to permit preparation of +financial statements in conformity with GAAP or other criteria applicable to such statements. + +49. As a result of the conduct described above, Respondents violated Exchange Act +Rule 13a-15(a), which requires issuers with securities registered under Section 12 of the Exchange +Act to maintain disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and +10 +also requires issuers required to file reports pursuant to Section 13(a) or Section 15(d) of the +Exchange Act to maintain internal control over financial reporting as defined in Exchange Act Rule +13a-15(f). + +Disgorgement +The disgorgement and prejudgment interest ordered in Section IV.D. below is consistent +with equitable principles and does not exceed BBPLC’s net profits from its violations. + +Undertakings + +A. Respondents have undertaken as follows: + + By sixty (60) days from the issuance of the Order, BBPLC shall adopt and implement the +following BBPLC Shelf Review recommendations for enhancements designed to effect +compliance with Section 5 of the Securities Act: + +1. The centralization of oversight of BBPLC’s SEC-registered shelves in +Group Treasury; + +2. The maintenance of clear minimum control requirements for BBPLC’s +SEC-registered shelves, including, but not limited to, a process for +reviewing any change in WKSI status for BBPLC and the tracking of +offers and sales off of BBPLC’s SEC-registered shelves as appropriate; +and + +3. The maintenance of a data repository, with appropriate controls and +governance designed to ensure reliability of the data, for the purpose of +tracking offers and sales, as appropriate, off of BBPLC’s SEC-registered +shelves. + + By ninety (90) days from the completion of the undertakings described above, +Respondents’ Internal Audit function shall (1) complete an audit of BBPLC’s policies and +procedures and internal controls relating to compliance with Section 5 of the Securities Act in +connection with BBPLC’s SEC-registered shelves to confirm the adoption and implementation +of the undertakings described above; and (2) submit its audit report (“Internal Audit Report”) to +the Audit Committee of Respondents’ Boards of Directors and the Commission staff. + + BBPLC shall certify, in writing, compliance with the undertakings set forth above. The +certification shall be made by BBPLC’s Treasurer. The certification shall identify the +undertaking, provide written evidence of compliance in the form of a narrative, and be supported +by exhibits sufficient to demonstrate compliance. The Commission staff may make reasonable +requests for further evidence of compliance, and Respondents agree to provide such evidence. +The certification and supporting material shall be submitted to Sheldon L. Pollock, with a copy +to the Office of Chief Counsel of the Enforcement Division, no later than thirty (30) days from +the submission of the Internal Audit Report described above. +11 + B. The Internal Audit Report will likely include confidential financial, proprietary, +competitive business or commercial information. Public disclosure of the Internal Audit Report +could discourage cooperation, impede pending or potential government investigations or +undermine the objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain non-public, except (1) +pursuant to court order, (2) as agreed to by the parties in writing, (3) to the extent that the +Commission determines in its sole discretion that disclosure would be in furtherance of the +Commission’s discharge of its duties and responsibilities, or (4) is otherwise required by law. + + C. Respondents shall preserve, for a period of not less than six (6) years from the end +of the fiscal year last used, the first two (2) years in an easily accessible place, any record of +compliance with these undertakings. + + D. For good cause shown, the Commission staff may extend any of the procedural +dates relating to the undertakings. Deadlines for procedural dates shall be counted in calendar +days, except that if the last day falls on a weekend or federal holiday, the next business day shall +be considered to be the last day. + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED that: + + Pursuant to Section 8A of the Securities Act, BBPLC cease and desist from +committing or causing any violations or any future violations of Sections 5(a) and (c) of the +Securities Act. + + Pursuant to Section 21C of the Exchange Act, Respondents cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and +13b(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-15(a) thereunder. + + Respondents shall comply with undertakings enumerated in Section III.A.-D. above. + + BBPLC shall pay disgorgement in the amount of $149,731,011.00 and prejudgment +interest thereon in the amount of $11,463,229.00. Payment of these amounts shall be deemed +satisfied by BBPLC’s offer of rescission to impacted investors that commenced on August 1, 2022 +and expired on September 12, 2022. + + Respondents shall, within 14 days of entry of the Order, jointly and severally pay a +civil money penalty in the amount of $200,000,000.00 to the Securities and Exchange Commission. +The Commission may distribute civil money penalties collected in this proceeding if, in its +discretion, the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, +Section 308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant +to this paragraph in an account at the United States Treasury pending a decision whether the +12 +Commission, in its discretion, will seek to distribute funds or, subject to Exchange Act Section +21F(g)(3), transfer them to the general fund of the United States Treasury. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, which will + provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondents may make direct payment from a bank account via Pay.gov through the + SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United States + postal money order, made payable to the Securities and Exchange Commission and + hand-delivered or mailed to: + + Enterprise Services Center + Accounts Receivable Branch + HQ Bldg., Room 181, AMZ-341 + 6500 South MacArthur Boulevard + Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +BPLC and BBPLC as Respondents in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Sheldon L. Pollock, Division of +Enforcement, Securities and Exchange Commission, New York Regional Office, 100 Pearl Street, +Suite 20-100, New York, New York 10004. + + Regardless of whether the Commission in its discretion orders the creation of a Fair +Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all purposes, +including all tax purposes. To preserve the deterrent effect of the civil penalty, Respondents agree +that in any Related Investor Action, they shall not argue that they are entitled to, nor shall they +benefit by, offset or reduction of any award of compensatory damages by the amount of any part of +Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Respondents agree that they shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. Such +a payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a “Related +Investor Action” means a private damages action brought against Respondents by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +13 + Respondents shall cooperate fully with the Commission staff and shall provide the +Commission staff with files, records, and/or supporting documentation as the Commission staff may +request for the purpose of any distribution from any Fair Fund, if, in its discretion, the Commission +orders the establishment of a Fair Fund pursuant to Section 308(a) of the Sarbanes-Oxley Act of +2002. + + + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4345.txt b/raw/aaer/2022/AAER-4345.txt new file mode 100644 index 0000000000000000000000000000000000000000..7d4c370b72c8fb8f9a122b37137c985b1f2e6f8b --- /dev/null +++ b/raw/aaer/2022/AAER-4345.txt @@ -0,0 +1,443 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 11111 / September 30, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95947 / September 30, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4345 / September 30, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21182 + + + +In the Matter of + +LISA SANFORD, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTION 4C OF THE SECURITIES +EXCHANGE ACT OF 1934, AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Lisa Sanford +(“Respondent” or “Sanford”) pursuant to Section 8A of the Securities Act of 1933 (“Securities +Act”), Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 +102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over her and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondent consents to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of +the Securities Act of 1933, Section 4C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + + From 2020 through 2021, Emerald Health Pharmaceuticals (“Emerald Health”) paid +undisclosed compensation for the purportedly independent recommendation from Palm Beach +Venture (“Palm Beach”), an investment newsletter. In fact, Palm Beach’s chief analyst and author +was secretly paid for this endorsement through middlemen who Emerald Health engaged as +consultants. These purported consultants funneled a portion of their Emerald Health consulting fees +to the analyst as payment for the promotion of Emerald Health. + + Lisa Sanford, in her role as Emerald Health’s chief financial officer and principal accounting +officer, authorized and issued the payments to the middlemen who Emerald Health engaged as +consultants. Sanford also signed and certified Emerald Health’s offering circulars and other filings +with the Commission, which failed to disclose to investors (1) the true nature of Emerald Health’s +consulting agreements with the middlemen, (2) that Emerald Health engaged in a paid promotion +through Palm Beach, and (3) that investor funds would be used to pay for Palm Beach’s + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 +recommendation. These omissions rendered the filings false and misleading. As a result, Sanford +violated Sections 17(a)(2) and (3) of the Securities Act. + +RESPONDENT + +1. Lisa Sanford, age 56, resides in San Diego, California. During the relevant period, +Sanford was the chief financial officer (“CFO”) and principal accounting officer of Emerald +Health. At all relevant times, Sanford was a certified public accountant licensed in California +(inactive). As Emerald Health’s CFO, Sanford was responsible for, among other things, reviewing +financial disclosures in periodic reports Emerald Health filed with the Commission. + +RELEVANT ENTITY + +2. Emerald Health Pharmaceuticals is a biopharmaceutical company incorporated +in Delaware with its principal place of business in San Diego, California. The Commission first +qualified Emerald Health to conduct a Regulation A (“Reg-A”) offering under the Securities Act in +March 2018. Emerald Health has engaged in several rounds of Reg-A offerings from 2019 +through 2021, and has filed periodic reports, including offering statements and annual reports, with +the Commission pursuant to Reg-A. + +FACTS + +3. Founded in 2017, Emerald Health is a biopharmaceutical company focused on +developing cannabinoid-derived drug products to treat autoimmune and neurodegenerative +diseases. + +4. From 2020 through 2021, Emerald Health participated in a fraudulent promotional +scheme, paying undisclosed compensation for promotion by a purportedly independent investment +newsletter, Palm Beach. + +5. From March 2020 through 2021, Palm Beach circulated at least two different +articles touting Emerald Health to its subscribers. + +6. Emerald Health raised approximately $30 million in its Reg-A offering from +thousands of investors through this fraudulent promotion. + +7. Emerald Health covertly paid Palm Beach’s chief analyst and author for the +promotion through two middlemen Emerald Health engaged to ostensibly provide consulting +services. In turn, the middlemen consultants funneled a portion of their consulting fees to Palm +Beach’s analyst. + +8. In June and August 2020, Emerald Health entered into sham consulting agreements +with two middlemen in order to procure Palm Beach’s promotion. + +4 +9. Pursuant to the June 2020 sham agreement, Emerald Health paid $100,000 to the +first middleman and issued him 100,000 shares of stock as total compensation for purported +consulting services. This middleman then transferred $80,000 of the consulting fees he received +from Emerald Health to the Palm Beach analyst. + +10. Pursuant to the August 2020 sham agreement, Emerald Health agreed to pay the +second middleman 6% of investor funds raised through Palm Beach’s promotional efforts. From +October 2020 through May 2021, Emerald Health paid this middleman a total of $1,636,313 for his +purported consulting services. This middleman funneled approximately $700,000 of his Emerald +Health consulting fees to the Palm Beach analyst and his associate. + +11. Although Sanford did not know about the arrangement between the two purported +consultants and Palm Beach’s analyst, she was negligent in failing to recognize the consulting +agreements as shams. + +12. Sanford reviewed, approved, and/or issued the compensation Emerald Health paid +the middlemen purporting to serve as consultants. + +13. In a 2020 quarterly update to its investors, Emerald Health highlighted that Palm +Beach recommended the company “as an attractive investment opportunity” without disclosing +that this was a paid-for recommendation. + +14. Sanford approved the quarterly update and directed that it be sent to investors and +posted on the company’s public website. + +15. Throughout 2020, Emerald Health filed offering circulars with the Commission that +included, as exhibits, the sham consulting agreements with the middlemen. These circulars misled +investors about the true nature of these consulting agreements and failed to disclose that the +company was paying for Palm Beach’s promotion. + +16. Sanford, in her role as CFO and chief accounting officer, reviewed, approved, +signed and certified the misleading circulars and their financial disclosures. Though she did not +know about the fraudulent promotional scheme, she was negligent in certifying the misleading +information. + +VIOLATIONS + +17. Section 17(a)(2) of the Securities Act makes it unlawful, in the offer or sale of +securities, to obtain money or property by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading. Section 17(a)(3) of the Securities Act +makes it unlawful, in the offer or sale of securities, to engage in any transaction, practice or course +of business that operates as a fraud or deceit upon the purchaser. + +5 +FINDINGS + +18. Based on the foregoing, the Commission finds that Sanford willfully violated +Sections 17(a)(2) and (3) of the Securities Act.4 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Sanford’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Sanford shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. + + B. Sanford is denied the privilege of appearing or practicing before the Commission as +an accountant. + +C. After three (3) years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +E. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + + +4 “Willfully,” for purposes of imposing relief under Section 4C(a)(3) of the Securities Act +and Rule 102(e)(1)(iii), “‘means no more than that the person charged with the duty knows what he +is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 +F.2d 969, 977 (D.C. Cir. 1949)). + +6 +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +F. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +G. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +H. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +7 +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in In the Matter +of Lisa Sanford, or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in writing if +any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a basis +for a forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +8 +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. + +I. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + J. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +K. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph J, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +L. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph J, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +9 +M. If the Commission declines to reinstate Respondent pursuant to Paragraphs K and +L, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + N. Respondent shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $25,000 to the Securities and Exchange Commission. If timely payment is +not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Lisa +Sanford as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Katharine Zoladz, Division of +Enforcement, Securities and Exchange Commission, 444 South Flower Street, Suite 900, Los +Angeles, CA 90071. + + O. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the penalties referenced in Paragraph N above. The Fair Fund may be combined with +any other fund established in any related civil injunctive action or administrative proceeding arising +out of the same investigative matter that is the basis of this action. Amounts ordered to be paid as +civil money penalties pursuant to this Order shall be treated as penalties paid to the government for +all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, she shall not argue that she is entitled to, +nor shall she benefit by, offset or reduction of any award of compensatory damages by the amount +of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the +court in any Related Investor Action grants such a Penalty Offset, Respondent agrees that she shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the Commission's +counsel in this action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and shall not be +10 +deemed to change the amount of the civil penalty imposed in this proceeding. For purposes of this +paragraph, a “Related Investor Action” means a private damages action brought against +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4348.txt b/raw/aaer/2022/AAER-4348.txt new file mode 100644 index 0000000000000000000000000000000000000000..247c032bdf75de461dc58bb53a47bd91a36c232b --- /dev/null +++ b/raw/aaer/2022/AAER-4348.txt @@ -0,0 +1,62 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95952 / September 30, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4348 / September 30, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21188 + +In the Matter of + +ANTHONY G. ROTH, +Respondent. +ORDER OF SUSPENSION PURSUANT +TO RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Anthony G. Roth pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice [17 C.F.R. § 201.102(e)(2)].1 +II. + The Commission finds that: + + 1. Roth, age 55, served as Executive Vice President, Chief Financial Officer, +Corporate Secretary, and as a member of the board of directors of ContinuityX Solutions, Inc. +(“ContinuityX”), a then publicly traded company, from March 25, 2011 until September 2012, +when he resigned all positions with ContinuityX. + + 2. On May 19, 2017, a judgment of conviction was entered against Roth in +United States v. Anthony Roth, 14-CR-00326-3, in the United States District Court for the Northern +District of Illinois, finding him guilty of one count of wire fraud in violation of Title 18, United +States Code, Section 1343 [18 U.S.C. § 1343]. + +1 Rule 102(e)(2) provides in pertinent part: “[A]ny person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” See 17 C.F.R. 201.102(e)(2). + + 2 + + 3. As a result of his conviction, Roth was sentenced to 30 months +imprisonment in a federal penitentiary and ordered to pay restitution in the amount of +$3,314,610.53. +III. + In view of the foregoing, the Commission finds that Roth has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission’s Rule of Practice. + + Accordingly, it is hereby ORDERED, that Anthony G. Roth is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rule of Practice. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4349.txt b/raw/aaer/2022/AAER-4349.txt new file mode 100644 index 0000000000000000000000000000000000000000..bae0f47c699fa3c027aa559b42a2d840b668abd1 --- /dev/null +++ b/raw/aaer/2022/AAER-4349.txt @@ -0,0 +1,798 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95958 / September 30, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4349 / September 30, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21192 + + + + +In the Matter of + +BrookWeiner, LLC; +James E. Schmidt, CPA; and +Sheldon Weiner, CPA + +Respondents. + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against BrookWeiner, LLC +(“BrookWeiner”), James E. Schmidt, and Sheldon Weiner (collectively, “Respondents”) pursuant +to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this order instituting public +administrative proceedings pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. This proceeding arises out of the 2017 audit of State Funds – Enhanced Ultra-Short +Duration Mutual Fund (“State Funds”) by audit firm BrookWeiner, audit engagement partner +Schmidt, and engagement quality reviewer Weiner. Respondents engaged in improper professional +conduct under Rule 102(e) by failing to conduct the audit in accordance with Public Company +Accounting Oversight Board (“PCAOB”) auditing standards. +2. Specifically, Schmidt, the engagement partner, and BrookWeiner failed to (i) +exercise due professional care and skepticism, (ii) adequately plan the audit to address significant +risks or develop appropriate audit plans or procedures, (iii) adequately train and supervise the +engagement team, (iv) prepare adequate audit documentation, (v) obtain sufficient appropriate audit +evidence to support the audit opinion, (vi) sufficiently identify, consider, and assess risks of material +misstatement and fraud, and (vii) inquire about and perform procedures to assess related parties, +relationships, and related-party transactions. +3. The engagement quality review conducted by Weiner, who was required under +PCAOB auditing standards to evaluate significant judgments made by the engagement team and +assess the engagement team’s response to significant risks, was deficient because Weiner failed to +(i) review and inquire about a number of key documents and issues, (ii) evaluate the engagement +team’s assessment of, and audit responses to, significant risks, and (iii) evaluate the significant +judgments made by the engagement team and the related conclusions reached. In addition, Weiner + + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 +lacked the competence to perform his engagement quality review because he had no formal training +on, or experience auditing, the types of transactions at issue in the audit, and had not received +training specific to his role as an engagement quality reviewer. +4. With respect to these failures by BrookWeiner, Schmidt, and Weiner, +BrookWeiner’s policies and procedures failed to comply with PCAOB quality control standards. +BrookWeiner also failed to adhere to PCAOB quality control standards by failing to employ +adequate monitoring procedures concerning the State Funds audits. +B. RESPONDENTS +5. BrookWeiner, LLC, was a limited liability company headquartered in Chicago, +Illinois, and was a public accounting firm registered with the PCAOB from March 2009 until +November 2020, when it withdrew its registration. In January 2022, BrookWeiner merged with +another accounting firm that is not registered with the PCAOB. +6. James E. Schmidt, CPA, age 63, is a resident of Oak Forest, Illinois. He worked as +an audit partner at BrookWeiner from 2014 through at least 2021. Schmidt was the engagement +partner for the 2017 audit of State Funds and had final responsibility over the audit. He has no +disciplinary history with the Commission. He has been licensed as a CPA with the state of Illinois +since 1990. +7. Sheldon Weiner, CPA, age 76, is a resident of Boca Raton, Florida. He was a +founding member of BrookWeiner and served as a partner from 1993 until 2018, when he retired. +Weiner was the Engagement Quality Review Partner for the 2017 audit of State Funds. He has no +disciplinary history with the Commission. He has been licensed as a CPA with the state of Illinois +since 1976. +C. OTHER RELEVANT ENTITIES AND INDIVIDUALS + +8. State Funds was a Nevada-based open-end mutual fund registered with the +Commission from 2017 through early 2019. State Funds filed a registration statement on Form N- +1A that became effective in 2017 and filed an application for deregistration due to liquidation in +February 2019. Ofer Abarbanel served as Trustee, President, Chief Executive Officer, Chief +Financial Officer, and Chief Compliance Officer of State Funds. +9. New York Alaska ETF Management LLC (“New York Alaska”) is a Nevada +limited liability company that was registered with the Commission as an investment adviser from +2015 to 2019, when it terminated its registration. New York Alaska was the investment adviser to +State Funds. Abarbanel is the owner, Chief Executive Officer, Chief Financial Officer, and Chief +Compliance Officer of New York Alaska. +10. Ofer Abarbanel resides in California. At all relevant times herein, Abarbanel +exercised full control over State Funds and New York Alaska. + +4 +11. Victor Chilelli resides in Delaware. At Abarbanel’s request, Chilelli set up +Institutional Syndication LLC (“IS” or the “Counterparty”) to act as a counterparty in purported +reverse repurchase transactions with State Funds. +D. FACTS +Background + +12. All versions of the State Funds prospectus filed with the Commission between 2016 +and 2018 provided that the fund would invest in a combination of U.S. Treasury securities and +repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities or cash. +Abarbanel used a portion of fund assets to invest in U.S. Treasury securities, but did not invest the +remaining fund assets in repurchase or reverse repurchase transactions. Instead, Abarbanel routed +State Funds’ assets to shell companies under his control, in what amounted to unsecured, related- +party lending arrangements. +13. As part of a fraudulent scheme orchestrated by Abarbanel, State Funds misstated its +2017 financial statements by improperly accounting for its transactions with the Counterparty as +investments in reverse repurchase agreements, instead of as unsecured loans receivable on its +balance sheet. Because State Funds never transferred or received any securities to or from the +Counterparty, these transactions were neither repurchase agreements nor reverse repurchase +agreements, but instead unsecured loans. The associated reverse repurchase fee income (“Fee +Income”) and disclosures were similarly misstated. +14. On June 21, 2021, the Commission filed an emergency civil injunctive action +alleging fraud charges against Abarbanel, Chilelli, and a related entity in the United States District +Court for the Southern District of New York, captioned Securities and Exchange Commission v. +Ofer Abarbanel, et al., Civil Action No. 21-cv-05429 (S.D.N.Y. June 21, 2021). On January 27, +2022, the Commission filed an amended complaint adding charges and additional allegations +against Abarbanel and New York Alaska. Id. (S.D.N.Y. Jan. 27, 2022). On February 24, 2022, +Chilelli consented to entry of a judgment against him. Id. (S.D.N.Y. Feb. 24, 2022). Another +defendant also consented to a judgment against it, and several relief defendants were dismissed +from the litigation, which is ongoing with respect to Abarbanel and New York Alaska. Id. +(S.D.N.Y. Jan. 31, 2022; May 6, 2022). The litigation is currently stayed pending criminal +proceedings against Abarbanel. United States of America v. Ofer Abarbanel, Criminal Action No. +21-cr-532 (S.D.N.Y.). +Respondents Failed to Conduct the 2017 Audit of State Funds in Accordance with PCAOB +Standards +15. In November 2017, Abarbanel engaged BrookWeiner to audit State Funds’ financial +statements for the year ended December 31, 2017. +16. The Respondents failed to detect State Funds’ incorrect accounting for its purported +reverse repurchase agreements, overlooked numerous red flags throughout the audit, and improperly +deferred to State Funds management. They failed to ask questions, seek documentation, or conduct + +5 +sufficient audit procedures to test the purported reverse repurchase agreements and related +disclosures in State Funds’ financial statements. +17. BrookWeiner failed to conduct the audit of State Funds in accordance with PCAOB +standards, and Schmidt and Weiner were responsible for these failures. As discussed below, +Respondents failed to demonstrate the necessary due professional care and professional skepticism +in the course of the audit. +BrookWeiner and Schmidt Had No Training or Proficiency in Reverse Repurchase Agreements +18. When BrookWeiner accepted the State Funds audit engagement, no member of the +engagement team had any formal training on reverse repurchase agreements or experience auditing +them. Despite identifying these agreements as a significant risk in the audit, the engagement team +sought neither formal training nor consultation with others experienced in these types of +transactions. Shortly before BrookWeiner withdrew from the State Funds audit in approximately +November 2018, Schmidt acknowledged BrookWeiner’s “lack of expertise in this form of +investments.” +BrookWeiner and Schmidt Did Not Develop Appropriate Audit Plans and Procedures +19. In the initial planning stages of the audit, BrookWeiner and Schmidt identified the +purported reverse repurchase agreements as posing a significant risk of material misstatement. +Specifically, BrookWeiner and Schmidt identified a high risk of material misstatements by State +Funds’ management regarding rights and obligations, valuation or allocation, and presentation and +disclosures relating to the alleged reverse repurchase agreements. They documented in work papers +that it would be critical to understand “all the underlying relationships for income, valuation, and +disclosures” with respect to the purported reverse repurchase agreements. +20. Despite identifying this significant risk, BrookWeiner and Schmidt failed to develop +audit procedures to assess whether State Funds’ financial statements were materially misstated or +misleading with respect to the reverse repurchase agreements, and to address the significant risk +they had assigned to those transactions. +21. BrookWeiner and Schmidt failed to identify Financial Accounting Standards Board +(“FASB”) Accounting Standard Codification (“ASC”) 860 as the authoritative guidance on +accounting for reverse repurchase agreements. Their planned procedures therefore did not require +the audit team to assess whether State Funds’ transactions qualified as a transfer under ASC 860.4 + +4 ASC 860 requires that transactions accounted for as reverse repurchase agreements entail the transfer of non- +cash financial assets from the seller to the buyer. State Funds reported $4,185,000 in reverse repurchase agreements on +its financial statements ending December 31, 2017, but it never transferred any non-cash financial assets to the purported +buyer. + +6 +22. BrookWeiner and Schmidt also failed in their planning work papers to identify +reverse repurchase agreements as an area requiring specialized accounting. They failed to assign +personnel with the requisite training and proficiency in reverse repurchase agreements. +23. BrookWeiner and Schmidt also demonstrated a lack of professional skepticism +towards State Funds’ management during the planning process. During the engagement team +discussion, which included Schmidt and Weiner, the team documented that there seemed to be +“little opportunity for error or fraud,” and that “it would be very difficult” for management to +perpetrate and conceal fraudulent reporting based on State Funds’ internal controls. Instead of +exercising professional skepticism in their examination of the reverse repurchase agreements, +purported collateral, and related disclosures, BrookWeiner accepted representations by State Funds’ +management on these issues. +24. As described in further detail below, BrookWeiner and Schmidt also failed to +develop and implement sufficient procedures to assess related parties, relationships, and related- +party transactions. +BrookWeiner and Schmidt Did Not Understand the Nature of the Transactions +25. BrookWeiner and Schmidt failed to understand that State Funds was transacting in +unsecured loans, not reverse repurchase agreements, contrary to its disclosures and statements to +investors, and that it had therefore improperly characterized and accounted for those transactions in +its financial statements. They failed to ask questions to demonstrate that they understood the +transactions that were central to the financial statements they were auditing. They accepted +management’s representations that the transactions in question were reverse repurchase agreements, +even when those representations were contradicted by the documentation they received. +26. BrookWeiner and Schmidt knew that State Funds, which deemed itself the seller- +borrower in these transactions, transferred only cash to the Counterparty. They also knew that, +despite references in the financial statements to U.S. Treasury securities as collateral, State Funds +only received unsecured promissory notes back from the Counterparty. The U.S. Treasury +securities allegedly involved in the transactions were never actually transferred. +27. Schmidt and Weiner incorrectly concluded that State Funds’ transfer of cash to the +counterparty in exchange for a purportedly secured debt agreement could be accounted for as a +reverse repurchase agreement. They did not consult the FASB authoritative guidance on accounting +for reverse repurchase agreements (ASC 860) before reaching this erroneous conclusion. State +Funds’ transfer of cash to the Counterparty in exchange for a promissory note constituted unsecured +loans that BrookWeiner and Schmidt should have measured at fair value in accordance with ASC +946, Investment Companies. +BrookWeiner and Schmidt Failed to Evaluate and Test Key Aspects of the Transactions +28. BrookWeiner and Schmidt documented their understanding of the purported reverse +repurchase agreements in a work paper titled “Reverse Repurchase Agreement Memo,” which +addressed, at a general level, the arrangement between State Funds and its Counterparty. The + +7 +memorandum stated that the purported reverse repurchase agreements were based on a standard +Global Master Repurchase Agreement (“GMRA”), which incorporated the Annex II Form of +Confirmation (“Annex II”), and the Private Placement Memorandums (“PPMs”), which included +the purported secured debt agreements that State Funds received from the Counterparty. +29. BrookWeiner and Schmidt failed to perform an independent accounting analysis to +determine whether the agreements qualified as reverse repurchase agreements under ASC 860. For +example, there is no documented assessment by BrookWeiner and Schmidt of the standard GMRA, +Annex II, or PPMs to determine the impact of their terms on the accounting for reverse repurchase +agreements. Further, Schmidt did not assess whether State Funds’ transactions qualified as a true +sale or a secured borrowing; whether State Funds, as seller/transferor, could transfer cash in lieu of +securities to maintain effective control over the transferred financial asset; and whether a +counterparty could pledge the securities purportedly sold. +30. BrookWeiner and Schmidt also performed inadequate testing of Fee Income. For +the numerous daily Fee Income accrual calculations made during the year on each of the purported +reverse repurchase agreements, they recalculated only one day of State Funds’ highly complex fee +accrual, failing to document the rationale for doing so. State Funds’ calculation also contained an +error that resulted in a higher amount of the “capital gain daily change” for a U.S. Treasury being +allocated to the amounts for each purported reverse repurchase agreement. This mistake should +have resulted in additional testing by Schmidt, but no additional testing was conducted. In addition, +the two largest amounts used in the allocation calculations were not documented and are not +traceable to any other work papers. +31. BrookWeiner and Schmidt did not perform any testing of State Funds’ disclosures in +the notes to the financial statements, which were false and materially misleading. The work paper +for evaluating the consistency of the disclosures indicated that the engagement team tied-out only +two items in the notes. None of the disclosures relating to the purported reverse repurchase +agreements were referenced back to the actual agreements or other work papers showing support for +the disclosures. +32. By way of example, State Funds claimed that the purported reverse repurchase +agreements provided the fund with a source of liquidity; this was inaccurate, as State Funds actually +reduced its liquidity by sending cash to the Counterparty. However, BrookWeiner and Schmidt +asked no questions and performed no testing relating to this misstatement during the audit. +BrookWeiner and Schmidt Failed to Assess the Purported Collateral +33. BrookWeiner and Schmidt received brokerage statements for accounts held in the +name of State Funds’ counterparty, IS, at year-end, which purported to show collateral for the +purported secured debt agreements that IS issued to State Funds as part of the reverse repurchase +agreements. However, the brokerage statements reflected that the U.S. Treasury securities cited as +collateral in State Funds’ financial statements were held on margin, in some cases in accounts with +negative margin balances. + +8 +34. These statements should have indicated that the U.S. Treasuries were already +serving as collateral for margin loans to IS, and State Funds had no legal interest in them. However, +BrookWeiner and Schmidt failed to recognize that the purported collateral was being held in margin +accounts of IS and did not inquire further into how securities held on margin in a counterparty’s +brokerage account could serve as collateral for loans by State Funds to the Counterparty. They +failed to exercise professional skepticism or perform audit procedures to determine whether these +securities could properly secure the debt obligation of the Counterparty to State Funds. +BrookWeiner and Schmidt Failed to Appropriately Audit Related-Party Transactions +35. BrookWeiner and Schmidt failed to inquire about and perform procedures to assess +related parties, relationships, and related-party transactions. Although related party procedures were +specified in a planning work paper, BrookWeiner and Schmidt did not make inquiries of State +Funds management, employees, or the audit committee regarding possible related-party +relationships or transactions. +36. Schmidt missed multiple red flags that indicated related-party transactions. +BrookWeiner and Schmidt reviewed an October 2017 Private Placement Memorandum from IS that +clearly identified Chilelli, General Manager of IS, as the former Deputy Compliance Manager for +State Funds as of October 2017 and Portfolio Manager for New York Alaska as of November 2016. +37. Schmidt also failed to review multiple SEC filings by State Funds that designated +Chilelli as a former officer, despite receiving a link to all of these filings from Abarbanel. The only +SEC filing included in BrookWeiner’s work papers was the most recent prospectus as of December +27, 2017, which did not include Chilelli because he departed State Funds in October 2017 to create +IS. +38. In addition, BrookWeiner and Schmidt did not ask for any minutes from State +Funds’ board meetings until just three days before the audit report date. Two other work papers, +including the Summary of Board Meeting Minutes, identified Chilelli as one of three “Trust +Appointees” during 2017 for State Funds, with the other two appointees being Abarbanel and +another officer of State Funds. +39. BrookWeiner and Schmidt knew that, at year-end, the Fee Income for State Funds +came entirely from one counterparty, IS, a newly formed single-member LLC, and that State +Funds’ reported investment performance was vastly higher than its benchmark (5.85% vs. 0.17%). +Nonetheless, BrookWeiner and Schmidt failed to inquire about whether IS was an undisclosed +related party, and whether Abarbanel could exercise undue influence over it. +BrookWeiner and Schmidt Failed to Ensure Adequate Documentation of the Audits +40. As discussed above, with respect to the work paper used to test the calculation of +Fee Income, BrookWeiner and Schmidt failed to document their rationale for recalculating only one +day of the highly complex fee accrual, and they did not document the source and explanation for the +two largest amounts used in the allocation calculations. + +9 +41. In addition, for multiple audit programs, none of the sign-offs on BrookWeiner’s +audit procedures reflected the date on which the procedure was completed, even though a column in +the audit program specifically designated “Performed by and date.” For some of these procedures, +it is therefore not possible to determine the date on which the procedure was performed. +BrookWeiner and Schmidt Failed to Adequately Supervise the Audit +42. BrookWeiner and Schmidt, as the engagement partner, failed to adequately +supervise the 2017 audit of State Funds for compliance with PCAOB standards. As described +above, they failed to provide reasonable assurance that BrookWeiner personnel had the necessary +training and proficiency to perform the audit. Schmidt also inadequately reviewed the work +performed by the staff auditor and failed to verify that it was complete and properly documented in +the work papers. He improperly evaluated whether the results of the audit work supported the +conclusions reached and whether the audit procedures were sufficient to provide reasonable +assurance that State Funds’ transactions were reported and disclosed in the financial statements in +accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). +43. Schmidt failed to verify whether that the purported reverse repurchase agreements +complied with ASC 860, which they did not. Schmidt also did not verify that the disclosures in the +notes to State Funds’ financial statements were assessed for accuracy, and did not identify errors in +the testing of Fee Income. Nor did he notice that inquiries were not made of management, others +within the company, and the audit committee of State Funds’ board regarding related party +relationships and transactions and missed clear indications in several documents that related-party +transactions had occurred. +Weiner’s Engagement Quality Review Was Deficient +44. As the engagement quality reviewer for BrookWeiner, Weiner failed to demonstrate +due professional care. PCAOB standards require an EQR to possess the level of knowledge and +competence related to accounting, auditing, and financial reporting required to serve as the +engagement partner. AS 1220.05, Engagement Quality Review. Among other requirements, the +EQR should evaluate significant judgments, the assessment of and responses to significant risks, +and support for the conclusions reached. +45. Like BrookWeiner and Schmidt, Weiner had no training in or experience auditing +reverse repurchase agreements, and had no training specific to his role as an engagement quality +reviewer. +46. Weiner did not participate in the audit planning process beyond an initial discussion +about the engagement, and he did not evaluate the significant judgments and related conclusions +made by the engagement team. Weiner did not consider State Funds’ transactions as requiring +special attention or presenting unusual risk, did not review the engagement team’s risk assessment +work paper that identified the purported reverse repurchase agreements as a significant risk, and +did not recall reviewing documentation to evaluate whether the engagement team appropriately +responded to risks. + +10 +47. Weiner failed to review and inquire about numerous key documents and issues, +including all of the reverse repurchase work papers and whether the team performed an accounting +analysis to determine whether the purported reverse repurchase agreements were accounted for and +disclosed correctly. +Violations +48. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Exchange Act 4C(b) +and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice define improper professional conduct +with respect to persons licensed to practice as accountant. +49. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional +conduct” means one of two types of negligent conduct: (1) a single instance of highly unreasonable +conduct in circumstances for which heightened scrutiny is warranted; or (2) repeated instances of +unreasonable conduct that indicate a lack of competence. +50. As set forth in more detail below, Respondents engaged in repeated violations of +PCAOB standards including in areas that, for reasons stated in ¶¶ 15–47 above, indicated a lack of +competence, as well as at least a single instance of highly unreasonable conduct that, for reasons +stated in ¶¶ 28–39 and 44–47 above, warranted heightened scrutiny. +Failure to Exercise Due Professional Care (AS 1015) +51. PCAOB standards require due professional care in the planning and performance of +an audit. AS 1015.01, Due Professional Care in the Performance of Work. Due professional care +concerns what the independent auditor does and how well he or she does it. AS 1015.04. Auditors +must exercise professional skepticism, which is “an attitude that includes a questioning mind and a +critical assessment of audit evidence” and “should not be satisfied with less than persuasive +evidence because of a belief that management is honest.” AS 1015.07, .09. +52. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +exercise due professional care in the 2017 audit of State Funds. +Training and Proficiency of the Independent Auditor (AS 1010) +53. PCAOB standards require that audits be performed by persons having adequate +technical training and proficiency, with training that is adequate in technical scope. AS 1010.01, +.03. Through training and experience, auditors should have the ability “to consider objectively and +to exercise independent judgment with respect to the information recorded in books of account or +otherwise disclosed by [their] audit[s].” AS 1010.05. + +11 +54. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +provide reasonable assurance that the 2017 State Funds audit was conducted by auditors with +adequate technical training and proficiency. +Failure to Engage in Adequate Audit Planning (AS 2101) +55. PCAOB standards establish the requirements regarding planning an audit. AS 2101, +Audit Planning. “Planning the audit includes establishing the overall audit strategy for the +engagement and developing an audit plan, which includes, in particular, planned risk assessment +procedures and planned responses to the risks of material misstatement.” AS 2101.05. When +developing the audit strategy and plan, the auditor should evaluate whether certain matters are +important to the company’s financial statements, including matters relating to the company’s +business, organization, operating characteristics, and risks. AS 2101.07. The auditor should +establish an overall strategy that sets the scope, timing, and direction of the audit and guides the +development of the audit plan. AS 2101.08. +56. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +engage in adequate audit planning in the 2017 audit of State Funds. +Failure to Identify and Assess Risks of Material Misstatement (AS 2110) +57. PCAOB standards require that auditors obtain an understanding of the company and +its environment to understand the events, conditions, and company activities that might reasonably +be expected to have a significant effect on the risks of material misstatement, which includes the +company’s selection and application of accounting principles, including related disclosures. AS +2110.07, Identifying and Assessing Risks of Material Misstatement. Obtaining an understanding of +the nature of the company includes understanding the company’s organizational structure and +management personnel and key customer relationships. AS 2110.10. +58. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +identify and assess the risks of material misstatements in the 2017 audit of State Funds. +Failure to Have Adequate Responses to the Risks of Material Misstatement (AS 2301) +59. PCAOB standards establish requirements regarding designing and implementing +appropriate responses to the risks of material misstatement. AS 2301.01, The Auditor’s Responses +to the Risks of Material Misstatement. In responding to the assessed risks of material misstatement, +the auditor should evaluate the company’s selection and application of significant accounting +principles. AS 2301.05.d. Once an auditor has assessed risks of a material misstatement, +particularly fraud risks, they should exercise “professional skepticism in gathering and evaluating +audit evidence,” which may include “obtaining sufficient appropriate evidence to corroborate +management explanations or representations concerning important matters.” AS 2301.07. +60. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +have adequate responses to the risks of material misstatements in the 2017 audit of State Funds. + +12 +Failure to Have Adequate Consideration of Fraud in a Financial Statement Audit (AS 2401) +61. PCOAB standards set forth that “because of the characteristics of fraud, the auditor’s +exercise of professional skepticism is important when considering the fraud risks. The auditor +should conduct the engagement with the mindset that recognizes the possibility that a material +misstatement due to fraud could be present, regardless of any past experience with the entity and +regardless of the auditor’s belief about management’s honesty and integrity. Furthermore, +professional skepticism requires an ongoing questioning of whether the information and evidence +obtained suggests that a material misstatement due to fraud has occurred.” AS 2401.13, +Consideration of Fraud in a Financial Statement Audit. +62. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +have adequate consideration of fraud in the 2017 audit of State Funds. +Failure to Identify Related Parties (AS 2410) +63. PCAOB standards include audit procedures that should be considered for +determining the existence of related parties and for identifying transactions with related parties. AS +2410.04–.07, Related Parties. Auditors must obtain sufficient appropriate audit evidence to +determine whether related parties and relationships and transactions with related parties have been +properly identified, accounted for, and disclosed. AS 2410.02. Auditors should inquire of +management and others within the company regarding, among other things, the names of the +company’s related parties during the period under audit, the nature of any relationships, and +transactions entered into with its related parties during the period under audit and the terms and +business purposes (or lack thereof) of such transactions. AS 2410.05–.06. Auditors should also +inquire of the audit committee, or its chair, regarding the audit committee’s understanding of the +company’s relationships and transactions with related parties that are significant to the company. +AS 2410.07. The PCAOB standards require auditors to evaluate whether the company has properly +identified related parties, relationships, and/or transactions by performing procedures to test the +accuracy and completeness of such identifications, taking into account the information gathered +during the audit. AS 2410.14. +64. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +obtain sufficient and appropriate audit evidence pertaining to related parties and transactions with +related parties in the 2017 audit of State Funds. +Failure to Obtain Sufficient Appropriate Audit Evidence (AS 1105) +65. PCAOB standards define audit evidence as “all the information, whether obtained +from audit procedures or other sources, that is used by the auditor in arriving at the conclusions on +which the auditor’s opinion in based.” AS 1105.02, Audit Evidence. This evidence consists of +information that supports and corroborates management’s assertions about financial statements or +internal control over financial reporting and information that contradicts such assertions. Id. +PCAOB standards require an auditor to “plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for his or her opinion.” AS 1105.04. To be + +13 +appropriate, audit evidence must be both relevant and reliable. AS 1105.06. An auditor should +evaluate whether the information produced by the company is sufficient and appropriate by +performing procedures to test its accuracy and completeness and should resolve inconsistencies in +information between sources. AS 1105.10, .29. +66. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +obtain sufficient and appropriate audit evidence to support the conclusions in BrookWeiner’s audit +opinion in the 2017 audit of State Funds. +Failure to Adequately Supervise the Audit Engagement (AS 1201) +67. Under PCAOB standards, it is the responsibility of the engagement partner to +provide proper supervision of the work of the engagement team and of compliance with PCAOB +auditing standards. AS 1201.03, Supervision of the Audit Engagement. Supervisory activities +include reviewing work of the engagement team to evaluate whether: (a) work was performed and +documented; (b) objectives of the procedures were achieved; and (c) the results of the work support +the conclusion reached. AS 1201.05.c. To determine the extent of supervision necessary for an +engagement team, the engagement partner should take into account: (a) the nature of the company, +including size and complexity; (b) the nature of the assigned work for each engagement team +member; (c) the risks of material misstatement; and (d) the knowledge, skill, and ability of each +engagement team member. AS 1201.06. +68. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +adequately supervise the work of the engagement team for the 2017 audit of State Funds. +Failure to Prepare Adequate Audit Documentation (AS 1215) +69. PCAOB standards require an auditor to document the procedures performed, +evidence obtained, and conclusions reached with respect to relevant financial statement assertions in +conducting an audit or interim review. AS 1215, Audit Documentation. The documentation should +(a) demonstrate that the engagement complied with PCAOB standards, (b) support the basis for the +auditor’s conclusions concerning every relevant financial statement assertion, and (c) demonstrate +that the underlying accounting records agreed or reconciled with the financial statements. AS +1215.05. Further, audit documentation must clearly demonstrate that the work was in fact +performed and “must contain sufficient information to enable an experienced auditor, having no +previous connection with the engagement (a) to understand the nature, timing, extent, and results of +the procedures performed, evidence obtained, and conclusions reached, and (b) to determine who +performed the work and the date such work was completed as well as the person who reviewed the +work and the date of such review.” AS 1215.06. +70. As a result of BrookWeiner and Schmidt’s conduct described above, each failed to +prepare adequate audit documentation in the 2017 audit of State Funds. + + + +14 +Failure to Provide Adequate Engagement Quality Review (AS 1220) +71. PCAOB standards require an EQR to possess the level of knowledge and +competence related to accounting, auditing, and financial reporting required to serve as the +engagement partner. AS 1220.05, Engagement Quality Review. To evaluate significant judgments +and related conclusions, an EQR should hold discussions with the engagement partner and +engagement team and review documentation. AS 1220.09. PCAOB standards require that an EQR +evaluate the significant judgments that relate to engagement planning and risks identified with the +firm’s client acceptance process. AS 1220.10. The EQR should also evaluate the engagement +team’s assessment of, and audit responses to, significant risks identified by the engagement team, +including fraud risks, and other significant issues identified by the EQR. Id. Review of +documentation should specifically include the engagement completion document. Id. In an audit, +the EQR should evaluate whether the engagement documentation reviewed indicates that the +engagement team responded appropriately to significant risks, and supports the conclusions +reached. AS 1220.11. An EQR may provide concurring approval of issuance only if, after +performing the review required by AS 1220 with due professional care, he or she is not aware of a +significant audit deficiency, such as a failure by the engagement team to obtain sufficient +appropriate audit evidence in accordance with the standards of the PCAOB. AS 1220.12. +72. As a result of BrookWeiner and Weiner’s conduct described above, each failed to +adequately conduct the engagement quality review in the 2017 audit of State Funds. +Failure to Adhere to the Quality Control Standards (QC 20, QC 30, and QC 40) +73. PCAOB Quality Control Section 20, System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice (“QC 20”), states, “[p]olicies and procedures should be +established to provide the firm with reasonable assurance that the work performed by engagement +personnel meets applicable professional standards, regulatory requirements, and the firm’s standards +of quality.” QC 20.17. QC 20 also states that a firm should communicate these policies and +procedures to its personnel in a manner that provides reasonable assurance that these policies and +procedures are understood and complied with. QC 20.23. +74. In addition, PCAOB Quality Control Section 30, Monitoring a CPA Firm’s +Accounting and Auditing Practice (“QC 30”), states, “[m]onitoring procedures taken as a whole +should enable the firm to obtain reasonable assurance that its system of quality control is effective.” +QC 30.03. +75. Finally, PCAOB Quality Control Section 40, The Personnel Management Element +of a Firm’s System of Quality Control- Competencies Required by a Practitioner-in-Charge of an +Attest Engagement (“QC 40”), states that a firm’s policies and procedures should be designed to +provide a firm with reasonable assurance that “work is assigned to personnel having the degree of +technical training and proficiency required in the circumstances,” and that “such individuals possess +the kinds of competencies that are appropriate given the circumstances of individual client +engagements.” QC 40.02–03. + +15 +76. As a result of BrookWeiner’s conduct described above, BrookWeiner’s policies and +procedures with respect to (i) exercising due professional care; (ii) adequately supervising, training, +and ensuring the proficiency of personnel involved in the audit; (iii) adequately planning the audit; +(iv) identifying, assessing, and responding to risks of material misstatement and fraud; (v) obtaining +sufficient appropriate audit evidence, including with respect to related parties; (vi) preparing +adequate audit documentation; and (vii) providing an adequate engagement quality review, failed to +comply with QC Sections 20, 30, and 40. +Findings + +77. Based on the foregoing, the Commission finds that BrookWeiner, Schmidt, and +Weiner engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +Undertakings + + BrookWeiner, Schmidt, and Weiner have undertaken to complete the following actions: + +78. BrookWeiner, Schmidt, and Weiner shall cooperate fully with the Commission +with respect to this proceeding and any related judicial or administrative proceeding or +investigation commenced by the Commission or to which the Commission is a party. +BrookWeiner’s cooperation shall include, but is not limited to, using reasonable efforts to secure +the attendance and truthful statements or testimony of any current partner, agent, or employee of +BrookWeiner at such times and places as the staff requests upon reasonable notice. In addition, +BrookWeiner’s, Schmidt’s, and Weiner’s cooperation shall include, but is not limited to, (i) +promptly and fully cooperating by taking any steps necessary to render documents or records +produced by BrookWeiner, Schmidt, and Weiner admissible in any U.S. court proceedings, which +may include, without limitation, providing business-records certifications requested by the +Commission; (ii) accepting service by mail or facsimile transmission of notices or subpoenas +issued by the Commission for documents or testimony at depositions, hearings, or trials, or in +connection with any related investigation by Commission staff; (iii) appointing Paul Gamboa, Esq., +Partner at Gordon & Rees Scully Mansukhani, One North Franklin Street, Suite 800, Chicago, IL +60606, as agent to receive service of such notices and subpoenas; (iv) with respect to such notices +and subpoenas, waiving the territorial limits on service contained in Rule 45 of the Federal Rules +of Civil Procedure and any applicable local rules, provided that the party requesting the testimony +reimburses BrookWeiner’s, Schmidt’s, and Weiner’s travel, lodging, and subsistence expenses at +the then-prevailing U.S. Government per diem rates; and (v) consenting to personal jurisdiction +over BrookWeiner, Schmidt, and Weiner in any United States District Court for purposes of +enforcing any such subpoena. +79. In determining whether to accept the Offers, the Commission has considered this +undertaking. + + +16 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. BrookWeiner, James E. Schmidt, and Sheldon Weiner are hereby denied the +privilege of appearing or practicing before the Commission as an accountant. +B. After two years from the date of the Order, James E. Schmidt may request that the +Commission consider his reinstatement by submitting an application to the attention of the Office of +the Chief Accountant. +C. After one year from the date of the Order, Sheldon Weiner may request that the +Commission consider his reinstatement by submitting an application to the attention of the Office of +the Chief Accountant. +D. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondents +Schmidt and/or Weiner shall submit a written statement attesting to an undertaking to have work by +Respondents Schmidt and/or Weiner reviewed by the independent audit committee of any public +company for which Respondents Schmidt and/or Weiner work or in some other manner acceptable +to the Commission, as long as Respondents Schmidt and/or Weiner practice before the Commission +in this capacity and will comply with any Commission or other requirements related to the +appearance and practice before the Commission as an accountant. +E. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are filed +with the Commission, Respondents Schmidt and/or Weiner shall submit a statement prepared by the +audit committee(s) with which Respondents Schmidt and/or Weiner will be associated, including +the following information: +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondents Schmidt and/or Weiner will be associated; + +2. A description of Respondents Schmidt’s and/or Weiner’s role on the specific +audit committee(s) with which Respondents Schmidt and/or Weiner will be +associated; + + +17 +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondents Schmidt’s and/or +Weiner’s service on the specific audit committee; and + +5. A statement noting whether Respondents Schmidt and/or Weiner will be able to +act unilaterally on behalf of the Audit Committee as a whole. + +F. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondents Schmidt +and/or Weiner must be associated with a public accounting firm registered with the Public Company +Accounting Oversight Board (the “PCAOB”), and Respondents Schmidt and/or Weiner shall +submit the following additional information: +1. A statement from the public accounting firm (the “Firm”) with which +Respondents Schmidt and/or Weiner are associated, stating that the firm is +registered with the PCAOB in accordance with the Sarbanes-Oxley Act of +2002; + +2. A statement from the Firm with which Respondents Schmidt and/or Weiner are +associated that the Firm has been inspected by the PCAOB and that the PCAOB +did not identify any criticisms of or potential defects in the Firm’s quality +control system that would indicate that Respondents Schmidt and/or Weiner +will not receive appropriate supervision; and + +3. A statement from Respondents Schmidt and/or Weiner indicating that the +PCAOB has taken no disciplinary actions against Respondents Schmidt and/or +Weiner since seven (7) years prior to the date of the Order other than for the +conduct that was the basis for the Order. +G. In support of any application for reinstatement, Respondents Schmidt and/or Weiner +shall provide documentation showing that Respondents Schmidt and/or Weiner are currently +licensed as certified public accountants (“CPA”) and that Respondents Schmidt and/or Weiner have +resolved all other disciplinary issues with any applicable state boards of accountancy. If +Respondents Schmidt and/or Weiner are not currently licensed as CPAs, Respondents Schmidt +and/or Weiner shall provide documentation showing that their licensure is dependent upon +reinstatement by the Commission. +H. In support of any application for reinstatement, Respondents Schmidt and/or Weiner +shall also submit a signed affidavit truthfully stating, under penalty of perjury: +1. That Respondents Schmidt and/or Weiner have complied with the Commission +suspension Order, and with any related orders and undertakings, or any related + +18 +Commission proceedings, including any orders requiring payment of +disgorgement or penalties; + +2. That Respondents Schmidt and/or Weiner undertake to notify the Commission +immediately in writing if any information submitted in support of the +application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending; + +3. That Respondents Schmidt and/or Weiner, since the entry of the Order, have +not been convicted of a felony or a misdemeanor involving moral turpitude that +would constitute a basis for a forthwith suspension from appearing or practicing +before the Commission pursuant to Rule 102(e)(2); + +4. That Respondents Schmidt and/or Weiner, since the entry of the Order: + +(a) have not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) have not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and have not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) have not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) have not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) have not been charged by the United States (or any agency of +the United States) or any state, territory, district, commonwealth, +or possession, civilly or criminally, with having committed an +act of moral turpitude, except for any charge concerning the +conduct that was the basis for the Order. + + +19 +5. That Respondents Schmidt’s and/or Weiner’s conduct is not at issue in any +pending investigation of the Commission’s Division of Enforcement, the +PCAOB’s Division of Enforcement and Investigations, any criminal law +enforcement investigation, or any pending proceeding of a State Board of +Accountancy, except to the extent that such conduct concerns that which +was the basis for the Order. + +6. That Respondents Schmidt and/or Weiner have complied with any and all +orders, undertakings, or other remedial, disciplinary, or punitive sanctions +resulting from any action taken by any State Board of Accountancy, or +other regulatory body. + +I. Respondents Schmidt and/or Weiner shall also provide a detailed description of: +1. Respondents Schmidt’s and/or Weiner’s professional history since the +imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondents Schmidt and/or Weiner reported for such work; and + +2. Respondents Schmidt’s and/or Weiner’s plans for any future appearance or +practice before the Commission. + +J. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. +K. If Respondents Schmidt and/or Weiner provide the documentation and attestations +required in this Order and the Commission (1) discovers no contrary information therein, and (2) +determines that Respondents Schmidt and/or Weiner truthfully and accurately attested to each of the +items required in Respondent Schmidt’s and/or Weiner’s affidavit, and the Commission discovers +no information, including under Paragraph J, indicating that Respondents Schmidt and/or Weiner +have violated a federal securities law, rule or regulation or rule of professional conduct applicable to +Respondents Schmidt and/or Weiner since entry of the Order (other than by conduct underlying +Respondents Schmidt’s and/or Weiner’s original Rule 102(e) suspension), then, unless the +Commission determines that reinstatement would not be in the public interest, the Commission shall +reinstate the respondent for cause shown. +L. If Respondents Schmidt and/or Weiner are not able to provide the documentation +and truthful and accurate attestations required in this Order or if the Commission has discovered +contrary information, including under Paragraph J, the burden shall be on Respondents Schmidt +and/or Weiner to provide an explanation as to the facts and circumstances pertaining to the matter +setting forth why Respondents Schmidt and/or Weiner believe cause for reinstatement nonetheless + +20 +exists and reinstatement would not be contrary to the public interest. The Commission may then, in +its discretion, reinstate Respondents Schmidt and/or Weiner for cause shown. +M. If the Commission declines to reinstate Respondents Schmidt and/or Weiner +pursuant to Paragraphs K and L, it may, at Respondents Schmidt’s and/or Weiner’s request, hold a +hearing to determine whether cause has been shown to permit Respondents Schmidt and/or Weiner +to resume appearing and practicing before the Commission as an accountant. + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4350.txt b/raw/aaer/2022/AAER-4350.txt new file mode 100644 index 0000000000000000000000000000000000000000..83d582915b26998194bdb9d766589a3e4defb008 --- /dev/null +++ b/raw/aaer/2022/AAER-4350.txt @@ -0,0 +1,834 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95959 / September 30, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4350 / September 30, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21193 + + + + +In the Matter of + +Berkower LLC; +Michael G. Mullen, CPA; and +Maurice Berkower, CPA + +Respondents. + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Berkower LLC (“Berkower”), +Michael G. Mullen, and Maurice Berkower (collectively, “Respondents”) pursuant to Section 4C1 +of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or ( 3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this order instituting public +administrative proceedings pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + + +A. SUMMARY + +1. This proceeding arises out of the 2018 audit of State Funds – Enhanced Ultra-Short +Duration Mutual Fund (“State Funds”) by audit firm Berkower, audit engagement partner Mullen, +and engagement quality reviewer Maurice Berkower. Respondents engaged in improper +professional conduct under Rule 102(e) by failing to conduct the audit in accordance with Public +Company Accounting Oversight Board (“PCAOB”) auditing standards. +2. Specifically, Mullen, the engagement partner, and Berkower did not (i) exercise due +professional care and skepticism, (ii) adequately plan the audit to address potential risks or develop +appropriate audit plans or procedures, (iii) obtain sufficient appropriate audit evidence to support the +audit opinion, and (iv) inquire about and perform procedures to assess related parties, relationships, +and related-party transactions. Mullen, as the engagement partner, also did not adequately supervise +the engagement team. +3. The engagement quality review conducted by Maurice Berkower, who was required +under PCAOB auditing standards to evaluate significant judgments made by the engagement team +and assess the engagement team’s response to significant risks, was deficient because he did not (i) +review and inquire about a number of key documents and issues, (ii) evaluate significant judgments + + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 +that relate to engagement planning, including related financial reporting issues and risks, and (iii) +evaluate the engagement team’s assessment of, and audit responses to, significant risks. +4. Berkower also did not adhere to PCAOB quality control standards. +B. RESPONDENTS +5. Berkower LLC, a limited liability company headquartered in Iselin, New Jersey, is a +public accounting firm registered with the PCAOB. +6. Michael G. Mullen, CPA, age 64, is a resident of Cranford, New Jersey. He has +worked at Berkower since 2014. Mullen was the engagement partner for the 2018 audit of State +Funds and had final responsibility over the audit. He has been licensed as a CPA with the states of +New Jersey since 1984, New York since 1997, and Pennsylvania since 2017. +7. Maurice Berkower, CPA, age 70, is a resident of Staten Island, New York. He is the +Managing Principal and founder of the firm since approximately 2012. Maurice Berkower was the +Engagement Quality Review Partner for the 2018 audit of State Funds. He has been licensed as a +CPA with the states of New York since 1975 and New Jersey since 1989. +C. OTHER RELEVANT ENTITIES AND INDIVIDUALS +8. State Funds was a Nevada-based open-end mutual fund registered with the +Commission from 2017 through early 2019. State Funds filed a registration statement on Form N- +1A that became effective in 2017 and filed an application for deregistration due to liquidation in +February 2019. Ofer Abarbanel served as Trustee, President, Chief Executive Officer, Chief +Financial Officer, and Chief Compliance Officer of State Funds. +9. New York Alaska ETF Management LLC (“New York Alaska”) is a Nevada limited +liability company that was registered with the Commission as an investment adviser from 2015 to +2019, when it terminated its registration. New York Alaska was the investment adviser to State +Funds. Abarbanel was the owner, Chief Executive Officer, Chief Financial Officer, and Chief +Compliance Officer of New York Alaska. +10. Ofer Abarbanel resides in California. At all relevant times herein, Abarbanel +exercised full control over State Funds and New York Alaska. +11. Victor Chilelli resides in Delaware. At Abarbanel’s request, Chilelli set up +Institutional Syndication LLC (“IS”) and North American Liquidity Resources LLC (“NALR”) +(collectively, the “Counterparties”) to act as counterparties in purported reverse repurchase +transactions with State Funds. + +4 +D. FACTS +Background + +12. All versions of the State Funds prospectus filed with the Commission between 2016 +and 2018 provided that the fund would invest in a combination of U.S. Treasury securities and +repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities or cash. +Abarbanel used a portion of fund assets to invest in U.S. Treasury securities, but did not invest the +remaining fund assets in repurchase or reverse repurchase transactions. Instead, Abarbanel routed +State Funds’ assets to shell companies under his control, in what amounted to related-party lending +arrangements. +13. As part of a fraudulent scheme orchestrated by Abarbanel, State Funds misstated its +2018 financial statements by improperly accounting for its transactions with the Counterparties as +investments in reverse repurchase agreements, instead of as loans receivable on its balance sheet. +Because State Funds never transferred securities to the Counterparties, and received only +promissory agreements back from the Counterparties, these transactions were neither repurchase +agreements nor reverse repurchase agreements, but instead loans. The associated reverse +repurchase fee income (“Fee Income”) and disclosures were similarly misstated. +14. On June 21, 2021, the Commission filed an emergency civil injunctive action +alleging fraud by Abarbanel, Chilelli, and a related entity in the United States District Court for the +Southern District of New York, captioned Securities and Exchange Commission v. Ofer Abarbanel +et al., Civil Action No. 21-cv-05429 (S.D.N.Y. June 21, 2021). On January 27, 2022, the +Commission filed an amended complaint adding charges and additional allegations against +Abarbanel and New York Alaska. Id. (S.D.N.Y. Jan. 27, 2022). On February 24, 2022, Chilelli +consented to entry of a judgment against him. Id. (S.D.N.Y. Feb. 24, 2022). Another defendant +also consented to a judgment against it, and several relief defendants were dismissed from the +litigation, which is ongoing with respect to Abarbanel and New York Alaska. Id. (S.D.N.Y. Jan. 31, +2022; May 6, 2022). The litigation is currently stayed pending criminal proceedings against +Abarbanel. United States of America v. Ofer Abarbanel, Criminal Action No. 21-cr-532 +(S.D.N.Y.). +Respondents Did Not Conduct the 2018 Audit of State Funds in Accordance with +PCAOB Standards +15. In December 2018, Abarbanel engaged Berkower to audit State Funds’ financial +statements for the year ended December 31, 2018. +16. The Respondents did not detect State Funds’ incorrect accounting for its purported +reverse repurchase agreements, overlooked numerous red flags throughout the audit, and improperly +deferred to State Funds management. They did not ask questions, seek or prepare adequate +documentation, or conduct sufficient audit procedures to test the purported reverse repurchase +agreements and related disclosures in State Funds’ financial statements. + +5 +17. Berkower did not conduct the audit of State Funds in accordance with PCAOB +standards, and Mullen and Maurice Berkower were responsible for these failures. As discussed +below, Respondents did not demonstrate the necessary due professional care and professional +skepticism in the course of the audit. +Berkower and Mullen Did Not Identify Significant Risks or Develop Appropriate Audit +Plans and Procedures +18. In the initial planning stages of the audit, Berkower and Mullen did not identify the +reverse repurchase agreement transactions as a significant risk in the audit. The purported reverse +repurchase agreements were the most complex transactions entered into by State Funds, and +accounted for 30% of State Funds’ assets and 67% of its income, but were not identified by the +Berkower team as a significant risk in the audit plan. +19. As a result, Berkower and Mullen did not develop audit procedures to assess +whether State Funds’ financial statements were materially misstated or misleading with respect to +the reverse repurchase agreements. +20. Berkower and Mullen did not assess the Fee Income as a significant risk. The +related work paper stated that Fee Income was a “moderate” risk and concluded: “The transaction +class is not deemed to have complex accounting issues and is not subject to significant estimates or +judgment.” The Fee Income was a highly complex calculation that should have been flagged as a +significant risk. +21. The failure to identify the reverse repurchase agreements and the Fee Income as +significant risks, and to develop an audit plan that accounted for these risks, resulted in insufficient +audit procedures. +22. Berkower and Mullen did not identify Financial Accounting Standards Board +(“FASB”) Accounting Standard Codification (“ASC”) 860 as the authoritative guidance on +accounting for reverse repurchase agreements. Their planned procedures were inadequate because +they did not require the audit team to assess whether State Funds’ transactions qualified as a transfer +under ASC 860.4 +23. Berkower and Mullen also failed in their planning work papers to identify reverse +repurchase agreements as an area requiring specialized accounting. +24. Furthermore, Berkower and Mullen did not perform certain audit steps during the +planning of the audit. Specifically, there were no audit steps included in the planning work papers + +4 ASC 860 requires that transactions accounted for as reverse repurchase agreements entail the transfer of non- +cash financial assets from the seller to the buyer. State Funds reported $27,205,000 in reverse repurchase agreements on +its financial statements ending December 31, 2018, but it never transferred any non-cash financial assets to the purported +buyer. + +6 +to review the fund’s SEC filings nor to inquire from the audit committee or other employees about +related party relationships and transactions. +Berkower and Mullen Did Not Understand the Nature of the Transactions +25. Berkower and Mullen did not identify that State Funds was transacting in what +amounted to loans, not reverse repurchase agreements, contrary to the disclosures and statements +State Funds made to investors, and that State Funds had improperly characterized and accounted for +those transactions in its financial statements. In violation of their duty to exercise due professional +care and professional skepticism, and to identify, assess, and respond to the risks of material +misstatement, they did not ask questions to demonstrate that they understood the transactions that +were material to the financial statements they were auditing. They accepted management’s +representations that the transactions in question were reverse repurchase agreements, even when +those representations were contradicted by the documentation they received. +26. Berkower and Mullen knew or should have known that State Funds, which deemed +itself the seller-borrower in these transactions, transferred only cash to the Counterparties. In +addition, they should have known that despite references in the financial statements to U.S. +Treasury securities as collateral, State Funds only received promissory notes back from the +Counterparties. The U.S. Treasury securities allegedly involved in the transactions were never +actually transferred. +27. For example, Mullen received an email from Abarbanel in December 2018 that +stated that, in the reverse repurchase agreements, cash is transferred to the counterparties instead of +U.S. Treasuries “in order to save T-Bill purchase & transfer costs.” On March 11, 2019, the +engagement team sent NALR and IS’s managers emails that contained the reverse repurchase +agreement confirmations for various purported reverse repurchase agreements with State Funds. +The confirmations specifically stated that the U.S. Treasuries were “to be cleared as Securities +transfer or a Cash transfer tied to the market value at the respective reverse repo date of US +Treasury bills.” The auditors did not question why a cash transfer would be included as an option. +28. Berkower and Mullen incorrectly concluded that State Funds’ transfer of cash to the +Counterparties in exchange for a purportedly secured debt agreement could be accounted for as a +reverse repurchase agreement. They did not consult the FASB authoritative guidance on accounting +for reverse repurchase agreements (ASC 860) before reaching this erroneous conclusion. State +Funds’ transfer of cash to the Counterparties in exchange for a promissory note constituted loans +that Berkower and Mullen should have measured at fair value in accordance with ASC 946, +Investment Companies. +Berkower and Mullen Did Not Evaluate and Test Key Aspects of the Transactions +29. The engagement team documented its understanding of the purported reverse +repurchase agreements in a work paper titled “Reverse Repurchase Agreements Process.” The two- +paragraph work paper stated that State Funds sold securities to the counterparties and received +bonds in return, but in reality, State Funds was sending cash and only receiving promissory notes in + +7 +return. The work paper, however, did not identify and assess the key transaction documents that +comprised the reverse repurchase agreements. +30. The work paper also stated that in order for New York Alaska “to ensure the credit +of those bonds, they have obtained a lien on the assets of those entities and those entities deposit US +Treasuries into accounts in their own name at reputable brokers.” As discussed in paragraphs 35–36 +below, however, any lien that New York Alaska purportedly held on the Counterparties’ assets was +unenforceable. The Counterparties deposited the U.S. Treasuries purportedly pledged to New York +Alaska into margin accounts. Some of those accounts had margin deficits at year end, meaning the +broker lent money to the Counterparties, and the Counterparties pledged their assets as collateral for +the loans. Even those accounts without margin deficits were in the complete control of the +Counterparties, who could have withdrawn cash from the accounts at any time, at their sole +discretion, leaving the Treasury securities leveraged and pledged as collateral for the resulting +margin loans. +31. Most importantly, Berkower and Mullen did not perform an independent accounting +analysis to determine whether the agreements qualified as reverse repurchase agreements under +ASC 860. For example, there is no documented assessment by Berkower and Mullen of the +transaction documents to determine the impact of their terms on the accounting for reverse +repurchase agreements. Further, the engagement team did not assess whether State Funds’ +transactions qualified as a true sale or a secured borrowing; whether State Funds, as +seller/transferor, could transfer cash in lieu of securities to maintain effective control over the +transferred financial asset; and whether a counterparty could pledge the securities purportedly sold. +32. Berkower and Mullen also performed inadequate testing of Fee Income. To test the +fees received from the purported reverse repurchase agreements, the engagement team created a +work paper meant to recalculate the total interest income from reverse repurchase agreements and +U.S. Treasuries, and tie the number back to the financial statements, but the document simply listed +values from the income statement, and it contained no actual calculations. The engagement team +never performed a calculation to determine whether any of these figures were calculated correctly +by management. +33. Berkower and Mullen did not perform any testing of State Funds’ disclosures in the +notes to the financial statements, which were false and materially misleading. They did not +compare the disclosures relating to the purported reverse repurchase agreements to the actual +agreements or other work papers. +34. By way of example, State Funds claimed in the notes to the financial statements that +the purported reverse repurchase agreements provided the fund with a source of liquidity. Had State +Funds engaged in reverse repurchase agreements in a manner consistent with its disclosures, selling +U.S. Treasury securities in exchange for cash, this may have been true. But because State Funds +actually sent cash to the Counterparties and received only promissory notes in return, the opposite +was actually true; State Funds reduced its liquidity through these lending transactions. However, +Berkower and Mullen asked no questions and performed no testing relating to this misstatement +during the audit. + +8 +Berkower and Mullen Did Not Assess the Purported Collateral +35. Berkower and Mullen received brokerage statements for accounts held in the name +of State Funds’ counterparties, which purported to show collateral for the debt agreements that the +Counterparties issued to State Funds as part of the reverse repurchase agreements. However, the +brokerage statements reflected that the U.S. Treasury securities cited as collateral in State Funds’ +financial statements were held in margin accounts, some of which had negative margin balances – +meaning that the securities were pledged as collateral to the brokerage firms holding the accounts. +36. These statements indicated that some of the U.S. Treasuries were already serving as +collateral for margin loans to the Counterparties, and that State Funds had no legal interest in them. +However, Berkower and Mullen did not recognize that the purported collateral was being held in +margin accounts of the Counterparties and did not inquire into how securities held on margin in a +counterparty’s brokerage account could serve as collateral for loans by State Funds to the +Counterparties. They did not exercise professional skepticism or perform audit procedures to +determine whether these securities could properly secure the debt obligation of the Counterparties to +State Funds. +Berkower and Mullen Did Not Appropriately Audit Related-Party Transactions +37. Berkower and Mullen did not sufficiently inquire about and perform procedures to +assess related parties, relationships, and related-party transactions. They did not discover that State +Funds and its Counterparties were related parties because they were under the common control of +Abarbanel. Although they identified related parties as a possible risk, Berkower and Mullen only +performed a cursory review to identify possible party relationships or transactions. Although the +engagement team did ask Chilelli and Abarbanel about related parties, both lied to them, denying +the related-party relationship between State Funds and its Counterparties. Berkower and Mullen did +not make inquiries of the other State Funds officer, the audit committee, or service providers such as +the fund administrator regarding possible related-party relationships or transactions or to take any +other steps to test the accuracy and completeness of Chilelli and Abarbanel’s representations. +38. Berkower and Mullen missed multiple red flags that indicated likely related-party +transactions. For example, they received a 2018 Private Placement Memorandum from IS that +identified Chilelli, General Manager of IS, as the former Deputy Compliance Manager for State +Funds (through October 2017) and Portfolio Manager for New York Alaska (through November +2016). It was apparent from documents collected through the audit that Chilelli founded IS and +entered into agreements with State Funds just weeks after leaving his Deputy Compliance Manager +position at State Funds, but Berkower and Mullen did not probe the relationship between IS and +State Funds or whether the transactions between them were really at arms-length. +39. In addition, Berkower and Mullen did not consider that all of the IS Fee Income for +the 2018 fiscal year, which was approximately 57% of Fee Income reported by State Funds, was +computed using pricing rates from documents based on a November 2, 2017 agreement with IS, +which became effective very soon after Chilelli left State Funds and founded IS. This fact should +have also caused Berkower and Mullen to ask more questions about the relationship between IS and + +9 +State Funds and the nature of the transactions between them. Berkower and Mullen also did not +review SEC filings by State Funds that designated Chilelli as a former officer. +40. Berkower and Mullen knew that, at year-end, the Fee Income for State Funds came +entirely from the two Counterparties, both single-member LLCs formed just days before entering +into the transactions with State Funds. Neither of these LLCs met the requirements for +counterparties that State Funds had described in its prospectus. They also knew that State Funds’ +reported investment performance was vastly higher than its benchmark (5.85% vs. 0.17%). +Nonetheless, Berkower and Mullen did not exercise due care and professional skepticism when +they disregarded red flags and did not sufficiently inquire about whether the Counterparties were +undisclosed related parties, and whether Abarbanel could exercise undue influence over them. +Berkower and Mullen Did Not Adequately Supervise the Audit +41. Berkower and Mullen, as the engagement partner, did not adequately supervise the +2018 audit of State Funds for compliance with PCAOB standards. As described above, Mullen +inadequately reviewed the work performed by the engagement team and did not determine that it +was complete and properly documented in the work papers. He improperly evaluated whether the +results of the audit work supported the conclusions reached and whether the audit procedures were +sufficient to provide reasonable assurance that State Funds’ transactions were reported and +disclosed in the financial statements in accordance with U.S. Generally Accepted Accounting +Principles (“GAAP”). +42. Mullen did not verify whether the purported reverse repurchase agreements +complied with ASC 860, which they did not. Mullen also did not verify that the disclosures in the +notes to State Funds’ financial statements that pertained to the purported reverse repurchase +agreements were assessed for accuracy, and did not notice that there was no actual testing of Fee +Income. Nor did he notice that inquiries were not made of other employees or the audit committee +of State Funds’ board regarding related party relationships and transactions. Mullen did not identify +that the engagement team missed clear indications that related-party transactions may have +occurred, and did not verify that corrective action, in the form of appropriate inquiry, was taken +during the audit. Finally, Mullen did not notice that the U.S. Treasuries that purportedly secured the +debt agreements were held in margin accounts, and he did not verify that copies or abstracts of the +transaction documents, both significant agreements, were included as audit documentation. +Maurice Berkower’s Engagement Quality Review Was Deficient +43. As the engagement quality reviewer (“EQR”) for Berkower, Maurice Berkower did +not demonstrate due professional care. PCAOB standards require an EQR to possess the level of +knowledge and competence related to accounting, auditing, and financial reporting required to serve +as the engagement partner. AS 1220.05, Engagement Quality Review. Among other requirements, +the EQR should evaluate significant judgments, the assessment of and responses to significant risks, +and support for the conclusions reached. + +10 +44. Maurice Berkower did not sufficiently evaluate the significant judgments and related +conclusions made by the engagement team. For example, he did not question the engagement +team’s and Mullen’s assessment that the reverse repurchase agreements or Fee Income were not +significant risks, despite numerous factors suggesting otherwise. +45. In December 2018, Maurice Berkower received an email from Abarbanel providing +an example of how a purported reverse repurchase transaction worked. In the email, Abarbanel +explained that the fund transferred cash, rather than securities, “to save T-Bill purchase & transfer +costs.” Maurice Berkower forwarded the email to members of the engagement team in December +2018 and again in March 2019. He did not question this information or assess whether it +contradicted information in the fund’s disclosures and in the internal memoranda prepared by the +team. +46. Maurice Berkower also did not sufficiently review and inquire about a number of +key documents and issues, including all of the reverse repurchase work papers and whether the team +performed an accounting analysis to determine whether the purported reverse repurchase +agreements were accounted for and disclosed correctly. +Violations +47. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Exchange Act 4C(b) +and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice define improper professional conduct +with respect to persons licensed to practice as accountant. +48. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional +conduct” means one of two types of negligent conduct: (1) a single instance of highly unreasonable +conduct in circumstances for which heightened scrutiny is warranted; or (2) repeated instances of +unreasonable conduct that indicate a lack of competence. +49. As set forth in more detail below, Respondents engaged in repeated violations of +PCAOB standards including in areas that, for reasons stated in paragraphs 15–46 above, indicated a +lack of competence, as well as at least a single instance of highly unreasonable conduct that, for +reasons stated in paragraphs 29–40 and 43–46 above, warranted heightened scrutiny. +Failure to Exercise Due Professional Care (AS 1015) +50. PCAOB standards require due professional care in the planning and performance of +an audit. AS 1015.01, Due Professional Care in the Performance of Work. Due professional care +concerns what the independent auditor does and how well he or she does it. AS 1015.04. Auditors +must exercise professional skepticism, which is “an attitude that includes a questioning mind and a + +11 +critical assessment of audit evidence” and “should not be satisfied with less than persuasive +evidence because of a belief that management is honest.” AS 1015.07, .09. +51. As a result of Berkower and Mullen’s conduct described above, each failed to +exercise due professional care in the 2018 audit of State Funds. +Failure to Engage in Adequate Audit Planning (AS 2101) +52. PCAOB standards establish the requirements regarding planning an audit. AS 2101, +Audit Planning. “Planning the audit includes establishing the overall audit strategy for the +engagement and developing an audit plan, which includes, in particular, planned risk assessment +procedures and planned responses to the risks of material misstatement.” AS 2101.05. When +developing the audit strategy and plan, the auditor should evaluate whether certain matters are +important to the company’s financial statements, including matters relating to the company’s +business, organization, operating characteristics, and risks. AS 2101.07. The auditor should +establish an overall strategy that sets the scope, timing, and direction of the audit and guides the +development of the audit plan. AS 2101.08. +53. As a result of Berkower and Mullen’s conduct described above, each failed to +engage in adequate audit planning in the 2018 audit of State Funds. +Failure to Identify Related Parties (AS 2410) +54. PCAOB standards include audit procedures that should be considered for +determining the existence of related parties and for identifying transactions with related parties. AS +2410.04–.07, Related Parties. Auditors must obtain sufficient appropriate audit evidence to +determine whether related parties and relationships and transactions with related parties have been +properly identified, accounted for, and disclosed. AS 2410.02. Auditors should inquire of +management and others within the company regarding, among other things, the names of the +company’s related parties during the period under audit, the nature of any relationships, and +transactions entered into with its related parties during the period under audit and the terms and +business purposes (or lack thereof) of such transactions. AS 2410.05–.06. Auditors should also +inquire of the audit committee, or its chair, regarding the audit committee’s understanding of the +company’s relationships and transactions with related parties that are significant to the company. +AS 2410.07. The PCAOB standards require auditors to evaluate whether the company has properly +identified related parties, relationships, and/or transactions by performing procedures to test the +accuracy and completeness of such identifications, taking into account the information gathered +during the audit. AS 2410.14. +55. As a result of Berkower and Mullen’s conduct described above, each failed to obtain +sufficient and appropriate audit evidence pertaining to related parties and transactions with related +parties in the 2018 audit of State Funds. + +12 +Failure to Obtain Sufficient Appropriate Audit Evidence (AS 1105) +56. PCAOB standards define audit evidence as “all the information, whether obtained +from audit procedures or other sources, that is used by the auditor in arriving at the conclusions on +which the auditor’s opinion in based.” AS 1105.02, Audit Evidence. This evidence consists of +information that supports and corroborates management’s assertions about financial statements or +internal control over financial reporting and information that contradicts such assertions. Id. +PCAOB standards require an auditor to “plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for his or her opinion.” AS 1105.04. To be +appropriate, audit evidence must be both relevant and reliable. AS 1105.06. An auditor should +evaluate whether the information produced by the company is sufficient and appropriate by +performing procedures to test its accuracy and completeness and should resolve inconsistencies in +information between sources. AS 1105.10, .29. +57. As a result of Berkower and Mullen’s conduct described above, each failed to obtain +sufficient and appropriate audit evidence to support the conclusions in Berkower’s audit opinion in +the 2018 audit of State Funds. +Failure to Adequately Supervise the Audit Engagement (AS 1201) +58. Under PCAOB standards, it is the responsibility of the engagement partner to +provide proper supervision of the work of the engagement team and of compliance with PCAOB +auditing standards. AS 1201.03, Supervision of the Audit Engagement. Supervisory activities +include reviewing work of the engagement team to evaluate whether: (a) work was performed and +documented; (b) objectives of the procedures were achieved; and (c) the results of the work support +the conclusion reached. AS 1201.05.c. To determine the extent of supervision necessary for an +engagement team, the engagement partner should take into account: (a) the nature of the company, +including size and complexity; (b) the nature of the assigned work for each engagement team +member; (c) the risks of material misstatement; and (d) the knowledge, skill, and ability of each +engagement team member. AS 1201.06. +59. As a result of Berkower and Mullen’s conduct described above, each failed to +adequately supervise the work of the engagement team for the 2018 audit of State Funds. +Failure to Provide Adequate Engagement Quality Review (AS 1220) +60. PCAOB standards require an EQR to possess the level of knowledge and +competence related to accounting, auditing, and financial reporting required to serve as the +engagement partner. AS 1220.05, Engagement Quality Review. To evaluate significant judgments +and related conclusions, an EQR should hold discussions with the engagement partner and +engagement team and review documentation. AS 1220.09. PCAOB standards require that an EQR +evaluate the significant judgments that relate to engagement planning and risks identified with the +firm’s client acceptance process. AS 1220.10. The EQR should also evaluate the engagement +team’s assessment of, and audit responses to, significant risks identified by the engagement team, +including fraud risks, and other significant issues identified by the EQR. Id. Review of + +13 +documentation should specifically include the engagement completion document. Id. In an audit, +the EQR should evaluate whether the engagement documentation reviewed indicates that the +engagement team responded appropriately to significant risks, and supports the conclusions +reached. AS 1220.11. An EQR may provide concurring approval of issuance only if, after +performing the review required by AS 1220 with due professional care, he or she is not aware of a +significant audit deficiency, such as a failure by the engagement team to obtain sufficient +appropriate audit evidence in accordance with the standards of the PCAOB. AS 1220.12. +61. As a result of Berkower and Maurice Berkower’s conduct described above, each +failed to adequately conduct the engagement quality review in the 2018 audit of State Funds. +Failure to Adhere to the Quality Control Standards (QC 20, QC 30, and QC 40) +62. PCAOB Quality Control Section 20, System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice (“QC 20”), states, “[p]olicies and procedures should be +established to provide the firm with reasonable assurance that the work performed by engagement +personnel meets applicable professional standards, regulatory requirements, and the firm’s standards +of quality.” QC 20.17. QC 20 also states that a firm should communicate these policies and +procedures to its personnel in a manner that provides reasonable assurance that these policies and +procedures are understood and complied with. QC 20.23. +63. In addition, PCAOB Quality Control Section 30, Monitoring a CPA Firm’s +Accounting and Auditing Practice (“QC 30”), states, “[m]onitoring procedures taken as a whole +should enable the firm to obtain reasonable assurance that its system of quality control is effective.” +QC 30.03. +64. Finally, PCAOB Quality Control Section 40, The Personnel Management Element +of a Firm’s System of Quality Control- Competencies Required by a Practitioner-in-Charge of an +Attest Engagement (“QC 40”), states that a firm’s policies and procedures should be designed to +provide a firm with reasonable assurance that “work is assigned to personnel having the degree of +technical training and proficiency required in the circumstances,” and that “such individuals possess +the kinds of competencies that are appropriate given the circumstances of individual client +engagements.” QC 40.02–03. +65. As a result of Berkower’s conduct described above, Berkower’s policies and +procedures with respect to (i) exercising due professional care; (ii) adequately supervising and +ensuring the proficiency of personnel involved in the audit; (iii) adequately planning the audit; (iv) +identifying, assessing, and responding to risks of material misstatement and fraud; (v) obtaining +sufficient appropriate audit evidence, including with respect to related parties; (vi) preparing +adequate audit documentation; and (vii) providing an adequate engagement quality review, failed to +comply with QC Sections 20, 30, and 40. + +14 +Findings + +66. Based on the foregoing, the Commission finds that Berkower, Mullen, and Maurice +Berkower engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange +Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +Undertakings + + Berkower has undertaken to complete the following actions: +67. Within ten (10) business days after the entry of this Order, Berkower shall issue a +firm-wide announcement describing this case and providing a copy of this Order. +68. Retain, within sixty (60) days after the entry of this Order, at its own expense, an +independent consultant (“Independent Consultant”) not unacceptable to the staff of the Commission, +to review and evaluate Berkower’s quality controls and policies and procedures for all audits of +SEC registrants regarding the following (hereinafter referred to as “Berkower’s Policies”): +a. staffing and supervision of engagement personnel; +b. audit planning; +c. risk assessment, including the consideration of fraud and evaluating the +company’s selection and application of significant principles; +d. the exercise of due professional care and professional skepticism in the +planning and performance of the audit; +e. obtaining sufficient appropriate audit evidence; +f. the identification of related parties and related party transactions and the +appropriate disclosures thereof; +g. the confirmation process, including obtaining and evaluating evidence +from third parties and determining whether further testing is required; +h. performing engagement quality reviews; and +i. adequate audit documentation, including work paper sign-off and retaining +copies or abstracts of significant contracts or agreements. +69. The Independent Consultant shall assess the foregoing areas to determine whether +Berkower’s Policies are adequate and sufficient to provide reasonable assurance of compliance with +all relevant Commission regulations and relevant audit standards and rules. + +15 +70. Berkower shall cooperate fully with the Independent Consultant and shall provide +the Independent Consultant with access to its own files, books, records, and personnel as reasonably +requested for the review. +71. Require that the Independent Consultant issue a report, within sixty (60) days of +being retained, summarizing the review and recommending changes to Berkower’s Policies, if any, +to provide reasonable assurance of compliance with all relevant Commission regulations and +relevant audit standards and rules. +72. Adopt all recommendations in the report of the Independent Consultant; provided, +however, that within thirty (30) days after the Independent Consultant serves that report, Berkower +shall in writing advise the Independent Consultant and the Commission staff of any +recommendations that it considers to be unnecessary, unduly burdensome, impractical, or costly. +With respect to any recommendation that Berkower considers unnecessary, unduly burdensome, +impractical or costly, Berkower need not adopt that recommendation at that time but shall propose +in writing an alternative policy, procedure, or system designed to achieve the same objective or +purpose. As to any recommendation on which Berkower and the Independent Consultant do not +agree, such parties shall attempt in good faith to reach an agreement within thirty (30) days after +Berkower serves the written advice. In the event Berkower and the Independent Consultant are +unable to agree on an alternative proposal, Berkower will abide by the determinations of the +Independent Consultant. +73. Require the Independent Consultant to enter into an agreement that provides that for +the period of engagement and for a period of two years from completion of the engagement, the +Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or +other professional relationship with Berkower, or any of its present or former affiliates, directors, +officers, employees, or agents acting in their capacity. The agreement will also provide that the +Independent Consultant will require that any firm with which he/she is affiliated or of which he/she +is a member, and any person engaged to assist the Independent Consultant in performance of his/her +duties under this Order shall not, without prior written consent of the Commission staff, enter into +any employment, consultant, attorney-client, auditing or other professional relationship with +Berkower, or any of its present or former affiliates, directors, officers, employees, or agents acting +in their capacity as such for the period of the engagement and for a period of two years after the +engagement. +74. The report by the independent consultant will likely include confidential financial, +proprietary, competitive business or commercial information. Public disclosure of the report could +discourage cooperation, impede pending or potential government investigations or undermine the +objectives of the reporting requirement. For these reasons, among others, the report and the +contents thereof are intended to remain and shall remain non-public, except (1) pursuant to court +order, (2) as agreed to by the parties in writing, (3) to the extent that the Commission determines in +its sole discretion that disclosure would be in furtherance of the Commission’s discharge of its +duties and responsibilities, or (4) is otherwise required by law. + +16 +75. Within two years of entry of this Order, Berkower shall ensure that each audit +professional who performs audits of SEC registrants has completed a minimum of 24 hours of +audit-related training. The audit-related training shall cover the topics specified above in paragraph +68 with an emphasis on the need to follow policies, procedures, and professional standards at all +times, even when faced with client pressure. The audit-related training requirement may be fulfilled +by completing courses conducted in accordance with the applicable state boards of accountancy. +76. Berkower’s managing partner shall certify, in writing, compliance with the +undertakings set forth above. The certification shall identify the undertakings, provide written +evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for further evidence +of compliance, and Respondent agrees to provide such evidence. The certification and supporting +material shall be submitted to Virginia Rosado-Desilets, Assistant Director, Division of +Enforcement, U.S. Securities and Exchange Commission, 100 F Street NE, Washington DC, 20549, +with a copy to the Office of Chief Counsel of the Enforcement Division, at the same address, no +later than sixty (60) days from the date of the completion of the undertakings. +77. All Respondents (Berkower, Mullen, and Maurice Berkower) shall cooperate fully +with the Commission with respect to this proceeding and any related judicial or administrative +proceeding or investigation commenced by the Commission or to which the Commission is a party. +Berkower’s cooperation shall include, but is not limited to, using reasonable efforts to secure the +attendance and truthful statements or testimony of any current partner, agent, or employee of +Berkower at such times and places as the staff requests upon reasonable notice. In addition, +Respondents’ cooperation shall include, but is not limited to, (i) promptly and fully cooperating by +taking any steps necessary to render documents or records produced by Respondents admissible in +any U.S. court proceedings, which may include, without limitation, providing business-records +certifications requested by the Commission; (ii) accepting service by mail or facsimile transmission +of notices or subpoenas issued by the Commission for documents or testimony at depositions, +hearings, or trials, or in connection with any related investigation by Commission staff; (iii) +appointing Mary Hansen, Esq., Partner at Duane Morris LLP, 30 South 17th Street +Philadelphia, PA 19103, as agent to receive service of such notices and subpoenas; (iv) with respect +to such notices and subpoenas, waiving the territorial limits on service contained in Rule 45 of the +Federal Rules of Civil Procedure and any applicable local rules, provided that the party requesting +the testimony reimburses Respondents’ travel, lodging, and subsistence expenses at the then- +prevailing U.S. Government per diem rates; and (v) consenting to personal jurisdiction over +Respondents in any United States District Court for purposes of enforcing any such subpoena. +78. Deadlines for procedural dates shall be counted in calendar days, unless otherwise +specified. If the last calendar day falls on a weekend or a federal holiday, the next business day shall +be considered to be the last day. +79. In determining whether to accept the Offer, the Commission has considered these +undertakings. + +17 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent Berkower is hereby censured. +B. Michael G. Mullen and Maurice Berkower are denied the privilege of appearing or +practicing before the Commission as accountants. +C. After two years from the date of the Order, Michael G. Mullen may request that the +Commission consider his reinstatement by submitting an application to the attention of the Office of +the Chief Accountant. +D. After one year from the date of the Order, Maurice Berkower may request that the +Commission consider his reinstatement by submitting an application to the attention of the Office of +the Chief Accountant. +E. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondents +Mullen and/or Maurice Berkower shall submit a written statement attesting to an undertaking to +have work by Respondents Mullen and/or Maurice Berkower reviewed by the independent audit +committee of any public company for which Respondents Mullen and/or Maurice Berkower work +or in some other manner acceptable to the Commission, as long as Respondents Mullen and/or +Maurice Berkower practice before the Commission in this capacity and will comply with any +Commission or other requirements related to the appearance and practice before the Commission as +an accountant. +F. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are filed +with the Commission, Respondents Mullen and/or Maurice Berkower shall submit a statement +prepared by the audit committee(s) with which Respondents Mullen and/or Maurice Berkower will +be associated, including the following information: +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondents Mullen and/or Maurice Berkower will be associated; + + +18 +2. A description of Respondents Mullen’s and/or Maurice Berkower’s role on the +specific audit committee(s) with which Respondents Mullen and/or Maurice +Berkower will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondents Mullen’s and/or Maurice +Berkower’s service on the specific audit committee; and + +5. A statement noting whether Respondents Mullen and/or Maurice Berkower will +be able to act unilaterally on behalf of the Audit Committee as a whole. + +G. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondents Mullen +and/or Maurice Berkower must be associated with a public accounting firm registered with the +Public Company Accounting Oversight Board (the “PCAOB”), and Respondents Mullen and/or +Maurice Berkower shall submit the following additional information: +1. A statement from the public accounting firm (the “Firm”) with which +Respondents Mullen and/or Maurice Berkower are associated, stating that the +firm is registered with the PCAOB in accordance with the Sarbanes-Oxley Act +of 2002; + +2. A statement from the Firm with which Respondents Mullen and/or Maurice +Berkower are associated that the Firm has been inspected by the PCAOB and +that the PCAOB did not identify any criticisms of or potential defects in the +Firm’s quality control system that would indicate that Respondents Mullen +and/or Maurice Berkower will not receive appropriate supervision; and + +3. A statement from Respondents Mullen and/or Maurice Berkower indicating that +the PCAOB has taken no disciplinary actions against Respondents Mullen +and/or Maurice Berkower since seven (7) years prior to the date of the Order +other than for the conduct that was the basis for the Order. +H. In support of any application for reinstatement, Respondents Mullen and/or Maurice +Berkower shall provide documentation showing that Respondents Mullen and/or Maurice Berkower +are currently licensed as certified public accountants (“CPA”) and that Respondents Mullen and/or +Maurice Berkower have resolved all other disciplinary issues with any applicable state boards of +accountancy. If Respondents Mullen and/or Maurice Berkower are not currently licensed as CPAs, +Respondents Mullen and/or Maurice Berkower shall provide documentation showing that their +licensure is dependent upon reinstatement by the Commission. +I. In support of any application for reinstatement, Respondents Mullen and/or Maurice +Berkower shall also submit a signed affidavit truthfully stating, under penalty of perjury: + +19 +1. That Respondents Mullen and/or Maurice Berkower have complied with the +Commission suspension Order, and with any related orders and undertakings, or +any related Commission proceedings, including any orders requiring payment +of disgorgement or penalties; + +2. That Respondents Mullen and/or Maurice Berkower undertake to notify the +Commission immediately in writing if any information submitted in support of +the application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending; + +3. That Respondents Mullen and/or Maurice Berkower, since the entry of the +Order, have not been convicted of a felony or a misdemeanor involving moral +turpitude that would constitute a basis for a forthwith suspension from +appearing or practicing before the Commission pursuant to Rule 102(e)(2); + +4. That Respondents Mullen and/or Maurice Berkower, since the entry of the +Order: + +(a) have not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) have not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and have not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) have not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) have not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) have not been charged by the United States (or any agency of +the United States) or any state, territory, district, commonwealth, +or possession, civilly or criminally, with having committed an + +20 +act of moral turpitude, except for any charge concerning the +conduct that was the basis for the Order. + +5. That Respondents Mullen’s and/or Maurice Berkower’s conduct is not at +issue in any pending investigation of the Commission’s Division of +Enforcement, the PCAOB’s Division of Enforcement and Investigations, +any criminal law enforcement investigation, or any pending proceeding of a +State Board of Accountancy, except to the extent that such conduct +concerns that which was the basis for the Order. + +6. That Respondents Mullen and/or Maurice Berkower have complied with +any and all orders, undertakings, or other remedial, disciplinary, or punitive +sanctions resulting from any action taken by any State Board of +Accountancy, or other regulatory body. + +J. Respondents Mullen and/or Maurice Berkower shall also provide a detailed +description of: +1. Respondents Mullen’s and/or Maurice Berkower’s professional history since +the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondents Mullen and/or Maurice Berkower reported for such +work; and + +2. Respondents Mullen’s and/or Maurice Berkower’s plans for any future +appearance or practice before the Commission. + +K. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. +L. If Respondents Mullen and/or Maurice Berkower provide the documentation and +attestations required in this Order and the Commission (1) discovers no contrary information +therein, and (2) determines that Respondents Mullen and/or Maurice Berkower truthfully and +accurately attested to each of the items required in Respondent Mullen’s and/or Maurice +Berkower’s affidavit, and the Commission discovers no information, including under Paragraph K, +indicating that Respondents Mullen and/or Maurice Berkower have violated a federal securities law, +rule or regulation or rule of professional conduct applicable to Respondents Mullen and/or Maurice +Berkower since entry of the Order (other than by conduct underlying Respondents Mullen’s and/or +Maurice Berkower’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +21 +M. If Respondents Mullen and/or Maurice Berkower are not able to provide the +documentation and truthful and accurate attestations required in this Order or if the Commission has +discovered contrary information, including under Paragraph K, the burden shall be on Respondents +Mullen and/or Maurice Berkower to provide an explanation as to the facts and circumstances +pertaining to the matter setting forth why Respondents Mullen and/or Maurice Berkower believe +cause for reinstatement nonetheless exists and reinstatement would not be contrary to the public +interest. The Commission may then, in its discretion, reinstate Respondents Mullen and/or Maurice +Berkower for cause shown. +N. If the Commission declines to reinstate Respondents Mullen and/or Maurice +Berkower pursuant to Paragraphs L and M, it may, at Respondents Mullen’s and/or Maurice +Berkower’s request, hold a hearing to determine whether cause has been shown to permit +Respondents Mullen and/or Maurice Berkower to resume appearing and practicing before the +Commission as an accountant. + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4357.txt b/raw/aaer/2022/AAER-4357.txt new file mode 100644 index 0000000000000000000000000000000000000000..410121a979616c2c4d9c23208e783ce0476d42da --- /dev/null +++ b/raw/aaer/2022/AAER-4357.txt @@ -0,0 +1,491 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 11123 / October 24, 2022 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96137 / October 24, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4357 / October 24, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-21215 + +In the Matter of +CRONOS GROUP INC. +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted against Cronos Group Inc. (“Cronos” or +“Respondent”), pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Section +21C of the Securities Exchange Act of 1934 (“Exchange Act”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as to +the Commission’s jurisdiction over it and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + +2 +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +SUMMARY +1. This matter concerns accounting violations by Cronos, a Canadian cannabis +company, which occurred in its first years operating as a U.S. publicly-traded issuer. In 2019, +shortly after becoming subject to SEC reporting requirements, Cronos embarked on a significant +business expansion, seeking to enter the nascent cannabis vaporizer market. Cronos, however, +lacked the requisite familiarity with applicable accounting requirements as well as the appropriate +internal accounting controls to prepare financial reports that complied with U.S. reporting +requirements. +2. Between 2019 and 2021, Cronos furnished to and/or filed with the Commission, +financial statements in three separate quarters that contained material accounting errors. In two of +the three quarters—the first quarter of 2019 and the third quarter of 2019—Cronos improperly +recognized revenue in connection with certain transactions with the same counter-party where the +sale of cannabis raw materials (or cannabis flower) by Cronos occurred simultaneously with the +purchase by Cronos of processed cannabis product. Separately, in the third quarter of 2019, a since- +terminated senior executive of Cronos entered into an undisclosed oral agreement with a different +counter-party to sell cannabis raw material to the counter-party but then repurchase the cannabis +product, either as a derivative product or in some other form, in the following quarter. This oral +repurchase agreement made it inappropriate for Cronos to recognize revenue in connection with the +sale transaction. Finally, in the second quarter of 2021, Cronos failed to timely record impairment +charges in connection with goodwill and intangible assets associated with its U.S. reporting unit. +As a result of the foregoing accounting errors, Cronos furnished to and/or filed with the +Commission, periodic reports that contained materially inaccurate financial statements. +3. After discovering the accounting errors, Cronos filed restated financial statements for +the relevant quarters. In connection with the first and third quarters of 2019, Cronos disclosed that +it had materially overstated its revenue by $5.8 million. In connection with the second quarter of +2021, Cronos disclosed that it should have recorded approximately $234.9 million in impairment +charges in relation to its U.S. reporting unit. Concerning all three quarters, Cronos disclosed that it +had identified material weaknesses in its internal control over financial reporting. +RESPONDENT +4. Cronos Group Inc. is incorporated in the Province of British Columbia and is +principally headquartered in Toronto, Ontario. Cronos engages in the cultivation, manufacturing, +and marketing of cannabis and cannabis-derived products. Cronos’ securities, which are registered +with the Commission pursuant to Section 12(b) of the Exchange Act, are dually-listed on the +Toronto Stock Exchange and on the NASDAQ (ticker: CRON). From March 2018 through +December 31, 2019, Cronos qualified as a foreign private issuer and had reporting, books and + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +3 +records, and internal controls obligations under Sections 13(a) and 13(b) of the Exchange Act and +related rules thereunder. As a foreign private issuer, Cronos’ financial statements were prepared in +accordance with International Financial Reporting Standards (“IFRS”). As of January 1, 2020, +Cronos began reporting as a U.S. domestic issuer and prepared its financial statements in +accordance with U.S. generally accepted accounting principles (“GAAP”). During the relevant +period, Cronos offered and sold securities through the Amended and Restated Stock Option Plan, +dated May 26, 2015, and the 2018 Stock Option Plan, dated June 28, 2018, which were registered +on Forms S-8 filed with the Commission. +FACTS +Cronos’ Evolving Business in 2019 +5. At the start of 2019, Cronos’ business was primarily focused on the cultivation and +growth of cannabis flower (also called biomass), which Respondent in turn expected to sell under +various brands in the retail market. However, beginning in early 2019 and continuing throughout +that year, an insect infestation of certain biomass in the company’s vault storage facilities rendered +that biomass unsuitable for retail sales as originally expected. Cronos also lacked the +manufacturing ability to convert the biomass to other uses. As a result, Cronos was left with a large +supply of lower-quality biomass in its limited vault storage facilities. In response, Cronos was +motivated throughout 2019 to sell off its inventory of lower-quality biomass to free up space in its +storage facilities. +6. Around the same time, in anticipation of forthcoming regulatory changes in Canada, +Cronos made a strategic decision to enter the cannabis vaporizer market. Cronos expected the +market for cannabis vaporizer products to eventually surpass the market for the sale of cannabis +flower. As part of its shift in business strategy, Cronos sought to procure a supply of cannabis resin, +a key input of vaporizer cartridges used in the production of vaporizer products. Cronos, however, +lacked the in-house manufacturing capability to convert biomass into resin, and, in any event, given +the lower quality of its biomass inventory, the company’s biomass product could not be used for +such purpose. As an alternative, Cronos looked to third-party manufacturers from which it could +purchase resin for use in the process of vaporizer production. +7. As part of its focus on the cannabis vaporizer market, Cronos entered into two +significant business agreements in 2019. First, in May 2019, Cronos entered into an 18-month +supply agreement (the “Resin Supply Agreement”) with Company A pursuant to which Cronos +agreed to purchase a fixed amount of resin from Company A each month, with the option to +purchase additional amounts of resin. Second, in July 2019, Cronos entered into a contract +manufacturing agreement (the “CMO Agreement”) with Company B pursuant to which Cronos and +Company B would jointly source biomass, and Company B would then perform all other steps in +the production of vaporizer cartridges, including processing the biomass into resin. +8. Cronos had historically operated primarily as a producer of cannabis flower for sale +in its retail channel. But, in 2019, Cronos faced the dual challenges of having to sell off its lower- +quality biomass inventory, while procuring a large supply of resin to use in the process of vaporizer +production. During this time period, there were a limited number of third-party firms in Canada +that either had the capacity to purchase Cronos’ lower-quality biomass and convert to other uses, or + +4 +the ability to supply resin to Cronos for use in vaporizer cartridge production. Cronos considered its +dealings with such third-party firms to be part of its wholesale channel. As explained in further +detail below, Cronos lacked sufficient internal accounting controls to conduct transactions in its +wholesale channel, resulting in material accounting errors in three separate transactions conducted +in 2019—two with Company A, and one with Company B. +Wholesale Transactions with Company A—First Quarter and Third Quarter of 2019 +9. On two separate occasions in 2019, Cronos sold its biomass to Company A, one of +the few third-party manufacturers in Canada at this time with the ability to put the lower-quality +biomass to an alternative use. At the same time as each of these sale transactions, Cronos purchased +resin from Company A, one of the few third-party manufacturers in Canada at this time with the +capacity to supply resin in bulk to Cronos. Under IFRS accounting standards applicable to Cronos +at the time, Cronos was required to assess whether it was appropriate to recognize revenue in +connection with the biomass sale transactions to Company A in light of the simultaneous purchases +of resin from Company A. Cronos, however, did not conduct any such analysis. +10. First Quarter of 2019. On March 15, 2019, Cronos sold $2.5 million CAD ($1.9 +million USD) in biomass to Company A. The sale was consistent with Cronos’ effort to sell off its +lower-quality biomass in order to clear space in its limited storage facilities. On the same date, +Cronos purchased $2.7 million CAD ($2.1 million USD) in resin from Company A. Although +Cronos did not have an immediate need for resin in the first quarter, the purchase was consistent +with the Cronos’ strategy to build up a supply of resin as part of its shift into the cannabis vaporizer +market. Several days later, Cronos and Company A simultaneously issued invoices to the other in +connection with the respective transactions, and further shipped biomass and resin for delivery to +the other. Although there was no agreement between Cronos and Company A tying the two +transactions together, it was believed that the purchase of resin from Company A at this time would +facilitate Company A’s purchase of biomass from Cronos. +11. Third Quarter of 2019. In September 2019, Cronos and Company A entered into a +series of transactions with each other. On September 27, 2019, Cronos sold $5.1 million CAD ($3.8 +million USD) in biomass to Company A. At the same time, Cronos purchased the fixed monthly +amount of resin for September pursuant to the Resin Supply Agreement (executed in May 2019) in +the amount of $2.5 million CAD ($1.9 million USD). Cronos also agreed to purchase an additional +$1.6 million CAD ($1.2 million USD) in resin that was an available option beyond the fixed amount +under the Resin Supply Agreement. Cronos further agreed to purchase $0.45 million CAD ($0.34 +million USD) of resin oil (i.e., resin further processed into a liquid oil substance for use in vaporizer +cartridges). Although there was no agreement between Cronos and Company A tying the +transactions together, it was believed that the purchase of the optional amount of resin from +Company A at this time would facilitate Company A’s purchase of biomass from Cronos. It was +further believed that the purchase of resin oil from Company A would foster a positive business +relationship with Company A. + +5 +12. IFRS requires that a contract have commercial substance to recognize revenue.2 +However, Cronos’ sales of biomass in the first quarter and third quarter of 2019 lacked commercial +substance and should not have resulted in the recognition of revenue. Among other things, the +value of biomass sold to Company A was substantially similar to the amount of resin purchased +from Company A; the respective purchase orders by Cronos and Company A were issued on the +same date; the respective payment invoices by Cronos and Company A were issued on the same +date; and the shipments of biomass and resin were close in time. In addition, for the transactions in +the first quarter of 2019, the product relinquished (biomass) and the product received (resin) +contained similar cannabinoid content profiles, and for the transactions in the first and third quarters +of 2019, both products were work in progress inventory to be used as raw materials in production of +vaporizer products. Lastly, it was believed that the purchase of resin at this time was meant to +facilitate Company A’s purchase of biomass. In light of the foregoing, the risk, timing and amount +of Cronos’ future cash flow were not affected by the transactions and Cronos should have treated +the simultaneous sale of biomass and purchase of resin as non-monetary transactions resulting in the +exchange of inventory. +13. In the first and third quarters of 2019, Cronos’ accounting and finance personnel +were aware that Cronos had agreed to sell biomass to Company A, and simultaneously purchase +resin from Company A. However, Cronos lacked a sufficient understanding of the applicable +accounting standards, or experience with evaluating revenue recognition criteria in its wholesale +channel, in the context of conducting simultaneous purchase and sale transactions with the same +counter-party. As a result, Cronos did not conduct any assessment of whether it was appropriate to +recognize revenue on the biomass sale transactions in these circumstances. +14. On March 30, 2020, Cronos issued a restatement for the first and third quarters of +2019. Cronos determined that it was inappropriate to recognize revenue in connection with the +sales of biomass to Company A. The improper revenue recognition was material as it represented +35% and 16% of Cronos’ gross revenue recognized in the first and third quarters of 2019, +respectively. +Wholesale Transaction with Company B—Third Quarter of 2019 +15. As noted above, in July 2019, Cronos entered into a CMO Agreement with Company +B. As described in the CMO Agreement, Cronos and Company B would jointly source biomass as +the raw material input, and Company B in turn would perform all other steps in the production of +vaporizer cartridges, including converting the biomass into resin. +16. Pursuant to the terms of the CMO Agreement, Cronos retained title and ownership of +any biomass and other input materials provided to Company B as well as any vaporizer products +produced by Company B. Accordingly, the provision of biomass to Company B by Cronos did not +constitute a sales transaction or result in the recognition of revenue. Rather, Cronos could recognize + +2 In assessing whether a contract has commercial substance, IFRS considers whether the risk, timing, or amount +of the entity’s future cash flows is expected to change as a result of the contract. See IFRS 15.9(d). Although Cronos +was required to furnish financial statements prepared in accordance with IFRS in 2019, Cronos subsequently assessed +whether a restatement was necessary under GAAP. The pertinent provisions of IFRS and GAAP, as applied here, are +similar and require that a contract have commercial substance. See ASC 606-10-25-1(d). + +6 +revenue under the CMO Agreement only when a vaporizer cartridge was ultimately sold by Cronos. +The CMO Agreement did not include terms permitting Cronos to sell biomass outright to Company +B. +17. Company B proceeded to procure biomass for the purpose of converting the biomass +into resin for use in vaporizer products and, in accordance with the terms of the CMO Agreement, +would then issue an invoice to Cronos for payment. Cronos preferred that Company B procure the +biomass for its vaporizer products from third-party sources to avoid sourcing biomass from Cronos, +which was of lower quality. +18. William Hilson served as Cronos’ Chief Financial Officer until April 2019, and +thereafter became Chief Commercial Officer until he separated from Respondent in December +2019. In these roles, Hilson was familiar with the CMO Agreement with Company B, as well as the +terms under which Cronos would provide biomass to Company B for conversion into resin. +19. In September 2019, consistent with its goal of increasing space in its limited storage +facilities, Cronos approached Company B about the possibility of selling some of its existing lower- +quality biomass to Company B. In addition, Cronos was seeking to increase reported revenue in its +third quarter 2019 as Respondent was facing a shortfall between its projected third quarter revenue +and internal revenue targets for the quarter largely due to lower than expected sales in its retail +channel. Revenue from its wholesale channel, which Respondent had not anticipated would be a +core sales channel, became necessary to bridge the gap. +20. As Hilson led the negotiations for the sale of biomass to Company B, he was +specifically instructed by a senior company executive that the biomass sale to Company B could not +be pursuant to the CMO Agreement, in part because Cronos did not want its lower-quality biomass +being used by Company B as part of the vaporizer production. As a result, the contemplated sale of +biomass from Cronos to Company B would be treated as a routine sales transaction, unrelated to the +CMO Agreement. +21. In late September 2019, a senior executive at Company B emailed Hilson informing +him that, although Company B had no need to purchase Cronos’ biomass, the company would enter +into such a transaction, in part to help Cronos meet its revenue goals. However, the senior +executive made clear that Company B would purchase Cronos’ biomass only if Cronos agreed to +buy it back as a derivative product or in some other form in the following quarter. Hilson orally +agreed to the condition proposed by the senior executive at Company B although he was not +authorized to enter into such a buy back arrangement. Hilson did not disclose to others at Cronos +that he had orally committed to Company B that Cronos would repurchase the cannabis as a +derivative product or in some other form in the following quarter. +22. On September 27, 2019, Company B issued a purchase order to Cronos for +approximately $3.1 million CAD ($2.4 million USD) of biomass, and a few days later, Cronos +issued an invoice to Company B for the sale and shipped the product to Company B. Neither the +purchase order nor the invoice made any reference to the CMO Agreement. In connection with this +biomass sale in September 2019, Cronos recognized $3.0 million CAD ($2.3 million USD) in +revenue in its third quarter 2019 financial results. + +7 +23. In November 2019, as part of the quarterly close process, Hilson signed a sub- +certification as a financial statement reviewer certifying that Cronos’ quarterly financial statements +were accurate and that he was not aware of any fraud involving the statements. Hilson did not +disclose that he had entered into an oral buy back agreement with Company B related to the +September 2019 sale of biomass. +24. In early December 2019, upon learning of Hilson’s upcoming departure from +Cronos, the senior executive at Company B contacted Hilson to discuss payment of the biomass +purchase in light of their prior agreement. +25. In January 2020, Company B informed Cronos that it had purchased the biomass in +September 2019 based on an oral commitment by Hilson to buy back the biomass in a processed +form. To date, Company B has not paid for the biomass sale, and Cronos ceased collection efforts +in March 2020 after writing off the receivable. +26. By virtue of Hilson’s oral agreement with Company B, which conditioned the sale of +biomass to Company B on Cronos’ commitment to repurchase the derivative product or product in +some other form in the subsequent quarter, Cronos did not meet the IFRS standards to recognize +revenue in connection with the biomass sale. Specifically, the risk, timing, or amount of Cronos’ +cash flows was not expected to change as a result of this proposed round-trip transaction, and thus, +the transaction lacked commercial substance under IFRS. +27. Because of the agreement to repurchase cannabis from Company B, Cronos +improperly recognized revenue from the sale transaction in the amount of $3.0 million CAD ($2.3 +million USD). The improper revenue recognition represented 22% of Cronos’ gross revenue +recognized in that quarter. As a result, Cronos furnished materially inaccurate financial statements +on Form 6-K on November 11, 2019. +28. In March 2020, Cronos furnished a Form 6-K/A for the third quarter of 2019 that +restated its quarterly financial results by, among other things, excluding revenue associated with the +sale of biomass to Company B in September 2019. +Impairment of U.S. Intangible Asset—Second Quarter of 2021 +29. In September 2019, Cronos acquired a U.S. business that manufactures, markets and +distributes hemp-derived supplements and cosmetics products under the brand, Lord Jones. With +the acquisition, Cronos recorded an indefinite-lived intangible asset of $64 million for the brand +name and goodwill of $213.4 million. As required by GAAP, U.S. public companies, as Cronos +was beginning in January 2020, are required to test goodwill and indefinite-lived intangible assets +for potential impairment at least once a year – and on an interim basis when certain indicators, or +“triggering events,” are present – and record any impairments.3 + +3 “Goodwill” is an asset representing the future economic benefits arising from other assets acquired in a +business combination that are not individually identified and separately recognized. “Intangible assets” are assets (not +including financial assets) that lack physical substance. The term intangible assets is used to refer to intangible assets +other than goodwill. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit + +8 +30. During the second quarter of 2021, certain Cronos personnel were aware of +information indicating the existence of impairment indicators related to goodwill and intangible +assets held by the U.S. business. In particular, the U.S. business had underperformed relative to +budget expectations as of the second quarter 2021; internal forecasts prepared during the second +quarter of 2021 had shown an approximate 60% decrease in projected revenues in future years; and +the U.S. business faced significant pricing pressures as a result of increased competition and +discounting by other firms. As a result of such information, Cronos should have determined that it +was required to perform an interim impairment test. +31. However, Cronos’ internal accounting controls were insufficient to provide +reasonable assurances that an appropriate impairment analysis was conducted in the second quarter +of 2021. Among other things, Cronos’ accounting personnel lacked a sufficient understanding of +GAAP and prepared an impairment analysis that applied an erroneous accounting standard. +Cronos’ accounting personnel further highlighted positive aspects of the U.S. business, while failing +to sufficiently weigh negative factors, including declining planned revenue and profits compared to +projected results of prior periods. Cronos’ accounting staff also failed to properly document their +impairment analysis or provide complete and accurate information to senior executives regarding +their analysis. +32. In the third quarter of 2021, Cronos reassessed the existence of impairment +indicators as of June 30, 2021 and determined that quantitative impairment analyses were required. +The quantitative analyses determined that the carrying amount of the Lord Jones intangible asset +and U.S. reporting unit exceeded their fair values and were impaired. In February 2022, Cronos +restated its financial statements for the second quarter of 2021, recording impairment charges of +$178.4 million and $56.5 million for goodwill and intangible assets, respectively, related to the U.S. +reporting unit. These adjusted amounts were material and represented approximately 99% of +Cronos’ goodwill, 80% of its intangible assets, and 12% of its total assets for the quarter. +Material Weakness in Internal Control over Financial Reporting +33. In connection with the accounting errors identified above, Cronos disclosed in its +restatements that it had identified a number of material weaknesses in its internal control over +financial reporting. +VIOLATIONS +34. As a result of the conduct described above in paragraphs 15 to 28, Cronos violated +Section 17(a) of the Securities Act, which prohibits fraudulent conduct in connection with the offer +or sale of securities, and Section 10(b) of the Exchange Act and Rules 10b-5(a) and 10b-5(c) +thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities. + +that includes goodwill exceeds its fair value. Impairment of an indefinite-lived intangible asset is the condition that +exists when its carrying amount exceeds its fair value. “Fair value” is the price that would be received to sell an asset or +paid to transfer a liability in an orderly transaction between market participants at the mea surement date. If there is +impairment, then the difference between the carrying amount (i.e., the amount of an item as displayed in the financial +statements) of the reporting unit that includes goodwill or the indefinite-lived intangible asset and its respective fair +value is recorded as an impairment charge. + +9 +35. As a result of the conduct described above, Cronos violated Section 13(a) of the +Exchange Act and Rules 13a-13, 13a-16 and 12b-20 promulgated thereunder, which require foreign +private issuers with securities registered under Section 12 of the Exchange Act to furnish certain +reports on Forms 6-K to the Commission, require U.S. public issuers to file quarterly reports with +the Commission, and mandate that such reports contain such further material information necessary +to make the required statements not misleading. +36. As a result of the conduct described above, Cronos violated Section 13(b)(2)(A) of +the Exchange Act, which requires reporting companies to make and keep books, records and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions +of their assets. +37. As a result of the conduct described above, Cronos violated Section 13(b)(2)(B) of +the Exchange Act, which requires reporting companies to devise and maintain a system of internal +accounting controls sufficient, among other things, to permit preparation of financial statements in +conformity with GAAP or any other criteria applicable to such statements. Cronos also violated +Exchange Act Rule 13a-15(a), which requires issuers to maintain internal control over financial +reporting. +COOPERATION +38. In determining whether to accept Cronos’ Offer, the Commission considered the +following: +a. Cronos had procedures in place designed to identify potential material +accounting errors and possible misconduct by its employees, including +mechanisms for employees to submit internal tips and complaints. In addition, +Cronos promptly took steps to evaluate tips and complaints submitted by +employees, including by conducting an internal investigation under the +supervision of its Audit Committee, which eventually led to the discovery of +material accounting errors in the first and third quarters of 2019, and the second +quarter of 2021. +b. Upon learning of the potential for material accounting errors in reports +previously filed with the Commission, and prior to the completion of its internal +investigation, Cronos promptly self-reported to Commission staff, information +related to potential violations of the federal securities laws in the first quarter and +third quarter of 2019, and thereafter it self-reported information related to further +potential violations in the second quarter of 2021. +c. Cronos provided timely updates to Commission staff and voluntarily produced +documents, reports, and other materials, including factual information learned +during the course of its internal investigation into the material accounting errors. +Cronos further facilitated interviews of current and former officers and +employees, including individuals residing outside of the United States. +d. Cronos undertook remedial measures upon learning of the material accounting +errors, including developing and implementing new internal accounting controls; + +10 +developing a new training program regarding accounting related matters; and +hiring additional staff with familiarity with GAAP requirements. +39. In consideration of the foregoing, the Commission has determined not to impose a +civil penalty on Cronos. +UNDERTAKINGS +Respondent has undertaken to: +40. Retain, within thirty (30) days of the date of entry of the Order, at its own expense, a +qualified independent consultant (the “Consultant”) not unacceptable to the Commission staff, to +review Respondent’s internal accounting controls and internal control over financial reporting. The +Consultant’s review and evaluation shall include an assessment of the following: +a. the sufficiency of Cronos’ internal accounting controls in light of Cronos’ +business strategy. The review shall include, but not be limited to, a review of +Respondent’s policies, procedures, and controls, relating to (i) revenue +recognition, including in its wholesale channel and non-routine transactions, and +(ii) the assessment and testing of goodwill and intangible assets for impairment; +b. Cronos’ compliance with Commission requirements related to internal control +over financial reporting, including but not limited to, the adequacy of +Respondent’s control environment and risk assessment based upon criteria +established in the Internal Control – Integrated Framework (2013) by the +Committee of Sponsoring Organizations of the Treadway Commission +(“COSO”); +c. Cronos’ employment of a sufficient number of accounting and finance personnel +with an understanding of GAAP and financial reporting requirements, as well as +the reporting lines of accounting and finance personnel to management and the +Board of Directors; and +d. Cronos’ training of its employees on matters related to GAAP as well as financial +reporting requirements. +41. Provide, within forty-five (45) days of the issuance of this Order, a copy of the +engagement letter detailing the Consultant’s responsibilities to Mark Cave, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, +DC 20549. +42. Require the Consultant, at the conclusion of the review, which in no event shall be +no more than 120 days after the entry of the Order, to submit a report of the Consultant to the +Respondent and the Commission staff. The report shall address the Consultant’s findings and shall +include a description of the review performed, the conclusions reached, and the Consultant’s +recommendations for changes or improvements. + +11 +43. Adopt, implement, and maintain all policies, procedures and practices recommended +in the report of the Consultant within 120 days of receiving the report from the Consultant. As to +any of the Consultant’s recommendations about which the Respondent and the Consultant do not +agree, such parties shall attempt in good faith to reach agreement within 180 days of the date of the +entry of the Order. In the event that the Respondent and the Consultant are unable to agree on an +alternative proposal, the Respondent will abide by the determination of the Consultant and adopt +those recommendations deemed appropriate by the Consultant. +44. Cooperate fully with the Consultant in its review, including making such information +and documents available as the Consultant may reasonably request, and by permitting and requiring +the Respondent’s employees and agents to supply such information and documents as the +Consultant may reasonably request, subject to any applicable privilege. +45. To ensure the independence of the Consultant, the Respondent (i) shall not have +received legal, auditing, or other services from, or have had any affiliations with, the Consultant +during the two years prior to the issuance of this Order; (ii) shall not have the authority to terminate +the Consultant without prior written approval of the Commission staff; and (iii) shall compensate +the Consultant for services rendered pursuant to the Order at their reasonable and customary rates. +46. Require the Consultant to enter into an agreement that provides that for the period of +engagement and for a period of two years from completion of the engagement, the Consultant shall +not enter into any employment, consultant, attorney-client, auditing or other professional +relationship with Respondent, or any of its present or former affiliates, directors, officers, +employees, or agents acting in their capacity. The agreement will also provide that the Consultant +will require that any firm with which he/she is affiliated or of which he/she is a member, and any +person engaged to assist the Consultant in performance of his/her duties under this Order shall not, +without prior written consent of the Commission staff, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Respondent, or any of its present or +former affiliates, directors, officers, employees, or agents acting in their capacity as such for the +period of the engagement and for a period of two years after the engagement. +47. The reports by the Consultant will likely include confidential financial, proprietary, +competitive business or commercial information. Public disclosure of the reports could discourage +cooperation, impede pending or potential government investigations or undermine the objectives of +the reporting requirement. For these reasons, among others, the reports and the contents thereof are +intended to remain and shall remain non-public, except (1) pursuant to court order, (2) as agreed to +by the parties in writing, (3) to the extent that the Commission determines in its sole discretion that +disclosure would be in furtherance of the Commission’s discharge of its duties and responsibilities, +or (4) is otherwise required by law. +48. Require the Consultant to report to the Commission staff on its activities as the staff +may request. +49. Respondent agrees that the Commission staff may extend any of the dates set forth +above at its discretion. + +12 +50. Certify, in writing, compliance with the undertaking(s) set forth above. The +certification shall identify the undertaking(s), provide written evidence of compliance in the form of +a narrative, and be supported by exhibits sufficient to demonstrate compliance. The Commission +staff may make reasonable request for further evidence of compliance, and the Respondent agrees to +provide such evidence. The certification and reporting material shall be submitted to Mark Cave, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F Street, +N.E., Washington, DC 20549, with a copy to the Office of the Chief Counsel of the Division of +Enforcement, no later than thirty (30) days from the date of the completion of the undertakings. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Cronos cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) +of the Exchange Act and Rules 10b-5, 13a-13, 13a-15(a), 13a-16 and 12b-20 thereunder. +B. Respondent shall comply with the undertakings enumerated in Paragraphs 41-51 +above. +C. Respondent acknowledges that the Commission is not imposing a civil penalty based +upon its cooperation in a Commission investigation. If at any time following the entry of the Order, +the Division of Enforcement (“Division”) obtains information indicating that Respondent +knowingly provided materially false or misleading information or materials to the Commission, or +in a related proceeding, the Division may, at its sole discretion and with prior notice to the +Respondent, petition the Commission to reopen this matter and seek an order directing that the +Respondent pay a civil money penalty. Respondent may contest by way of defense in any resulting +administrative proceeding whether it knowingly provided materially false or misleading +information, but may not: (1) contest the findings in the Order; or (2) assert any defense to liability +or remedy, including, but not limited to, any statute of limitations defense. +By the Commission. +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4359.txt b/raw/aaer/2022/AAER-4359.txt new file mode 100644 index 0000000000000000000000000000000000000000..c97bc276b1f6d991144d8c4f15a8967932afe3e1 --- /dev/null +++ b/raw/aaer/2022/AAER-4359.txt @@ -0,0 +1,415 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96153 / October 25, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4359 + +ADMINISTRATIVE PROCEEDING +File No. 3-21219 + + +In the Matter of + +SCOTT A. +WOODWARD, CPA, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Scott A. +Woodward, CPA (“Respondent” or “Woodward”) pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondent consents to the entry of this +(“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + These proceedings arise out of Respondent’s purchase of the common stock of PFSweb, Inc. +while in the possession of material non-public information. PFSweb engaged Respondent, a +Certified Public Accountant, in January 2021, to provide accounting services in connection with the +possible sale of a business unit. In late June 2021, he purchased PFSweb stock, shortly before +PFSweb disclosed the pending sale of the unit. At that time, PFSweb had notified its employees to +cease trading in its shares. Woodward had signed an agreement to be bound by PFSweb’s trading +policies, and to not trade in violation of the federal securities laws. Woodward later sold the stock, +for a profit of $21,326.36. + +B. RESPONDENT + + Scott A. Woodward, 47, of Dallas, Texas, is a Certified Public Accountant licensed by the +Texas State Board of Public Accountancy since 1999. PFSweb retained him to provide contract +accounting services, through Woodward & Co. CPA, PLLC, a professional corporation Woodward +owned. + +C. RELATED ENTITY + +PFSweb, Inc. (now PFScommerce.com) is a Section 12(b) reporting company with offices +in Allen, Texas. Its stock is listed on Nasdaq. PFSweb has managed customer-shopping services +for major branded manufacturers through its LiveArea unit, which provided ecommerce services, +and its PFS Operations unit, which provided logistics and customer-fulfillment services. + + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 +D. FACTS + +1. In January 2021, PFSweb engaged Woodward, through his professional corporation, +to provide accounting services relating to the company’s plan to sell LiveArea and to assist in +preparing reports filed with the Commission. Woodward had signed an agreement to maintain the +confidentiality of information he obtained in the engagement and not to violate federal laws +regarding trading in PFSweb securities while in the possession of material non-public information. +Woodward also agreed to comply with any policies and procedures restricting PFSweb officers, +directors, employees, and contractors from trading in the company’s securities. PFSweb also +warned Woodward that the planned LiveArea sale was material non-public information. For +PFSweb’s 2020 fiscal year, LiveArea generated $85.8 million of PFSweb’s total revenues of +$342.5 million, or 25%. + +2. On May 10, 2021, PFSweb notified its personnel, including Woodward, that their +window for trading in the company’s securities would open from May 10 through June 14, 2021. +Thereafter, their window for buying or selling PFSweb securities would remain closed until +August 2021. Regardless, on June 28 and 29, 2021, after the trading window closed, Woodward +purchased 4,970 shares of PFSweb stock split among four accounts he controlled. At the open of +trading on July 6, 2021, PFSweb issued a press release, publicly announcing that it had agreed to +sell LiveArea to another company for $250 million. + +3. On Friday, July 2, 2021, in advance of the three-day July 4 holiday weekend, +PFSweb’s stock had closed at $7.57, on a volume of 30,662 shares. On Tuesday, July 6, 2021, the +day of the announcement, the stock closed at $10.80 on a volume of 4,072,206 shares. On +Wednesday, July 7, 2021, the stock closed at $11.78, on a volume of 1,777,312 shares. Through +September, the stock generally appreciated in price, trading for as much as $13.48 per share. +Woodward made sales of the stock he purchased while in the possession of material non-public +information, from July 20, 2021 through September 24, 2021, realizing $21,326.36 in profit. + +4. On December 10, 2021, Woodward signed a letter from PFSweb terminating his +retention and acknowledging that he had purchased the stock while in possession of material non- +public information concerning the planned LiveArea sale and while he was restricted from trading +in PFSweb securities. + +E. VIOLATIONS + + Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud in connection +with the purchase or sale of any security. A person violate Section 10(b) of the Exchange Act and +Rule 10b-5 thereunder when that person engages in a purchase or sale of a security: (i) on the basis +of material, nonpublic information; (ii) in breach of a fiduciary duty or a similar duty arising out of a +relationship of trust or confidence; and (iii) with scienter. Dirks v. SEC, 463 U.S. 646, 653-54 +(1983); Chiarella v. United States, 445 U.S. 222, 227-35 (1980). + +F. FINDINGS + +1. Based on the foregoing, the Commission finds that Respondent willfully violated + +4 +Section 10(b) of the Exchange and Rule 10b-5 thereunder. + +2. The disgorgement and prejudgment interest ordered in paragraph IV.N. is consistent +with equitable principles and does not exceed Respondent’s net profits from his violations. +Returning the money to Respondent would be inconsistent with equitable principles. Therefore, in +these circumstances, distributing disgorged funds to the U.S. Treasury is the most equitable +alternative. The disgorgement and prejudgment interest ordered in paragraph IV.N. shall be +transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange +Act. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Woodward’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + +B. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After five years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +E. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are +filed with the Commission, Respondent shall submit a statement prepared by the audit +committee(s) with which Respondent will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +5 + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +F. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor), Respondent must be associated with a public +accounting firm registered with the Public Company Accounting Oversight Board (the “PCAOB”) +and Respondent shall submit the following additional information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +G. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall +provide documentation showing that Respondent’s licensure is dependent upon reinstatement by +the Commission. + +H. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in this +proceeding, or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + + +6 +2. That Respondent undertakes to notify the Commission immediately in writing if +any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a basis +for a forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +7 + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. + +I. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + +J. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +K. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph J, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +L. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph J, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +M. If the Commission declines to reinstate Respondent pursuant to Paragraphs K and +L, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + +N. Respondent shall pay disgorgement of $21,326.36, prejudgment interest of $555.59 +and civil penalties of $21,326.36, plus post order interest, to the Securities and Exchange +Commission Payment shall be made in the following installments: + + +8 +30 days from the entry of the order $4,320.83 + +180 days from the entry of the order $19,443.74 + +360 days from the entry of the order Remaining principal and interest + +Payments shall be applied first to post order interest, which accrues pursuant to SEC Rule of +Practice 600 and/or pursuant to 31 U.S.C. 3717. Prior to making the final payment set forth herein, +Respondent shall contact the staff of the Commission for the amount due. If Respondent fails to +make any payment by the date agreed and/or in the amount agreed according to the schedule set +forth above, all outstanding payments under this Order, including post-order interest, minus any +payments made, shall become due and payable immediately at the discretion of the staff of the +Commission without further application to the Commission. + +O. Payment must be made in one of the following ways: + +1. Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +2. Respondent may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +3. Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission +and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Scott +Woodward as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Eric Werner, Associate Director, +Division of Enforcement, Securities and Exchange Commission, Fort Worth Regional Office, 801 +Cherry Street, Suite 1900, Fort Worth, TX 76102. + +P. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the + +9 +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4363.txt b/raw/aaer/2022/AAER-4363.txt new file mode 100644 index 0000000000000000000000000000000000000000..ca296250be4de56536857ac0b6fe0896b6e2cdd8 --- /dev/null +++ b/raw/aaer/2022/AAER-4363.txt @@ -0,0 +1,268 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96235 / November 4, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4363 / November 4, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21230 + +In the Matter of +SCOTT DAVID MAHONEY, +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Scott +David Mahoney (“Respondent” or “Mahoney”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, and the +findings contained in Section III.4. below, which are admitted, Respondent consents to the entry of + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. +2 +this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), +as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Mahoney, age 47, is a Chartered Financial Analyst (“CFA”). He has been +the CEO and a director on the Board of Directors of Taronis Technologies, Inc., n/k/a BBHC, Inc. +(“Taronis Tech”) since November 2018. Mahoney previously was the CEO and a director on the +Board of Directors of Taronis Fuels, Inc. (“Taronis Fuels”) from its formation until resigning from +Taronis Fuels on April 2, 2021. Mahoney also served as Taronis Tech’s CFO and Secretary from +December 2016 until November 2018, and as Taronis Fuels’ Interim CFO and Treasurer briefly in +December 2020. + + 2. Taronis Tech is a Delaware corporation headquartered in Peoria, Arizona, +with common stock registered with the Commission under Section 12(g) of the Securities +Exchange Act of 1934 (“Exchange Act”). Taronis Tech has no operations and no employees, +except for Mahoney continuing to serve as CEO. Taronis Tech previously produced fuel and +water products. + 3. Taronis Fuels is a Delaware corporation headquartered in Peoria, Arizona, +which previously had common stock registered with the Commission under Section 12(g) of the +Exchange Act until May 23, 2022, when Taronis Fuels filed a Form 15 with the Commission to +terminate its registration. Taronis Fuels produces fuel products. + + 4. On November 2, 2022, a judgment was entered by consent against +Mahoney, permanently enjoining him from future violations of Section 17(a) of the Securities Act +of 1933 (“Securities Act”), Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a- +14, 13b2-1, and 13b2-2 thereunder, and Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”); +from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder; and, pursuant to Section 20(a) of +the Exchange Act, from controlling any person who violates Sections 10(b), 13(a), 13(b)(2)(A), +and13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder, in +the civil action entitled Securities and Exchange Commission v. Scott David Mahoney, et al., Civil +Action Number 8:22-cv-01939-TPB-AAS, in the United States District Court for the Middle +District of Florida. Mahoney also was ordered to pay a $150,000 civil money penalty. + + 5. The Commission’s complaint alleged, among other things, that, at +Mahoney’s direction, Taronis Tech (from January 2019 to March 2020) and Taronis Fuels (from +February 2020 to November 2020) issued materially false and misleading press releases touting +agreements and relationships with customers that did not exist or were exaggerated. Mahoney +knew or was reckless in not knowing that there was no basis to make these statements. In addition, +Taronis Fuels’ financial statements for the second and third quarters of its 2020 fiscal year +3 +improperly recognized revenue as a result of an intentional incorrect application of Generally +Accepted Accounting Principles (“GAAP”). Mahoney knowingly falsified Taronis Fuels’ books +and records by creating fake and backdated orders, which resulted in Taronis Fuels improperly +recognizing this revenue. During that period, Taronis Fuels raised approximately $30 million from +investors, while making representations and warranties that the financial statements in SEC filings +were prepared in accordance with GAAP. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Mahoney’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Mahoney is suspended from appearing or practicing before the Commission as an +accountant. + +B. After five (5) years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are +filed with the Commission, Respondent shall submit a statement prepared by the audit +committee(s) with which Respondent will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; +4 +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee(s); and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (“PCAOB”) and Respondent shall submit the following additional information: + +1. A statement from the public accounting firm (“Firm”) with which Respondent is +associated, stating that the firm is registered with the PCAOB in accordance +with SOX; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in the +Commission’s District Court Action, or any related Commission proceedings, +including any orders requiring payment of disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in writing if +any information submitted in support of the application for reinstatement +5 +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a basis +for a forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice; + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the basis for +the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not been +enjoined from violating the federal securities laws, except for any finding or +injunction concerning the conduct that was the basis for the Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning the +conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or possession, +or any bar thereof to have committed an offense (civil or criminal) +involving moral turpitude, except for any finding concerning the conduct +that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, civilly +or criminally, with having committed an act of moral turpitude, except for +any charge concerning the conduct that was the basis for the Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of the +Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement investigation, +or any pending proceeding of a State Board of Accountancy, except to the +extent that such conduct concerns that which was the basis for the Order. +6. That Respondent has complied with any and all orders, undertakings, or other +remedial, disciplinary, or punitive sanctions resulting from any action taken by +any State Board of Accountancy, or other regulatory body. +6 +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +a. all job titles, responsibilities and role at any employer; + +b. the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent +reported for such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + By the Commission. + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4364.txt b/raw/aaer/2022/AAER-4364.txt new file mode 100644 index 0000000000000000000000000000000000000000..d92330b992a4459cef21817c70498ac0adeb366d --- /dev/null +++ b/raw/aaer/2022/AAER-4364.txt @@ -0,0 +1,135 @@ + + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11133 / November 10, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96299 / November 10, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4364 / November 10, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21239 + + +In the Matter of + +ANDY CHIN FONG CHEN, +CPA + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to Rule +102(e)(3)1 of the Commission’s Rules of Practice against Andy Chin Fong Chen (“Respondent” or +“Chen”). + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + +II. + +The Commission finds that: + +A. RESPONDENT + +1. Chen, age 54, was licensed in the State of Washington as a Certified Public +Accountant in 1990 and the Washington State Board of Accountancy website indicates that he +currently holds a valid CPA-Inactive certificate in that state that expires in 2025. From at least 2009 +to the present , Chen has been a shareholder, board member, and President of Aero Space Po rt +International, Inc. (“ASPI”), a real estate company owned by Chen’s family that also participated in +the United States Citizenship and Immigration Service’s (“USCIS”) Employment-Based Immigration +Fifth Preference Program (“EB-5 Program”). As ASPI’s President, Chen is responsible for all of +ASPI’s strategic decisions, including overall management of the entity, financial decisions, and +specific projects. Chen is the sole signatory on all of ASPI’s bank accounts. From approximately +2011 to 2013, Chen also served as a director for a regional bank. + + + B. CIVIL INJUNCTION + +2. On August 16, 2022 , the U.S. District Court for the Western District of +Washington entered a final judgment against Chen, permanently enjoining him from future +violations, direct or indirect, of Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of +the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder. Securities and Exchange +Commission v. Chen, et al., Civil Action Number 2:17-cv-0045-JLR. + +3. The Commission’s complaint alleged, among other things, that Chen and +ASPI fraudulently raised over $14.5 million from EB-5 Program investors using materially false and +misleading statements that the investors’ funds would be used to develop real property in Grant +County, Washington enabling them to obtain permanent residency in the United States through +USCIS’s EB-5 Program when Chen actually used certain of those funds to, among other things, +engage in personal stock trading, satisfy margin calls, pay ASPI’s operating expenses, make lease +payments on a luxury automobile, and fund other ASPI-related businesses he controlled. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Chen, a CPA, from violating the Federal securities laws within the meaning +of Rule 102(e)(3)(i)(A) of the Commission ’s Rules of Practice. In view of these findings, the +Commission deems it appropriate and in the public interest that Chen be temporarily suspended from +appearing or practicing before the Commission. + + IT IS HEREBY ORDERED that Chen be, and hereby is, temporarily suspended from +appearing or practicing before the Commission. This Order shall be effective upon service on the + 3 +Respondent. + + IT IS FURTHER ORDERED that Chen may within thirty days after service of this Order +file a petition with the Commission to lift the temporary suspension. If the Commission within thirty +days after service of the Order receives no petition, the suspension shall become permanent pursuant +to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the matter +down for hearing at a time and place to be designated by the Commission, or both. If a hearing is +ordered, following the hearing, the Commission may lift the suspension, censure the petitioner, or +disqualify the petitioner from appearing or practicing before the Commission for a period of time, or +permanently, pursuant to Rule 102(e)(3)(iii). + +This Order shall be served forthwith upon Respondent Chen as provided for in the +Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4365.txt b/raw/aaer/2022/AAER-4365.txt new file mode 100644 index 0000000000000000000000000000000000000000..c37b94d98855210d3d53f37de13c9d373059268e --- /dev/null +++ b/raw/aaer/2022/AAER-4365.txt @@ -0,0 +1,51 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96325 / November 16, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4365 / November 16, 2022 +Admin. Proc. File No. 3-21139 +In the Matter of +IRA S. VIENER, CPA +SECOND ORDER REGARDING SERVICE +On September 22, 2022, the Securities and Exchange Commission issued an Order +Instituting Proceedings (“OIP”) against Ira S. Viener, CPA, pursuant to Sections 4C and 21C of +the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice.1 +On November 3, 2022, based on a status report that the Division of Enforcement filed on +October 25, 2022, we concluded that the OIP was served on Viener on October 14, 2022, +because a copy of the OIP had been mailed “to Viener’s counsel at the counsel’s address.”2 +On November 10, 2022, the Division filed a statement explaining that on November 7, +2022, it learned that the counsel was no longer representing Viener. The statement added that +the Division spoke to Viener on November 9, 2022, when Viener agreed to a hearing date after +December 13, 2022;3 that the Division is waiting for Viener to sign a joint statement regarding +the hearing date; and that the Division will file the joint statement after Viener signs it. +Rule 141(a)(2)(i) does not permit service on an individual’s former counsel. +Accordingly, IT IS ORDERED that the Division of Enforcement file a declaration concerning +1 Ira S. Viener, CPA, Exchange Act Release No. 95884, 2022 WL 4445472 (Sept. 22, +2022) +2 Ira S. Viener, CPA, Exchange Act Release No. 96224, 2022 WL 16709978, at *1 & n.4 +(Nov. 3, 2022) (citing Rule of Practice 141(a)(2)(i), 17 C.F.R. § 201.141(a)(2)(i)). +3 See id. at *1 (noting a respondent’s statutory right to a hearing within 60 days of service +of the OIP in a cease-and-desist proceeding unless the respondent agrees to a later hearing date). +2 + +service of the OIP by November 30, 2022, that addresses (i) whether, on October 14, 2022, +Viener’s former counsel was still representing Viener and (ii) if not, whether the Division has +otherwise served the OIP on Viener consistent with Rule of Practice 141(a)(2)(i). The Division +may file the joint statement regarding the hearing date either at the same time or separately. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.4 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +4 Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a redaction and omission of sensitive personal information requirement. Amendments to the +Commission’s Rules of Practice, 85 Fed. Reg. at 86,465–81. \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4366.txt b/raw/aaer/2022/AAER-4366.txt new file mode 100644 index 0000000000000000000000000000000000000000..4028fecaa69c824751ea813365adff83db6032ba --- /dev/null +++ b/raw/aaer/2022/AAER-4366.txt @@ -0,0 +1,857 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96347 / November 17, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4366 / November 17, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21241 + + + +In the Matter of + +Jason Jianxun Tang, CPA, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE +102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER, AND +NOTICE OF HEARING + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted against +Jason Jianxun Tang, CPA (“Tang” or “Respondent”) pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to po ssess +the requisite qualifications to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and +abetted the violation of, any provision of the securities laws or the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. +2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Public Administrative and +Cease-And-Desist Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act +of 1934 and Rule 102(e) of the Commission’s Rules Of Practice, Making Findings, and Imposing +Remedial Sanctions and a Cease-And-Desist Order, and Notice of Hearing (“Order”), as set forth +below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. This matter involves violations of the federal securities laws and improper +professional conduct by Respondent in conducting multi-year audits of two public issuers, +iFresh, Inc. (“iFresh”) and Issuer A (together, the “Reporting Companies”). iFresh retained +Friedman LLP (“Friedman”) to audit its financial statements for the fiscal years ended March 31, +2017 through 2020. Issuer A retained Friedman to audit its financial statements for the years +ended December 31, 2016 through 2020. Tang was the audit engagement partner for the +aforementioned audits. + +2. Respondent failed to comply with the standards of the Public Company +Accounting Oversight Board (“PCAOB”) in conducting audits of the Reporting Companies +because he did not: (1) design and perform procedures adequately designed to be responsive to +assessed risks; (2) perform adequate procedures to identify related party transactions; (3) obtain +sufficient appropriate audit evidence; (4) sufficiently respond to fraud risks; (5) adequately +document procedures performed and significant findings; (6) maintain control over the +confirmation requests and responses in connection with the iFresh audit for fiscal year 2017; and +(7) exercise due professional care and professional skepticism. + +3. Respondent conducted the iFresh and Issuer A audits without including +procedures that were adequately designed to identify related party transactions, and stated the +audits had been conducted in accordance with PCAOB standards, when they had not. As a +result, Respondent caused Friedman’s violations of Section 10A(a)(2) of the Exchange Act and +Rule 2-02(b)(1) of Regulation S-X, and engaged in improper professional conduct within the +meaning of Section 4C of the Exchange Act and under Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice. + + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. +3 + +Respondent + +4. Jason Jianxun Tang, age 51, resides in Durham, North Carolina. He was a +partner at Friedman until September 2022 when it merged with Marcum LLP (“Marcum”). He +has been a Certified Public Accountant (“CPA”) licensed in New Jersey since 2003. + +Relevant Entities and Individuals + +5. Friedman LLP (“Friedman”), a limited liability partnership headquartered in +New York, New York, is a public accounting firm registered with the PCAOB. Friedman +merged with Marcum, a PCAOB-registered public accounting firm, on September 6, 2022. + +6. iFresh, Inc. (“iFresh”) is a Delaware corporation headquartered in Long Island +City, New York. In February 2017, iFresh and its wholly owned subsidiary, E-Compass +Acquisition Corp. (“E-Compass”), a SPAC, merged with NYM Holding, Inc. (“NYM”) through +a reverse merger, and became a public company. iFresh is an Asian/Chinese grocer that operates +wholesale businesses and retail supermarkets across New York, Massachusetts, and Florida. +iFresh’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and is quoted on an unsolicited basis under the ticker symbol “IFMK” on OTC +Link whose parent company is OTC Markets Group Inc. iFresh’s fiscal year ends on March 31, +and it files periodic reports, including Form 10-K, with the Commission pursuant to Section +13(a) of the Exchange Act and related rules thereunder. + +7. Issuer A is a Delaware corporation whose common stock is registered with the +Commission pursuant to Section 12(b) of the Exchange Act. + +8. Long Deng (“Deng”), age 54, is a resident of Roslyn, New York. Deng was the +Chairman of the Board of iFresh from February 2017 until April 2022, when the Delaware +Chancery Court affirmed a shareholder vote to remove him from iFresh’s board of directors. +Deng was also iFresh’s Chief Executive Officer (“CEO”) and Chief Operating Officer (“COO”) +from February 2017 through April 2022. Deng founded NYM in 1995 and was NYM’s CEO, +COO and sole Director during the relevant time period. + +Facts + +2017–2020 iFRESH AUDITS + +Background + +9. Friedman was first engaged to perform an audit for NYM for the fiscal years +ending March 31, 2015 and 2016 in March 2016 (collectively the “2016 audit”). Friedman also +performed audits for iFresh for the fiscal years ending March 31, 2017, 2018, 2019, and 2020, +and issued unqualified audit reports in all of these fiscal years. The audit reports each stated that +4 + +Friedman had conducted its audits in accordance with PCAOB standards. After the review for +the quarter ended June 30, 2020, iFresh dismissed Friedman as its auditor.4 + +10. iFresh and Deng engaged in a substantial number, and a variety of types of, +related party transactions. iFresh filed year-end financial statements for the fiscal years ending +March 31, 2017, 2018, 2019 and 2020 that were materially misstated because they failed to +properly disclose certain material related party transactions. + +11. The NYM and iFresh engagements were assigned to the China Practice Group, +whose clients all have Chinese speaking management, are Chinese or Chinese-American owned, +or have operations in China. Since 2010, Tang had been a partner and co-head of the China +Practice Group at Friedman, until it merged with Marcum in September 2022. Tang was the +engagement partner on the iFresh audit and review engagements from March 2016 through +September 2020. He and members of the engagement teams were fluent in Mandarin and +communicated with Deng in Mandarin. + +Respondent Failed to Conduct the 2017 through 2020 iFresh Audits in Accordance with +PCAOB Standards + +12. Respondent performed inadequate audit procedures with regard to iFresh’s related +party transactions. Friedman did not obtain a sufficient understanding of iFresh’s relationships +and transactions with its related parties as required by PCAOB Auditing Standard 2410, Related +Parties (“AS 2410”). In connection with each of the 2017 through 2020 audits, Friedman +obtained related party lists from iFresh that contained the names of at least 30, and as many as 42 +entities, all of which were owned or controlled by Deng. Respondent reviewed the related party +lists in connection with the audits. However, he did not sufficiently understand how the related +party list was created, or whether the list was complete. + +13. iFresh disclosed in its Form 10-Ks for the 2017 through 2020 fiscal years that its +disclosure controls and procedures were not effective and that it lacked employees with adequate +knowledge of the SEC’s rules and requirements. In the Form 10-K for fiscal year 2018, iFresh +reported that its internal control over financial reporting was not effective, and in the Forms 10-K for +fiscal years 2019 and 2020, it reported material weaknesses related to lacking accounting +personnel with sufficient knowledge of GAAP and SEC reporting experience. Despite these +disclosures, Respondent did not sufficiently understand iFresh’s process for identifying a related +party or accounting for and disclosing relationships and transactions with related parties.5 + +Respondent Failed to Design and Perform Procedures Responsive to Assessed Risks for the +2017 through 2020 Audits. + +14. PCAOB Auditing Standard 2301, The Auditor's Responses to the Risks of +Material Misstatement (“AS 2301”) requires that “the auditor should design and perform audit + +4 iFresh filed a Form 8-K on October 6, 2020 announcing a change in auditor and that there were no +disagreements with Friedman. + +5 See Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures +5 + +procedures in a manner that addresses the assessed risks of material misstatement for each +relevant assertion of each significant account and disclosure” (.08). AS 2301 states that “[f]or +significant risks, the auditor should perform substantive procedures, including tests of details, +that are specifically responsive to the assessed risks” (.11). PCAOB Auditing Standard No. +2110, Identifying and Assessing Risks of Material Misstatement, states that a fraud risk is a +significant risk (.71). + +15. Respondent failed to perform sufficient substantive audit procedures specifically +designed to be responsive to fraud risks. Related party transactions were identified as a fraud +risk for the 2017 through 2020 audits. In addition, accounts receivable and revenue were +identified as significant audit areas and fraud risks for all audits. Due professional care in these +audit areas required Friedman to exercise professional skepticism. PCAOB Auditing Standard No. +2401, Consideration of Fraud in a Financial Statement Audit (.13). + +16. Respondent failed to exercise professional skepticism when reviewing work +papers. First, the work papers that documented the details and testing of accounts receivable and +prepaid expenses and other current assets contained names included on iFresh’s related party +lists. Respondent signed off as having reviewed the accounts receivable work papers in +connection with the 2017 through 2020 audits, and the prepaid expenses and other current assets +work papers for the 2017, 2018, and 2020 audits. Respondent did not identify the names on the +work papers as related parties, so certain related party transactions were not disclosed in the +financial statements. + +17. Second, Respondent failed to recognize red flags that indicated undisclosed +related parties. For example, schedules provided to Friedman by iFresh in connection with the +2018 through 2020 audits included names of entities that had similar names as iFresh +subsidiaries, and transaction descriptions that were inconsistent with iFresh’s business. + +18. Respondent also encountered numerous red flags of undisclosed related party +transactions with Li Ba HVAC & Construction (“Li Ba”). Li Ba was a related party because it +was owned by Deng’s brother.6 In connection with the 2018 audit, Respondent was aware that +Li Ba was owned by Deng’s brother. AS 2410 states the auditor should look to the requirements +of the SEC and to GAAP for the definition of a related party (.01). Accounting Standards +Codification Topic 850, Related Party Disclosures provides that related party transactions +include, among other things, transactions between an entity and its principal owners, +management, or members of their immediate families. ASC 850-10-05-3. Immediate family is +defined as “Family members who might control or influence a principal owner or a member of +management, or who might be controlled or influenced by a principal owner or a member of +management, because of the family relationship.” ASC 850-10-20. + + +6 Li Ba was also a related party because Deng could exercise control by having signature authority over Li Ba’s +bank accounts. Friedman was not aware of Deng’s signature authority. + +6 + +a. Other red flags that indicated undisclosed related party transactions with Li Ba +include7: iFresh’s largest receivable was from Li Ba, with long aging and +little to no collection for the 2017 through 2020 audits (the aging exceeded +iFresh’s bad-debt policy, which required accounts receivable to be written off +after 90 days); + +b. iFresh engaged in significant unusual transactions with Li Ba. Friedman’s +2017 through 2020 audit files documented that iFresh sold commercial +refrigeration equipment to Li Ba, which was outside the normal course of +business for iFresh; + +c. Documents provided to Friedman and Friedman’s workpapers indicated that +Li Ba had the same address as iFresh; and + +d. Li Ba paid a legal settlement in the amount of $652,000 on behalf of iFresh. +Respondent signed off as having reviewed the settlement agreement that was +saved in the 2018 audit file. The disclosure in the financial statements +inaccurately stated a third party paid the settlement on iFresh’s behalf. +Respondent reviewed the settlement agreement but did not question why Li Ba +paid the legal settlement or question if this payment was evidence that Deng +could exercise control over Li Ba. + +19. In addition, iFresh made material undisclosed payments to Li Ba for property and +equipment. + +20. During the fiscal year 2020 second and third quarter reviews, Respondent failed +to identify red flags that indicated transactions with other undisclosed related parties. Friedman +obtained agreements that showed Deng made payments totaling $500,000 to iFresh on behalf of +New York Mart White Plains, Inc. (“White Plains”) to satisfy accounts receivable owed to +iFresh, and another undisclosed related party, Jiutian Music Club (“Jiutian”), made capital +contributions of approximately $558,000 to iFresh on behalf of Deng. White Plains and Jiutian +were related parties because Deng could exercise control by having signature authority over bank +accounts and they are owned by Deng’s brother. Respondent did not sufficiently question why +Deng would personally pay a liability on behalf of a purportedly unrelated party and why a +purportedly unrelated party would make capital contributions on behalf of Deng. + +Respondent Failed to Perform Procedures to Identify Related Party Transactions for the 2017 +through 2020 Audits. + +21. Section 10A(a)(2) of the Exchange Act requires that the audit of the financial +statements of an issuer by a registered public accounting firm shall include procedures designed +to identify related party transactions that are material to the financial statements or otherwise +require disclosure therein. + +7 Appendix A of AS 2410 provides examples of information that could indicate undisclosed related party +transactions. The examples include, extended payment terms, borrowing or lending without fixed repayment terms, +and contracts or agreements representing unusual transactions (.A2). +7 + + +22. The guidance in AS 2410 requires the auditor to perform procedures to test the +accuracy and completeness of related parties and related party transactions identified by the +company, including taking into account information gathered during the audit, which could +include significant unusual transactions (.14). As detailed above, the 2017 through 2020 Li Ba +transactions were material, and Respondent overlooked numerous red flags indicating that there +were undisclosed related party transactions. + +23. AS 2410.15 states, “If the auditor identifies information that indicates that related +parties or relationships or transactions with related parties previously undisclosed to the auditor +might exist, the auditor should perform the procedures necessary to determine whether +previously undisclosed relationships or transactions with related parties, in fact, exist. These +procedures should extend beyond inquiry of management.” As detailed above, Respondent did +not perform sufficient procedures designed to identify related party transactions and failed to +perform procedures when confronted with information that indicated undisclosed related party +transactions. + +Respondent Failed to Obtain Sufficient Appropriate Audit Evidence for the 2017 through +2020 Audits. + +24. PCAOB Auditing Standard 1105, Audit Evidence (“AS 1105”), requires the +auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion” (.04). Friedman issued audit reports in +connection with the 2017 through 2020 audits that contained unqualified opinions, and +Respondent approved the issuances of those audit reports. However, Respondent failed to obtain +sufficient appropriate audit evidence to provide a reasonable basis for the opinions. + +25. For fiscal years 2017 through 2020, iFresh disclosed in the notes to the financial +statements that it had advanced funds to related entities that it intended to acquire (“Target +Entities”). The disclosed amounts due from the Target Entities included balances that were +assigned to the Target Entities from other entities that were owned or controlled by Deng +(“Assignors”). Respondent did not obtain agreements that authorized the transfer from the +Assignors to the Target Entities of all of the liabilities that were reflected in the balances due +from the Target Entities in fiscal years 2017 through 2020. + +26. In fiscal year 2020, iFresh disclosed in the notes to the financial statements a debt +conversion agreement in which iFresh converted $3.5 million in debt owed to Deng to 1,000 +preferred shares of iFresh. Respondent failed to obtain sufficient appropriate audit evidence to +support portions of the debt conversion agreement in connection with the 2020 audit. +Respondent also failed to obtain sufficient evidence regarding the transactions underlying +iFresh’s debts that were assigned by Deng before the debt conversion. + +Respondent Failed to Respond to Fraud Risks for the 2017 through 2020 Audits. + +27. PCAOB Auditing Standard 2401, Consideration of Fraud in a Financial +Statement Audit (“AS 2401”) states that the auditor should design and perform procedures to +obtain an understanding of the business purpose of significant unusual transactions (.66A) and +8 + +“must evaluate whether significant unusual transactions that the auditor has identified have been +properly accounted for and disclosed in the financial statements” (.67A). Significant unusual +transactions are defined as “outside the normal course of business for the company or that appear +to be unusual due to their timing, size, or nature” (.66). + +28. Respondent failed to design and to perform procedures to obtain a sufficient +understanding of the following significant unusual transactions involving undisclosed related +parties: 1) the sale of commercial refrigeration equipment to Li Ba and the resulting large +receivable with long aging and little to no collection for the 2017 through 2020 audits; 2) a legal +settlement paid by Li Ba on behalf of iFresh for the 2018 audit; 3) iFresh and Li Ba extending +loans to each other for the 2019 and 2020 audits; 4) Deng’s payments to iFresh on behalf of +White Plains for the 2020 audit; and 5) Jiutian’s capital contributions to iFresh on behalf of Deng +for the 2020 audit. + +29. Respondent failed to adequately evaluate the business purpose of the above +transactions and whether there were indications of undisclosed related party transactions that +would cause fraudulent financial reporting. Even when Respondent obtained supporting +documentation, as discussed above, he failed to recognize red flags of undisclosed related party +transactions. + +Respondent Failed to Document Procedures Performed and Significant Findings for the 2017 +through 2020 Audits. + +30. AS 1215, Audit Documentation (“AS 1215”), states that “audit documentation +must include information the auditor has identified relating to significant findings or issues that +is inconsistent with or contradicts the auditor’s final conclusions” (.08). Audit documentation is +“the written record of the basis for the auditor's conclusions that provides the support for the +auditor's representations, whether those representations are contained in the auditor’s report or +otherwise. Audit documentation also facilitates the planning, performance, and supervision of +the engagement, and is the basis for the review of the quality of the work because it provides the +reviewer with written documentation of the evidence supporting the auditor’s significant +conclusions” (.02). + +31. In connection with the 2017 through 2020 audits, Respondent failed to document +the Assignors’ assignment of a portion of the advances and receivables due from related parties +to the Target Entities (“Debt Assignments”). More specifically, Friedman’s audit work papers +did not adequately document the existence of the Debt Assignments, nor did Respondent obtain +the underlying agreements. + +32. In connection with the 2018 through 2020 audits, Respondent failed to document +that Li Ba was owned by Deng’s brother. + +9 + +Respondent Failed to Maintain Control over the Confirmation Requests and Responses for the +2017 Audit. + +33. PCAOB Auditing Standard AS 2310, The Confirmation Process (“AS 2310”) +provides guidance about the audit confirmation process. Confirmation is the process of +obtaining and evaluating a direct communication from a third party in response to a request for +information about a particular item affecting financial statement assertions, including +presentation and disclosure; and evaluating the information provided by the third party (AS 2310 +at .04 and .11). Additionally, “The auditor should exercise an appropriate level of professional +skepticism throughout the confirmation process” (.15). An auditor should maintain control over +confirmation requests and responses, which means establishing direct communication between +intended recipient and the auditor to minimize the possibility that the results will be biased +because of interception and alteration (AS 2310 at .28). + +34. In connection with the 2017 audit, Respondent failed to adhere to AS 2310. First, +Respondent failed to ensure the engagement team obtained a confirmation response directly from +Li Ba. Instead, the engagement team accepted an email forwarded from the iFresh Accounting +Manager containing the confirmation response from Li Ba. Second, Respondent failed to +evaluate the information provided on the confirmation with professional skepticism. Li Ba’s +2017 confirmation listed the same address as iFresh, an indication that it may be (and in fact +was) an undisclosed related party. + +Respondent Failed to Exercise Due Professional Care for the 2017 through 2020 Audits. + +35. PCAOB Auditing Standard 1015, Due Professional Care in the Performance of +Work (“AS 1015”), states that auditors are required to exercise due professional care throughout +the audit. AS 1015 states that the “engagement partner should know, at a minimum, the relevant +professional accounting and auditing standards…” (.06). Due professional care requires that the +auditor exercise professional skepticism. Under this standard, “[p]rofessional skepticism is an +attitude that includes a questioning mind and a critical assessment of audit evidence” (.07), and +auditors should “consider the competency and sufficiency of the evidence” (.08) and “neither +assume[] that management is dishonest nor assume[] unquestioned honesty” (.09). + +36. As a result of Respondent’s conduct described in paragraphs 12 through 34 above, +Respondent failed to exercise due professional care and an attitude of professional skepticism as +required by AS 1015. + +2017–2019 ISSUER A AUDITS + +Background + +37. Friedman was first engaged in September 2017 to perform an audit of Issuer A’s +financial statements for the years ending December 31, 2016 and 2017 (collectively the “2017 +audit”). Friedman also performed audits of Issuer A’s financial statements for the years ending +December 31, 2018, 2019, and 2020, and issued unqualified audit reports for each of those years. +10 + +Each audit report stated that Friedman had conducted its audits in accordance with PCAOB +standards. Issuer A dismissed Friedman as its auditor in September 2021.8 + +The Issuer A engagements were assigned to Friedman’s China Practice Group. +Respondent served as the engagement partner for all of the Issuer A’s audit and review +engagements. + +Respondent Failed to Conduct the 2017 through 2019 Issuer A Audits in Accordance with +PCAOB Standards + +Respondent Failed to Obtain Sufficient Appropriate Audit Evidence Relating to the Staff Loan +Program for the 2017 through 2019 Audits (AS 1105). + +38. Prior to going public, Issuer A had a multimillion dollar liability recorded on its +books and records, described by Issuer A’s management as a liability for a “staff loan” program. +In 2017, in preparation for going public, Issuer A removed this liability from its books in a series +of accounting entries which included assigning this liability to an executive of Issuer A, via the +executive’s loan account on Issuer A’s books. + +39. Issuer A reclassified amounts from the executive’s loan account into a note +receivable from a purportedly unrelated party on Issuer A’s books, based on a claim that the note +receivable related to a line of credit provided to that entity. Issuer A amended the note +receivable several times. Issuer A also continued to increase the balance on the note receivable +via a series of transactions in Issuer A’s cash on hand account, including after Issuer A went +public in 2018. As of December 31, 2018, the then-outstanding note receivable totaled +approximately $3.8 million. In 2019, the executive issued a personal guarantee for the +outstanding note receivable, and subsequently purchased the note receivable from Issuer A using +shares of Issuer A. + +40. Respondent was aware of the liability for the staff loan program, the transfer of +the balance to the executive’s loan account, and the removal of the staff loan liability from Issuer +A’s books and records. Respondent was also aware of the line of credit with the unrelated party, +the notes receivable, and the executive’s personal guarantee and purchase of the outstanding +note. + +41. Notwithstanding this knowledge, there is insufficient audit evidence that +Respondent or his staff took adequate steps to: understand the operation of the staff loan program +by Issuer A; evaluate whether it was proper not to disclose it in Issuer A’s financial statements +audited by Friedman; or gather adequate audit evidence to ensure that all transactions were +properly recorded in Issuer A’s books and records. Respondent failed to obtain any formal +documentation evidencing that the executive had agreed to assume the liability for the amounts +relating to the staff loan program. Respondent also failed to ensure the engagement team +performed any procedures to verify that the liability was legally assumed by the executive and +appropriately removed from the books and records of Issuer A. + + +8 Issuer A filed a Form 8-K announcing a change in auditor and that there were no disagreements with Friedman. +11 + +42. In addition, Respondent failed to obtain adequate information to understand the +underlying business purpose for the notes receivable with the purportedly unrelated party. +Respondent also failed to ensure the audit staff gathered appropriate audit evidence to validate +the notes receivable, including failing to vouch the transfer of cash or assets from Issuer A to the +purportedly unrelated party. + +Respondent Failed to Obtain Sufficient Appropriate Audit Evidence, and Failed to Document +Procedures Performed Relating to VIEs for the 2018 and 2019 Audits (AS 1105 and AS 1215). + +43. In 2018 and 2019, Issuer A had transactions with multiple related parties that had +characteristics of variable interest entities (VIEs) but which were not classified as VIEs by Issuer +A and not consolidated into Issuer A’s financial statements and related disclosures. Generally +accepted accounting principles (GAAP) indicate that a VIE is defined as a legal entity subject to +consolidation according to the variable interest entities model. The application of the VIE +guidance should be based on substantive terms, transactions, and arrangements.9 + +44. During the 2018 and 2019 audits, Respondent was aware of transactions with +related parties that had characteristics indicating their potential status as VIEs, including the lack +of adequate equity capital and issues of whether the holders of the equity interests of the +companies had the power to direct the activities of the entity. Notwithstanding this, Respondent +failed to perform and document sufficient procedures to evaluate the VIE status of these related +parties and whether the entities should be consolidated. + +Respondent Failed to Properly Audit Related Party Transactions for the 2017 through 2019 +Audits (AS 2410). + +45. From 2018 to 2019, Issuer A made at least $1,400,000 in payments to a related +party partially owned by one of its executives, pursuant to a service agreement between Issuer A +and the related party. The invoices from the related party to Issuer A lacked detail of the +services provided and instead only contained generic descriptions such as “service fee” or +“professional fee.” + +46. Respondent failed to design and perform sufficient audit procedures to identify +and evaluate these related party transactions during the 2018 and 2019 audits. Specifically, +Respondent failed to ensure the audit staff confirmed the underlying business purpose and +services rendered in connection with these related party payments. Respondent thus failed to +design procedures to identify and obtain an adequate understanding of Issuer A’s relationships +and transactions with its related parties as required by Section 10A(a)(2) of the Exchange Act +and AS 2410. + +47. Issuer A also had numerous transactions with another related party partially +owned by an executive. By December 31, 2017, Issuer A had extended approximately $6 +million to this related party in the form of trade receivables. However, Issuer A did not have a +regular trading relationship with this related party. Eventually, the outstanding receivable +balance was converted into a promissory note between Issuer A and the related party. In 2019, + +9 ASC Topic 810, Consolidation. +12 + +an executive of Issuer A issued a personal guarantee for the note, then later purchased the note +using shares of Issuer A. + +48. Respondent failed to design and to perform sufficient audit procedures to identify +and evaluate these related party transactions during the 2017, 2018, and 2019 audits. +Specifically, Respondent failed to confirm the existence of a trading relationship between Issuer +A and the related party that supported the large outstanding trade receivable balance. +Respondent thus failed to design procedures to identify and obtain an adequate understanding of +Issuer A’s relationships and transactions with its related parties as required by Section 10A(a)(2) +of the Exchange Act and AS 2410. + +Respondent Failed to Obtain Sufficient Appropriate Audit Evidence in Connection with a Sale +of Assets to a Related Party for the 2018 Audit (AS 1105 and AS 2410). + +49. In 2018, Issuer A removed multiple assets and liabilities from its books, in +connection with a sales transaction with a related party connected to one of its executives. + +50. Respondent was aware of this transaction during the 2018 audit, but failed to +obtain and evaluate sufficient audit evidence to confirm whether the transaction was properly +accounted for as a sale under GAAP. Respondent also failed to obtain and evaluate sufficient +audit evidence to confirm whether the corresponding liabilities were properly removed from +Issuer A’s books and records. + +Respondent Failed to Exercise Due Professional Care for the 2017 through 2019 Audits (AS +1015). + +51. As a result of Respondent’s conduct described in paragraphs 38 through 50 above, +Respondent failed to exercise due professional care and an attitude of professional skepticism as +required by AS 1015. + +Violations + +52. Section 10A(a)(2) of the Exchange Act requires each audit to include procedures +designed to identify related party transactions that are material to the financial statements or +otherwise require disclosure therein. No showing of scienter is necessary to establish a violation +of Section 10A of the Exchange Act. As a result of the conduct described above, Respondent +caused Friedman’s violation of Section 10A(a)(2) of the Exchange Act. + +53. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +“whether the audit was made in accordance with generally accepted auditing standards” +(“GAAS”).10 “[R]eferences in Commission rules and staff guidance and in the federal securities +laws to GAAS or to specific standards under GAAS, as they relate to issuers, should be +understood to mean the standards of the PCAOB plus any applicable rules of the Commission.” +See SEC Release No. 34-49708 (May 14, 2004). No showing of scienter is necessary to + +10 In November 2018, Rule 2-02(b)(1) was amended to refer to “applicable professional standards” instead of +GAAS. +13 + +establish a violation of Rule 2-02(b)(1) of Regulation S-X. As a result of the conduct described +above, Respondent caused Friedman’s violation of Rule 2-02(b)(1) of Regulation S-X, because +Friedman stated the audits had been conducted in accordance with PCAOB standards, when the +audits had not been. + +54. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may deny, temporarily or permanently, +the privilege of appearing or practicing before the Commission to any person who is found by +the Commission to have engaged in improper professional conduct. With respect to persons +licensed to practice as accountants, “improper professional conduct” includes either of the +following two types of negligent conduct: (1) a single instance of highly unreasonable conduct +that results in a violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or (2) repeated +instances of unreasonable conduct, each resulting in a violation of applicable professional +standards, that indicate a lack of competence to practice before the Commission. Rule +102(e)(1)(iv)(B). Through the conduct described above, Respondent engaged in “improper +professional conduct” within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +55. In determining to accept the Offer, the Commission considered the Respondent’s +cooperation afforded to the Commission staff. + +IV. + +Pursuant to the Offer, Respondent agrees to additional proceedings in this proceeding to +determine what, if any, civil penalties are appropriate under Section 21C of the Exchange Act. In +connection with such additional proceedings: (a) Respondent agrees that he will be precluded from +arguing that he did not violate the federal securities laws described in this Order; (b) Respondent +agrees that he may not challenge the validity of this Order; (c) solely for the purposes of such +additional proceedings, the findings made in this Order shall be accepted as and deemed true by the +hearing officer; and (d) the hearing officer may determine the issues raised in the additional +proceedings on the basis of affidavits, declarations, excerpts of sworn deposition or investigative +testimony, documentary evidence, and, if the hearing officer determines it necessary, hearing +testimony. + +V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Sections 4C and 21C of the Exchange Act, Respondent shall cease and +desist from committing or causing any violations and any future violations of Section 10A(a)(2) of +the Exchange Act and Rule 2-02(b)(1) of Regulation S-X. + +14 + +B. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + +1. After three years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an +application to the attention of the Office of the Chief Accountant. + +2. In support of any application for reinstatement to appear and practice before +the Commission as a preparer or reviewer, or a person responsible for the +preparation or review, of financial statements of a public company to be filed +with the Commission, other than as a member of an audit committee, as that +term is defined in Section 3(a)(58) of the Exchange Act, Respondent shall +submit a written statement attesting to an undertaking to have Respondent’s +work reviewed by the independent audit committee of any public company for +which Respondent works or in some other manner acceptable to the +Commission, as long as Respondent practices before the Commission in this +capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +3. In support of any application for reinstatement to appear and practice before +the Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Exchange Act, as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial +statements that are filed with the Commission, Respondent shall submit a +statement prepared by the audit committee(s) with which Respondent will be +associated, including the following information: + +a. A summary of the responsibilities and duties of the specific audit +committee(s) with which Respondent will be associated; + +b. A description of Respondent’s role on the specific audit committee(s) +with which Respondent will be associated; + +c. A description of any policies, procedures, or controls designed to +mitigate any potential risk to the Commission by such service; + +d. A description relating to the necessity of Respondent’s service on the +specific audit committee; and + +e. A statement noting whether Respondent will be able to act unilaterally +on behalf of the Audit Committee as a whole. + +4. In support of any application for reinstatement to appear and practice before +the Commission as an independent accountant (auditor) before the +Commission, Respondent must be associated with a public accounting firm +15 + +registered with the PCAOB and Respondent shall submit the following +additional information: + +a. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the +PCAOB in accordance with the Sarbanes-Oxley Act of 2002; + +b. A statement from the Firm with which the Respondent is associated +that the Firm has been inspected by the PCAOB and that the PCAOB +did not identify any criticisms of or potential defects in the Firm’s +quality control system that would indicate that Respondent will not +receive appropriate supervision; and + +c. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to +the date of the Order other than for the conduct that was the basis for +the Order. + +5. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a CPA and +that Respondent has resolved all other disciplinary issues with any applicable +state boards of accountancy. If Respondent is not currently licensed as a +CPA, Respondent shall provide documentation showing that Respondent’s +licensure is dependent upon reinstatement by the Commission. + +6. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +a. That Respondent has complied with the Commission suspension +Order, and with any related orders and undertakings, or any related +Commission proceedings, including any orders requiring payment of +disgorgement or penalties; + +b. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise +changes in any material way while the application is pending; + +c. That Respondent, since the entry of the Order, has not been convicted +of a felony or a misdemeanor involving moral turpitude that would +constitute a basis for a forthwith suspension from appearing or +practicing before the Commission pursuant to Rule 102(e)(2); + +d. That Respondent, since the entry of the Order: + +16 + +1) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +2) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +3) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +4) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +5) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, +or possession, civilly or criminally, with having committed an +act of moral turpitude, except for any charge concerning the +conduct that was the basis for the Order. + +e. That Respondent’s conduct is not at issue in any pending investigation +of the Commission’s Division of Enforcement, the PCAOB’s Division +of Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of +Accountancy, except to the extent that such conduct concerns that +which was the basis for the Order. + +f. That Respondent has complied with any and all orders, undertakings, +or other remedial, disciplinary, or punitive sanctions resulting from +any action taken by any State Board of Accountancy, or other +regulatory body. + +7. Respondent shall also provide a detailed description of: + +a. Respondent’s professional history since the imposition of the Order, +including: + +1) all job titles, responsibilities and role at any employer; +17 + + +2) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + +b. Respondent’s plans for any future appearance or practice before the +Commission. + +8. The Commission may conduct its own investigation to determine if the +foregoing attestations are accurate. + +9. If Respondent provides the documentation and attestations required in this +Order and the Commission (1) discovers no contrary information therein, and +(2) determines that Respondent truthfully and accurately attested to each of +the items required in Respondent’s affidavit, and the Commission discovers +no information, including under Paragraph 8, indicating that Respondent has +violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by +conduct underlying Respondent’s original Rule 102(e) suspension), then, +unless the Commission determines that reinstatement would not be in the +public interest, the Commission shall reinstate the respondent for cause +shown. + +10. If Respondent is not able to provide the documentation and truthful and +accurate attestations required in this Order or if the Commission has +discovered contrary information, including under Paragraph 8, the burden +shall be on the Respondent to provide an explanation as to the facts and +circumstances pertaining to the matter setting forth why Respondent believes +cause for reinstatement nonetheless exists and reinstatement would not be +contrary to the public interest. The Commission may then, in its discretion, +reinstate the Respondent for cause shown. + +11. If the Commission declines to reinstate Respondent pursuant to Paragraphs 9 +and 10, it may, at Respondent’s request, hold a hearing to determine whether +cause has been shown to permit Respondent to resume appearing and +practicing before the Commission as an accountant. + +VI. + +IT IS ORDERED that a public hearing for purposes of taking evidence on the questions +set forth in Section IV hereof shall be convened at a time and place to be fixed and before an +Administrative Law Judge to be designated by further order as provided by Rule 110 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.110. + +If Respondent fails to appear at a hearing after being duly notified, the Respondent may +be deemed in default and the proceedings may be determined against him upon consideration of +18 + +this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), +220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), +201.220(f), 201.221(f) and 201.310. + +IT IS FURTHER ORDERED that, pursuant to Rule 360(a)(2) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.360(a)(2), the Administrative Law Judge shall issue an initial +decision no later than 75 days from the occurrence of one of the following events: (A) The +completion of post-hearing briefing in a proceeding where the hearing has been completed; (B) +Where the hearing officer has determined that no hearing is necessary, upon completion of +briefing on a motion pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.250; or (C) The determination by the hearing officer that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155 and no hearing is +necessary. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, +17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to +service of paper copies, service to the Division of Enforcement of all opinions, orders, and +decisions described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), +17 C.F.R. § 201.150(a), in these proceedings shall be by email to the attorneys who enter an +appearance on behalf of the Division, and not by paper service. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, except +as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule +making” within the meaning of Section 551 of the Administrative Procedure Act, it is not +deemed subject to the provisions of Section 553 delaying the effective date of any final +Commission action. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4369.pdf b/raw/aaer/2023/AAER-4369.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d9b389da26c2eb94023979880ac343164b6829c2 --- /dev/null +++ b/raw/aaer/2023/AAER-4369.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:00a03449c8616e8ead3462075bfc983e649bc65537bf4564fe6eb27d8eda539d +size 222652 diff --git a/raw/aaer/2023/AAER-4370.pdf b/raw/aaer/2023/AAER-4370.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d8d669c8e3da8e27a9a8434e518240ffd04cf3ac --- /dev/null +++ b/raw/aaer/2023/AAER-4370.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1dd22562aa7dff3fc7a68e4eeea29f720f788119ef7255cedb603b7287baf213 +size 229734 diff --git a/raw/aaer/2023/AAER-4372.txt b/raw/aaer/2023/AAER-4372.txt new file mode 100644 index 0000000000000000000000000000000000000000..9d4008679e8b72d16efa9e48bff43b348cc93f83 --- /dev/null +++ b/raw/aaer/2023/AAER-4372.txt @@ -0,0 +1,41 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96771 / January 30, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4372 / January 30, 2023 + +Admin. Proc. File No. 3-18292 + + +In the Matter of + +GREGORY A. WAHL, CPA, MICHAEL +DEUTCHMAN, CPA, and GEORGIA CHUNG, CPA + + + + + + + +ORDER EXTENDING TIME TO ISSUE DECISION + + The Commission has determined, in its discretion, that it is appropriate to extend by 90 +days the period within which the decision in this matter may be issued. Accordingly, IT IS +ORDERED that such period be, and hereby is, extended to May 1, 2023.1 + + By the Commission. + + + + +Vanessa A. Countryman +Secretary + + +1 April 30, 2023 is a Sunday. \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4374.pdf b/raw/aaer/2023/AAER-4374.pdf new file mode 100644 index 0000000000000000000000000000000000000000..10ecfe09011d5d99ab862cccc81867bef6f65515 --- /dev/null +++ b/raw/aaer/2023/AAER-4374.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ca813777471dd755e31afc8e75d1a7abfeb4a908ae2e65d579deb53691f368cc +size 285394 diff --git a/raw/aaer/2023/AAER-4374.txt b/raw/aaer/2023/AAER-4374.txt new file mode 100644 index 0000000000000000000000000000000000000000..36d6d9851b997cfd1e33c7850284df1ceb44c3e3 --- /dev/null +++ b/raw/aaer/2023/AAER-4374.txt @@ -0,0 +1,516 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96852 / February 8, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4374 / February 8, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21298 + + +In the Matter of + +Jia Roger Qian Wang, +CPA and +Wang Certified Public +Accountant, P.C., + +Respondents. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE AND NOTICE OF +HEARING + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate +and in the public interest that public administrative and cease-and-desist proceedings be, +and hereby are, instituted pursuant to Sections 4C and 21C of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice +against Jia Roger Qian Wang (“R. Wang”) and Wang Certified Public Accountant, P.C., +(“Wang CPA”) (collectively, “Respondents”). + + 2 +II. + +After an investigation, the Division of Enforcement alleges that: + + A. RESPONDENTS + + 1. Respondent R. Wang, age 47, resides in Queens, New York, and is a +licensed Certified Public Accountant (“CPA”) in New York State. R. Wang has no +disciplinary history and is the sole owner and proprietor of Wang CPA. + + 2. Respondent Wang CPA, a New York professional corporation, is an +accounting firm based in Queens, New York. Wang CPA registered with the Public +Company Accounting Oversight Board (“PCAOB”) on June 17, 2016. Wang CPA +performed audits and interim reviews of the financial statements for Future FinTech Group +Inc. (“FTFT” or the “company”), which filed periodic reports with the Commission pursuant +to Section 13(a) of the Exchange Act. R. Wang voluntarily withdrew Wang CPA’s +registration with the PCAOB. On September 1, 2020, the PCAOB accepted Wang CPA’s +application to withdraw its registration. + + B. OTHER RELEVANT ENTITIES + + 1. Future FinTech Group Inc., is a Florida corporation (formerly doing +business as SkyPeople Fruit Juice, Inc.) that engaged in the production and sale of fruit +juice, purees, and concentrates, with operations in the People’s Republic of China and +headquartered in China from 2016 through 2018. In 2018 FTFT changed its business model +to include cryptocurrency and an e-commerce platform. FTFT is a public issuer whose +ordinary shares are registered with the Commission pursuant to Exchange Act Section +12(b). FTFT’s shares are traded on the NASDAQ under the symbol FTFT. Presently their +principal executive offices are in New York. + +C. SUMMARY OF WANG CPA AND R. WANG’S INSUFFICIENT +AUDITS + + 1. At the time of its application for registration with the PCAOB in +2016, neither R. Wang nor Wang CPA had conducted or played a substantial role in an +audit of an issuer. Despite having inadequate experience auditing the financial statements +of public companies, Respondents accepted the engagement to audit the financial +statements of FTFT for its fiscal year ended December 31, 2015, for which it issued an +audit report containing and unqualified opinion dated November 5, 2016. During its years +auditing FTFT, R. Wang relied heavily on contract auditors that he retained in China to +assist him. + + 2. From fiscal year 2016 through 2018 (the “relevant period”), FTFT +experienced a series of setbacks that resulted in a continuous decline in its core business. +As a result, certain assets experienced various triggering events throughout the relevant +period that required FTFT to test those assets for recoverability and record impairment + 3 +losses in the event an asset’s carrying value exceeded its fair value in accordance with ASC +Topic 360. + + 3. Respondents’ audits were deficient in multiple ways. First, there is +no evidence that assets subject to the impairment were meaningfully considered in the +planning or risk assessment stages of any of the audits despite multiple disclosures +elsewhere in the filings alerting Respondents to the existence of various triggering events. +There is insufficient evidence that Respondents evaluated the economic conditions that +gave rise to potential triggering events related to certain assets. There is no evidence +Respondents performed procedures related to the measurement of the recoverability of +certain assets. As a result, Respondents failed to obtain sufficient appropriate audit +evidence to support the carrying value of numerous FTFT assets. + + 4. During the relevant period, Respondents failed to prepare audit +documentation in sufficient detail to provide a clear understanding of the work performed +and the conclusions reached. Finally, Respondents failed to evaluate the results of the audit +procedures performed as evidenced by clear inconsistencies and facial errors present in +financial statements and accompanying footnotes in multiple periods. Respondents’ +numerous audit failures and lack of professional skepticism demonstrate a lack of due +professional care that resulted in the violation of PCAOB Standards and Regulation S-X +and caused violations of Exchange Act Section 13(a), and Exchange Act Rule 13a-1 +thereunder. + +D. FACTS + +1. For each FTFT audit for fiscal years 2016, 2017 and 2018, Wang +CPA issued a report representing that the audit was conducted in accordance with PCAOB +standards, and each report was filed by FTFT with its 10-K for each year. + + Lack of Training and Proficiency + +2. PCAOB Standards require that the audit be performed by “a person +or persons having adequate technical training and proficiency as an auditor.” AS 1010.01. +Respondents had inadequate experience in auditing issuers and took no steps to obtain the +knowledge or expertise to attain the necessary proficiency. Respondents had a professional +obligation to acquire the necessary knowledge and skills, suggest someone else qualified to +perform the work, or decline the engagement. + + Lack of Planning and Risk Assessment Procedures + +3. PCAOB Standards require that the auditor properly plan the audit. +AS 2101.04. Planning requires the establishment of an overall audit strategy that includes +an audit plan, which includes risk assessment procedures and planned responses to the risks +of material misstatement. AS 2101.05. Respondents’ planning activities failed to develop +an appropriate strategy to plan for or otherwise assess the risk of misstatement related to +multiple assets subject to impairment that represented between 47% of FTFT’s total assets + 4 +for fiscal year 2017 and 283% of FTFT’s total assets for fiscal year 2018. Due to +Respondents’ failures to adequately plan audit procedures over the relevant period, +Respondents similarly failed to identify and appropriately assess the risks of material +misstatement. AS 2110.03. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +4. PCAOB Standards require an auditor to plan and perform audit +procedures to obtain sufficient appropriate audit evidence to support the opinion expressed +in the auditor’s report. AS 1105.03. If audit evidence obtained from one source is +inconsistent with that obtained from another, or if the auditor has doubts about the +reliability of information to be used as audit evidence, the auditor should perform the audit +procedures necessary to resolve the matter and should determine the effect, if any, on other +aspects of the audit. AS 1105.29. + +5. Per FASB ASC 360-10, Accounting for the Impairment or Disposal +of Long-Lived Assets, long-lived assets such as property, plant and equipment are +reviewed for impairment whenever events or changes in circumstances indicate that the +carrying value of an asset may not be recoverable. It is reasonably possible that these +assets could become impaired as a result of technological or other industrial changes. +Under GAAP, FTFT was required to perform such a “recoverability test” on each asset +when there was an indicator of impairment. If the carrying value is not recoverable, GAAP +requires that an impairment loss be recorded measured as the amount by which the carrying +amount of the assets exceeds the fair value of the assets. + +6. Throughout the relevant period, FTFT experienced various events or +changes in circumstances that indicated the carrying amounts of its property, plant, and +equipment may not have been recoverable. In addition to observable evidence available to +R. Wang and his firm during the course of the audits, FTFT itself disclosed in its periodic +filings that various of its fruit juice related businesses were experiencing significant adverse +changes in the business climate, including limited or no production and sustained operating +losses that would affect certain property, plant and equipment. Moreover, over the course +of the relevant period, FTFT disclosed the impairment of certain assets that resulted in the +partial write down of assets to purported recoverable values. However, R. Wang and his +firm repeatedly failed to perform even basic procedures related to management’s assertion +of the appropriate carrying value of its assets. Their audit documentation lacked +documentation of sufficient procedures or analysis related to FTFT’s impairment testing +and R. Wang offered no persuasive evidence of meaningful procedures performed to test +management’s assertions about the carrying value of the assets presented in FTFT’s +financial statements. + +7. The following examples of this are seen in the following operating +subsidiaries of FTFT: + +a. Huludao Wonder + + 5 + i. In FTFT’s Form 10-K for fiscal year ended December 31, 2016, the +company disclosed that its subsidiary, Huludao Wonder (“Huludao”), which produced +concentrated apple juice, was being wound down after years of operating losses. The +disclosure suggested that equipment would be transferred to another subsidiary, that land +and facilities would be sold upon favorable circumstances, and that the book value of the +subsidiary’s land usage rights and building was “lower than its fair market value, less the +cost to sell.” Similar disclosures were made in fiscal years 2017 and 2018, and the +company reported fixed asset impairment losses of $2.4 million in 2016, and $11.3 million +in 2017. However, Respondents failed to perform procedures to test the measurement of +the impairment or corroborate FTFT’s assertions related to the carrying value subsequent to +the recognition of the impairment loss. + + ii. For example, while Respondent’s audit documentation contain no +reference or analysis related to the recognized impairment loss, FTFT’s board of director +minutes for the fiscal year 2016 document a decision to fully impair all Huludao +equipment, in conflict with the disclosure in its form 10-K filing. Meanwhile, Respondents +performed no meaningful procedures with respect to the carrying value of the company’s +land and real property. There is no credible audit documentation related to the carrying +value of the land and real property. More significantly, the land and real property were +used by Huladao as collateral for a loan on which Huladao had defaulted. Despite +disclosure of the litigation involving the default in September 2016, Respondents failed to +assess the impact of that litigation on the rights and obligations related to the assets. + + b. Suizhong Project + + i. This project involved construction of facilities to support FTFT’s +fruit juice business. Under the ASC 360-10-35, an impairment model requires that +reporting entities monitor for events or changes in circumstances indicating that the +carrying value of an asset, or an asset grouping, may not be recoverable. Examples include +a significant decrease in the market price of the asset, a significant adverse change to the +extent or manner in which as asset is being used. + + ii. Respondents were required to test and audit FTFT’s recoverability +analysis which would have included a comparison of the carrying value of the asset or asset +group to the sum of the undiscounted cash flows expected to result from the use and +eventual disposition of the asset. The asset or asset group is considered to not be +recoverable if its carrying value exceeds the sum of its undiscounted cash flows. While +FTFT reported assets including an office building, dormitory, refrigeration storage facility, +and warehouse, the company disclosed in their 10-K for the fiscal year 2015 that work on +the project had been suspended because of heavy competition in the fruit juice business. In +the 10-K for fiscal year 2016, the company’s disclosures indicate that the situation had not +changed. Nonetheless, despite these significant adverse changes to the business climate +and a lack of any operating cash flow over multiple years, FTFT failed to perform a +recoverability analysis and failed to record the appropriate impairment losses in 2016. + + 6 + iii. In fiscal year 2017, FTFT recorded impairment losses of $25.06 +million, equaling their construction costs and nearly their entire investment. + + iv. However, Respondents’ audit documentation for the fiscal year +2016 audit do not contain any analysis with respect to potential impairment of the related +assets. + +c. Guo Wei Mei + + i. Shaanxi Guo Wei Mei Kiwi Deep Processing Co., Ltd. (“Guo Wei +Mei”), a subsidiary of another subsidiary of the company called Hede Jiachaan Xian was +supposed to produce kiwi fruit juice, puree, and cider beverages. Since its establishment in +2013, it had not become operable and FTFT disclosed in its fiscal years 2015 and 2016 10- +Ks that it projected completing construction in the second quarter of 2017. However, the +fiscal year 2017 10-K disclosed that the Chinese government had recently tightened +environmental regulations, that the company was in the process of adapting to the new +standards, that the project had been delayed and construction stopped in early 2017, and +most importantly: “Since the [c]ompany’s current cash cannot support the future input of +this project and there is no forecasted cash flow from this project, the [c]ompany recorded +an impairment cost of $30.26 million with respect to construction in progress and fixed +assets of this project.” + + ii. For fiscal year 2018, FTFT inconsistently disclosed that it recorded +an impairment loss of $25.19 million in the financial footnotes and $45 million in the +MD&A of the 2018 10-K. In addition to the inconsistency of the disclosure, the +disclosures contained no additional relevant facts as to why the impairment was not +recorded earlier in fiscal 2017 nor justification for taking the impairment loss in fiscal +2018. Respondents’ audit documentation contains no explanation or analysis of the +recorded impairment loss or the appropriate timing of the recognition of the loss. + +d. Yingkou + + i. In the fiscal year 2015 10-K that FTFT filed in November 2016, +FTFT disclosed that a concentrated apple juice business operating in a subsidiary called +Yingkou had no production activity, had not operated in the past two years, and was +recognizing a $2.38 million impairment loss with respect to its production equipment. +Notably the MD&A sections of the respective filings contained inconsistencies. In its 10-K +for fiscal year 2016, the company disclosed that it had recognized a $2.1 million +impairment loss in 2016 with respect to the concentrated fruit juice equipment. However, +in its 10-K for the fiscal year 2017, FTFT’s filing disclosed that it recognized an +impairment loss of $2.1 million in 2017 and $0 in 2016. And finally, in its 10-K for fiscal +year 2018, it disclosed that it had recorded an impairment loss of $4.36 million for 2018. + + ii. Contrary to these inconsistent disclosures, FTFT actually did not +record any impairment losses in 2016 and 2017, but did recognize impairment of the +remaining value of the asset in 2018. Again, Respondents’ audit documentation for fiscal + 7 +years 2016 and 2017 does not contain any impairment analysis related to the recoverability +of Yingkou’s real property, which had been idle for years. And once again, Respondents +failed to recognize the inconsistencies and errors in FTFT’s explanations across its 10-Ks. + +In sum, Wang CPA and R. Wang failed to perform sufficient audit procedures +related to the recognition and measurement of impairment of multiple assets. Respondents’ +failure to obtain sufficient appropriate audit evidence in these areas resulted in a lack of +support for the audit opinions contained in FTFT’s 2016, 2017, and 2018 Forms 10-K. + + Failure to Prepare Audit Documentation in Sufficient Detail + +8. PCAOB Auditing Standard No. 1215, Audit Documentation, +requires that the auditor must document the procedures performed, evidence obtained, and +conclusions reached with respect to relevant financial statement assertions. AS 1215.6 also +requires that audit documentation must contain sufficient information to enable an +experienced auditor, having no previous connection with the engagement: (a) to understand +the nature, timing, extent, and results of the procedures performed, evidence obtained, and +conclusions reached, and (b) to determine who performed the work and the date such work +was completed as well as the person who reviewed the work and the date of such review. + +9. As described above, Respondents’ audit documentation does not +contain sufficiently detailed information about the procedures performed, evidence +obtained, or conclusions reached with respect to the carrying values of FTFT’s various +fruit-related businesses. + +Failure to Reconcile Financial Statements with Underlying Accounting +Records and with Other Information in Documents Containing Audited +Financial Statements + +10. PCAOB Auditing Standard No. 2810, Evaluating Audit +Results, establishes requirements regarding evaluating the presentation of the financial +statements, including the disclosures. AS 2810.02 states that the objective of the auditor is +to evaluate the results of the audit to determine whether the audit evidence obtained is +sufficient and appropriate to support the opinion to be expressed in the auditor’s report. AS +2810.31 also requires that the auditor evaluate the presentation of financial statements, and +evaluate whether the financial statements contain information essential for a fair +presentation of the financial statements in conformity with the applicable financial +reporting framework. Evaluation of the information disclosed in financial statements +includes consideration of the form, arrangement, and content of the financial statements +(including accompanying notes), encompassing matters such as terminology used, amount +of detail given, classification of items in the statements, and bases of amounts set forth. + +11. PCAOB Audit Standard 2710, Other Information in Documents +Containing Audited Financial Statements, guides an auditor’s conduct in reviewing +information in documents such as annual reports filed with the Securities and Exchange +Commission. AS 2710.04 provides that an auditor should read other information in such + 8 +filings that may be relevant to the audit; consider whether such information or the manner +of its presentation is materially inconsistent with information, or the manner of its +presentation, in the financial statements; and resolve any material inconsistency. + +12. For the audits of FTFT’s fiscal years 2016 through 2018, +Respondents did not reconcile the underlying accounting records to the issuer’s financial +statements or footnotes concerning impairment. Moreover, Respondents did not reconcile +the financial statement footnotes to supporting documentation. Respondents failed to +address several significant inconsistencies contained in FTFT’s filings. The fiscal year +2017 10-K describes the impairment for Huludao as either $11.76 million (p.40), $11.34 +million (p.50) or $11.33 million (F-7). Similarly the fiscal year 2018 10-K describes the +impairment for Huludao as $1.07 million (p.59) or $10.78 million in fixed assets and $2.2 +million in inventory (p.62). The fiscal year 2018 10-K also discloses that impairments in +both 2017 and 2018 were taken for “concentrated fruit juice production equipment” (p.59), +while FTFT did not actually record any impairment losses in 2018. Respondents simply +did not review the relevant Forms10-Ks with the requisite professional skepticism to catch +and correct these mistakes and inconsistencies. These are some of the inconsistencies +throughout FTFT’s filings. + + Failure to Exercise Due Professional Care + +13. PCAOB AS No. 1015 requires an auditor to exercise due +professional care in the planning and performance of the audit. AS 1015.7 requires the +auditor to exercise professional skepticism, an attitude that includes a questioning mind and +a critical assessment of audit evidence. + +14. Wang CPA and R. Wang did not possess the degree of skill +commonly possessed by other auditors to complete procedures to test the carrying value of +FTFT’s fruit-related assets and the procedures Respondents did perform were not done +with the reasonable care and diligence necessary to meet the standard of due care required +by AS 1015. + +E. VIOLATIONS + +1. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to +state “the applicable professional standards under which the audit was conducted.” 17 CFR +210.2-02(b)(1). For audits of fiscal years 2016 and 2017, Rule 2-02(b)(1) similarly +mandated that an accountant’s report “state whether the audit was made in accordance with +accepted auditing standards….” An auditor violates Regulation S-X Rule 2-02(b)(1) if it +issues a report stating it has conducted its audit in accordance with the PCAOB standards +when it has not. Wang CPA violated Rule 2-02(b)(1) of Regulation S-X by issuing audit +reports for FTFT fiscal years 2016, 2017 and 2018 audits and stating that it had conducted +the audits in accordance with PCAOB standards when it had not. R. Wang was the sole +proprietor of Wang CPA and approved the signing of the firm’s name to the audit report +and their issuance for inclusion in the filings with the Commission therefore R. Wang +caused Wang CPA’s violations of Rule 2-02(b)(1) of Regulation S-X. + 9 + +2. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +requires issuers with equity securities registered under Section 12 of the Exchange Act to +file annual reports with the Commission that do not contain materially inaccurate or +misleading information. FTFT filed annual reports on Form 10-K for fiscal years 2016, +2017 and 2018, all of which contained Wang CPA’s materially inaccurate statements that +FTFT’s financial statements had been audited in accordance with PCAOB standards. As a +result, R. Wang and Wang CPA caused FTFT’s violations of Section 13(a) of the +Exchange Act and Rule 13a-1 thereunder. + +3. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice provide, in part, that the Commission may censure a +person or deny, temporarily or permanently, the privilege of appearing or practicing before +the Commission to any person who is found by the Commission to have engaged in +improper professional conduct. With respect to persons licensed to practice as accountants, +“improper professional conduct” includes “[r]epeated instances of unreasonable conduct, +each resulting in violations of applicable professional standards, that indicate a lack of +competence to practice before the Commission.” See Rule 102(e)(1)(iv)(B)(2). By failing +to comply with PCAOB standards in the audits of FTFT, as described above, R. Wang and +Wang CPA engaged in improper professional conduct as defined in Rule 102(e)(1)(iv). + +III. + +In view of the allegations made by the Division of Enforcement, the Commission +deems it necessary and appropriate in the public interest that public administrative and +cease-and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford R. Wang and Wang CPA an opportunity to establish any +defenses to such allegations; + +B. What, if any, remedial action is appropriate in the public interest against +Respondents pursuant to Section 4C(a) of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice; + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondents should +be ordered to cease and desist from committing or causing violations of and any future +violations of Regulation S-X Rule 2-02(b)(1); Section 13(a) of the Exchange Act, and +Exchange Act Rule 13a-1 thereunder; whether Respondents should be ordered to pay a civil +penalty pursuant to Section 21B(a) of the Exchange Act, and whether Respondents should +be ordered to pay disgorgement pursuant to Sections 21B(e) and 21C(e) of the Exchange +Act. + + +IV. + + 10 +IT IS ORDERED that a public hearing before the Commission for the purposes of +taking evidence on the questions set forth in Section III hereof shall be convened not earlier +than 30 days and not later than 60 days from service of this Order at a time and place to be +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules +of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the +allegations contained in this Order within twenty (20) days after service of this Order, as +provided by Rule 220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondents +shall conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The +parties may meet in person or participate by telephone or other remote means; following +the conference, they shall file a statement with the Office of the Secretary advising the +Commission of any agreements reached at said conference. If a prehearing conference was +not held, a statement shall be filed with the Office of the Secretary advising the +Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fails to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the +proceedings may be determined against the Respondent upon consideration of this Order, +the allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), +221(f) and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), +201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondents by any means permitted by +the Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to service of paper copies, service to the Division of Enforcement of all +opinions, orders, and decisions described in Rule 141, 17 C.F.R. § 201.141, and all papers +described in Rule 150(a), 17 C.F.R. § 201.150(a), in these proceedings shall be by email to +the attorneys who enter an appearance on behalf of the Division, and not by paper +service. + +Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is +set before the Commission, all papers (including those listed in the following paragraph) +shall be filed electronically in administrative proceedings using the Commission’s +Electronic Filings in Administrative Proceedings (eFAP) system access through the +Commission’s website, www.sec.gov, at http://www.sec.gov/eFAP. Respondents also +must serve and accept service of documents electronically. All motions, objections, or +applications will be decided by the Commission. + 11 + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to filing with or disposition by a hearing officer, all filings, including those +under Rules 210, 221, 222, 230, 231, 232, 233, and 250 of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, and 250, shall be directed to +and, as appropriate, decided by the Commission. This proceeding shall be deemed to be +one under the 120-day timeframe specified in Rule of Practice 360(a)(2)(i), 17 C.F.R. § +201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and 250, 17 C.F.R. §§ +201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that the Commission shall issue a decision on the basis of +the record in this proceeding, which shall consist of the items listed at Rule 350(a) of the +Commission’s Rules of Practice, 17 C.F.R. § 201.350(a), and any other document or item +filed with the Office of the Secretary and accepted into the record by the Commission. The +provisions of Rule 351 of the Commission’s Rules of Practice, 17 C.F.R. § 201.351, +relating to preparation and certification of a record index by the Office of the Secretary or +the hearing officer are not applicable to this proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public +hearing has been completed; (B) The completion of briefing on a motion for a ruling on the +pleadings or a motion for summary disposition pursuant to Rule 250 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.250, where the Commission has determined that no +public hearing is necessary; or (C) The determination that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155, and no public +hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, +except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is +not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it +is not deemed subject to the provisions of Section 553 delaying the effective date of any +final Commission action. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4375.pdf b/raw/aaer/2023/AAER-4375.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9cb12385c3812b3078d9bce2fef0d8cf9700b368 --- /dev/null +++ b/raw/aaer/2023/AAER-4375.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:59cbe77039febf58f143eece5021d21da42d5ec0da9dcef7cc6a76df5dda1d57 +size 233068 diff --git a/raw/aaer/2023/AAER-4378.txt b/raw/aaer/2023/AAER-4378.txt new file mode 100644 index 0000000000000000000000000000000000000000..31fccaa9c770623df964421c47bf58d99972c08d --- /dev/null +++ b/raw/aaer/2023/AAER-4378.txt @@ -0,0 +1,354 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96961 / February 22, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4378 / February 22, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21310 + + +In the Matter of + +Alan A. Tucker, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 15(b) AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Alan A. Tucker (“Tucker” or “Respondent”) pursuant to Sections 15(b) and 21C +of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(3)(i) of the +Commission’s Rules of Practice.1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . found by the Commission in any administrative proceeding to which he or she +is a party to have violated (unless the violation was found not to have been willful) or aided and +abetted the violation of any provision of the Federal securities laws or of the rules and +regulations thereunder. + + +2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondent consents to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to +Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds2 that: + +Summary + + This matter involves violations of the federal securities laws by Tucker, acting on behalf of +Enviro Impact Resources, Inc., then known as Industry Source Consulting, Inc. (“INSO” or the +“Company”). INSO is a public company that posts annual and quarterly disclosure statements +(“Reports”) through a publicly-available website maintained by OTC Markets Group, Inc. (“OTC +Markets”). In early 2021, Tucker acquired a controlling shareholder interest in INSO, and became +INSO’s sole officer and director. Under Tucker’s direction, INSO posted Reports on the OTC +Markets website, which Reports included INSO financial statements that Tucker represented he +prepared. Tucker signed and certified the Reports. Under Tucker’s direction, INSO posted opinion +letters relating to the Reports signed by two attorneys (the “Attorney Letters”). Tucker knew, or +was severely reckless in not knowing, that the Reports and Attorney Letters posted under his +direction contained materially false and misleading statements. + +Respondent + +1. Tucker, age 59, resides in Thomasville, Georgia. In February 2021, Tucker entered +into a stock purchase agreement with INSO’s sole officer, director, and controlling shareholder +(the “Seller”), pursuant to which Tucker purchased from the Seller one share of INSO Series A +preferred stock, constituting a controlling shareholder interest in INSO. However, the Seller +continued to retain substantial shares of other INSO stock. Effective on or about March 1, 2021, +the Seller resigned as INSO’s sole officer and director, and Tucker became INSO’s sole officer and +director. Approximately one year later, Tucker agreed to sell the Series A preferred stock back to +the Seller. Tucker resigned as sole officer and director of INSO effective on or about March 30, +2022, and Tucker completed the transfer of the Series A preferred stock back to the Seller. While + +2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + +3 +serving as sole officer and director of INSO, Tucker participated in an offering of INSO stock, +which is a penny stock. Tucker is not, and had not been, licensed as a Certified Public Accountant. + +Other Relevant Entities + + 2. INSO, a microcap public company based in Georgia, was incorporated in Wyoming +on June 12, 2010, and has had a lengthy corporate history with multiple former names. INSO also +claims to have had several start-up businesses, including digital and e-commerce and legal +cannabis consulting. INSO has issued and outstanding shares of common stock and preferred +stock. INSO’s common stock is quoted under the symbol “INSO” on OTC Link, whose parent +company is OTC Markets. During the relevant period, INSO’s common stock typically traded in +the range of one cent per share, and constituted “penny stock” as defined in Section 3(a)(51) of the +Exchange Act and Rule 3a51-1 thereunder. + +Background + +3. In February 2021, Tucker acquired a controlling shareholder interest in INSO from +the Seller. Effective on or about March 1, 2021, Tucker became INSO’s sole officer and director. +On or about March 24, 2022, Tucker and the Seller entered into a Stock Purchase Agreement, +pursuant to which Tucker agreed to sell his controlling shareholder interest in INSO back to the +Seller. On or about March 30, 2022, Tucker resigned as INSO’s sole officer and director. On +April 27, 2022, INSO posted on the OTC Markets website a Supplemental Disclosure for Change +of Control Events dated April 5, 2022, signed by the Seller as INSO’s Chairman/CEO, reporting +that on April 4, 2022, Tucker sold his controlling shareholder interest in INSO back to the Seller. + +Under Tucker’s Direction, INSO Posted False and Misleading Reports + +4. During the period that Tucker served as INSO’s sole officer and director, and under +Tucker’s direction, INSO posted on the OTC Markets website the following eight Reports signed +and certified by Tucker: an annual Report for the period ended December 31, 2020, initially +posted on September 7, 2021, and amended on October 20, 2021; a quarterly Report for the period +ended March 31, 2021, initially posted on September 7, 2021, and amended on October 20, 2021; a +quarterly Report for the period ended June 30, 2021, initially posted on September 7, 2021, and +amended on October 20, 2021; and a quarterly Report for the period ended September 30, 2021, +initially posted on November 26, 2021, and amended on December 17, 2021. Each of the Reports +contained INSO’s unaudited financial statements for applicable periods stated in the Reports. + +5. Tucker represented in each of the foregoing Reports that: (i) he prepared the +financial statements included in the Reports, (ii) the financial statements were prepared in +accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), and (iii) the financial +statements were prepared in accordance with GAAP “by persons with sufficient financial skills.” + +6. Tucker signed each of the foregoing Reports as INSO’s principal executive officer +and principal financial officer, and he certified that: (1) he had reviewed the Report; (2) to the best +of his knowledge, the Report did not “contain any untrue statement of a material fact or omit to +state a material fact necessary to make the statements made, in light of the circumstances under + + +4 +which such statements were made, not misleading with respect to the period covered by this +disclosure statement;” and (3) based on his knowledge, “the financial statements, and other +financial information included or incorporated by reference in this disclosure statement, fairly +present in all material respects the financial condition, results of operations and cash flows of the +issuer as of, and for, the periods presented in this disclosure statement.” + +7. Contrary to Tucker’s certifications, Tucker willfully, and knowingly or recklessly, +made materially false and misleading statements in the foregoing Reports that INSO posted on the +OTC Markets website under Tucker’s direction, including as follows: + +(a) Tucker falsely and misleadingly certified that the financial statements and +other financial information included in the Reports “fairly present in all material respects the +financial condition, results of operations and cash flows” of INSO “as of, and for, the periods +presented,” when they did not. At the outset, even though Tucker represented in the Reports that +he prepared the financial statements, Tucker knew that the Seller actually prepared some or all of +the financial statements included in the Reports. Tucker accepted the Seller’s disclosures of +INSO’s financial condition, results of operations, and cash flows without any meaningful +independent review. Moreover, Tucker falsely and misleadingly certified that the financial +statements and other information included in the Reports fairly presented in all material respects +INSO’s financial condition, results of operations, and cash flows as of and for the periods +presented, when in fact INSO bank records and other evidence indicate that the financial +statements and other financial information in the Reports did not fairly present in all material +respects INSO’s financial condition, results of operations, and cash flows as of and for the periods +presented, and Tucker had no reasonable basis for his certifications. + +(b) Tucker falsely and misleadingly represented that the financial statements in +the Reports were prepared in accordance with GAAP, when they were not. Among other things, to +comply with GAAP, INSO was required to disclose its revenues, expenses, assets, and liabilities +using actual, historical numbers for the periods presented. INSO failed to do so. Moreover, to +comply with GAAP, INSO was required to disclose material compensation paid by INSO and +material compensation owed by INSO; however, INSO failed accurately to do so. + +(c) Tucker falsely and misleadingly stated in the Reports that INSO’s financial +statements were prepared in accordance with GAAP by “persons with sufficient financial skills,” +when Tucker lacked such skills and any other persons involved in the preparation of the financial +statements lacked such skills. Tucker lacked any formal education, training, or experience as an +accountant; he has never held an accounting degree; he had never prepared financial statements for +any public company before ostensibly preparing INSO’s financial statements; and he did not obtain +any accounting advice from an accountant (or other person with sufficient financial skills) in the +preparation of any of INSO’s financial statements. + +(d) Tucker falsely and misleadingly disclosed in the financial statements for +each of the Reports that INSO’s principal asset was a license with a reported value of $500,000. +However, Tucker had no reasonable basis to support either the existence of the license as an asset +or its valuation. Although the purported license constituted virtually all of INSO’s disclosed +assets, Tucker took no steps to independently obtain any information about the license, and instead + + +5 +simply relied on INSO’s prior disclosures of the license by the Seller without any independent +review. Moreover, Tucker continued to report the license as a $500,000 asset on at least one +Report after he was requested to produce evidence of the license and its valuation, but was unable +to do so. + +Under Tucker’s Direction, INSO Posted False and Misleading Attorney Letters + +8. During the period that Tucker served as INSO’s sole officer and director, and under +Tucker’s direction, INSO posted on the OTC Markets website two Attorney Letters authored by +two different attorneys, both opining that the particular Reports identified in the respective +Attorney Letters constituted adequate current public information about INSO for purposes of Rule +144(c)(2) of the Securities Act of 1933.3 + +9. One Attorney Letter, dated September 8, 2021, stated that Tucker was “qualified to +prepare financial statements by virtue of his years of experience preparing financial statements for +public companies.” The other Attorney Letter, dated November 30, 2021, stated that Tucker had +“more than five years of experience in the preparation of financial reports.” Both Attorney Letters +contained a representation that, after inquiry of INSO’s management and directors, neither INSO +nor any holder of 5% or more of its securities was currently under investigation by any federal or +state regulatory authority for any violation of federal or state securities law. + +10. Under Tucker’s direction, INSO posted the Attorney Letters on the OTC Markets +website even though he knew, or was severely reckless in not knowing, that the Attorney Letters +contained false and misleading statements, because: (a) Tucker did not have years of experience in +preparing financial statements for public companies; he had never prepared financial statements for +a public company before INSO; some or all of INSO’s financial statements included in the relevant +Reports were initially prepared by the Seller, and purportedly approved by Tucker without any +meaningful review or independent verification; and Tucker and the Seller lacked sufficient +financial skills to prepare INSO’s financial statements in accordance with GAAP; and (b) INSO +and one or more holders of 5% or more of INSO’s securities were under investigation by staff of +the Commission at the time that Tucker signed and certified the Reports and posted the Attorney +Letters, and Tucker had been informed of such investigation before the dates of the Attorney +Letters. + +Violations + +11. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraudulent +conduct in connection with the purchase or sale of securities. As a result of the conduct described +above, the Commission finds that: (i) Tucker willfully violated, and willfully aided and abetted and +caused INSO’s violations of, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and + +3 Rule 144 permits the public resale of restricted or control securities if a number of +conditions are met, including, as provided in Rule 144(c)(2), that issuers of the securities must +make adequate current public information about the issuer available before the sale. + + +6 +(ii) as a result of such violations, Tucker engaged in conduct subject to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Tucker’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Tucker cease and desist from committing or causing any violations and any future +violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + +B. Tucker be, and hereby is, prohibited for five (5) years from the date of this Order +from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file +reports pursuant to Section 15(d) of the Exchange Act. + +C. Tucker be, and hereby is, barred from participating in any offering of a penny stock, +including: acting as a promoter, finder, consultant, agent or other person who +engages in activities with a broker, dealer or issuer for purposes of the issuance or +trading in any penny stock, or inducing or attempting to induce the purchase or sale +of any penny stock. + +D. Tucker be, and hereby is, suspended from appearing or practicing before the +Commission as an accountant. + +E. Tucker shall, within twenty (20) days of the entry of this Order, pay a civil money +penalty in the amount of $75,000 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in +its discretion, the Commission orders the establishment of a Fair Fund pursuant to +15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley Act of 2002. The +Commission will hold funds paid pursuant to this paragraph in an account at the +United States Treasury pending a decision whether the Commission, in its +discretion, will seek to distribute funds or, subject to Exchange Act Section +21F(g)(3), transfer them to the general fund of the United States Treasury. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +F. Payment must be made in one of the following ways: + +(1) Tucker may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Tucker may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + + +7 +(3) Tucker may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + Enterprise Services Center + Accounts Receivable Branch + HQ Bldg., Room 181, AMZ-341 + 6500 South MacArthur Boulevard + Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Alan A. Tucker as a Respondent in these proceedings, and the file +number of these proceedings; a copy of the cover letter and check or money order +must be sent to Justin Jeffries, Associate Director, Division of Enforcement, +Securities and Exchange Commission, 950 East Paces Ferry Road, N.E., Suite 900, +Atlanta, GA 30326. + +G. Regardless of whether the Commission in its discretion orders the creation of a Fair +Fund for the penalties ordered in this proceeding, amounts ordered to be paid as +civil money penalties pursuant to this Order shall be treated as penalties paid to the +government for all purposes, including all tax purposes. To preserve the deterrent +effect of the civil penalty, Tucker agrees that in any Related Investor Action, he +shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Tucker’s +payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Tucker agrees that he shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission's counsel in this action and pay the amount of the Penalty Offset to the +Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related +Investor Action” means a private damages action brought against Tucker by or on +behalf of one or more investors based on substantially the same facts as alleged in +the Order instituted by the Commission in this proceeding. + +(Continued on Next Page) + + + +8 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a debt +for the violation by Respondent of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4379.pdf b/raw/aaer/2023/AAER-4379.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a241cafff49eda71e90edbf0b37bb47b7fb0f22c --- /dev/null +++ b/raw/aaer/2023/AAER-4379.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b7408a85d7376b9b27d30782965f37f9f895253c83c70631372825b4a22bcdff +size 209558 diff --git a/raw/aaer/2023/AAER-4380.pdf b/raw/aaer/2023/AAER-4380.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e41fdf24804ab53eb33591a384c69b56ac1e6798 --- /dev/null +++ b/raw/aaer/2023/AAER-4380.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:65578ba981a38aa81bc54a48abdfce2dc50bcf01a1dfb2b3f701353633e29bed +size 411159 diff --git a/raw/aaer/2023/AAER-4380.txt b/raw/aaer/2023/AAER-4380.txt new file mode 100644 index 0000000000000000000000000000000000000000..1b0afb5681b7a9f611a7beafdb7908dbbfc0ee79 --- /dev/null +++ b/raw/aaer/2023/AAER-4380.txt @@ -0,0 +1,742 @@ +1 + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96995 / February 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4380 / February 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21314 + + +In the Matter of + +Alan J. Markowitz, CPA, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE +AND NOTICE OF HEARING + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice2 against Alan J. Markowitz +(“Markowitz” or “Respondent”). + +1 Section 4C provides, in relevant part: +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided +and abetted the violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part: + The Commission may censure a person or deny, temporarily or permanently, the privilege of appeari ng or + practicing before it . . . to any person who is found . . . to have engaged in unethical or improper + professional conduct. +2 + +II. + +After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: + +A. SUMMARY + +1. Alan J. Markowitz, a certified public accountant (“CPA”) , engaged in improper +professional conduct, within the meaning of Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, during the audits of the 2016 and 2017 financial statements of FTE +Networks, Inc. (“FTE”). FTE later restated these financial statements (the “Restatement”). + +2. For both audits, Markowitz served as the lead engagement partner for Marcum LLP +(“Marcum”), the audit firm performing these audits, but repeatedly fai led to conduct them in +accordance with Public Company Accounting Oversight Board (“PCAOB”) auditing standards. +Markowitz violated several PCAOB standards, including standards requiring Markowitz to act +with due professional care, by improperly relying on FTE management’s false representations +during the audits and failing to obtain sufficient audit evidence regarding the existence and +valuation of unbilled receivables and revenue, miscellaneous receivables, notes payable and equity +transactions. Despite contradictory evidence and significant red flags that signaled FTE’s +underlying misconduct, Markowitz improperly relied on management representations and failed to +perform procedures to substantiate or reconcile those representations with contradictory evidence. + +3. Markowitz also caused Marcum to violate Rule 2-02(b)(1) of Regulation S-X. In +connection with the 2016 and 2017 audits, Marcum issued audit reports that stated that the audits +were performed in accordance with PCAOB standards. Markowitz approved the issuance of +Marcum’s audit reports that contained these unqualified opinions when he knew or should have +known that Marcum’s representations were false because Marcum’s audits were not performed in +accordance with PCAOB standards. + +B. RESPONDENT + +4. Markowitz, age 66, resides in Wayne, New Jersey, and is a CPA licensed in New +York and New Jersey. Markowitz has been a partner at Marcum LLP since 2007. Markowitz was +the lead engagement partner on Marcum’s annual audits of FTE from 2014 through 2017. He has +no known disciplinary history. + +C. OTHER RELEVANT ENTITIES + +5. Marcum is a limited liability partnership headquartered in New York City with +approximately 50 offices in the United States and other countries. It has more than 2,500 +employees providing accounting, advisory, and consulting services. Marcum is a public +accounting firm registered with the PCAOB. + +6. FTE is a Nevada corporation currently headquartered in New York, New York and +previously headquartered in Naples, Florida. FTE’s common stock was registered with the +3 + +Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock +Exchange under the ticker symbol FTNW from December 14, 2017 until December 17, 2019. +Prior to that, FTE’s common stock was registered with the Commission pursuant to Section 12(g) +of the Exchange Act and traded on OTC Pink as FTNW. From September 12, 2014 until May 16, +2015, the Commission revoked the registration of FTE’s shares pursuant to Section 12(j) of the +Exchange Act for failure to file periodic reports with the Commission for more than two years. +Currently, FTE’s common stock is not publicly traded on any exchange nor quoted on OTC Pink. +However, its common stock remains registered pursuant to Section 12(g) of the Exchange Act. + +D. FACTS + + FTE’s Improper Accounting for Convertible Notes + +7. From approximately January 2017 through January 2019, cash-strapped FTE issued +approximately 71 convertible notes (“Notes”) to lenders totaling approximately $22.7 million in +order to provide itself with much needed short-term funding. Each individual Note contained +varying terms and features that required FTE to perform extensive and complex analyses under +generally accepted accounting principles (“GAAP”) to determine the proper accounting treatment +and required financial statement disclosures related to each Note. These varying terms included +such features as (1) the ability of the debt to be converted, at the option of the holder, to shares of +FTE common stock at large discounts to market prices and (2) the contemporaneous issuance of +attached warrants to purchase shares of FTE common stock. These varying terms will be referred +to hereinafter as the “Convertible Features.” + +8. FTE improperly accounted for the Notes as conventional promissory notes and its +financial statements did not contain certain required financial disclosures. Indeed, as part of FTE’s +Restatement for the years ended December 31, 2016 and 2017 and the quarterly periods ended +March 31, June 30, and September 30 in 2017 and 2018, FTE’s analyses confirmed that the +Convertible Features of the Notes required separate accounting treatment as derivatives under +GAAP. By failing properly to account for the Notes, FTE materially understated its reported net +loss before taxes and current liabilities by 65% and 34%, respectively for the year ended December +31, 2017 and materially understated its reported current liabilities between 9% and 39% during the +quarterly periods ended March 31, June 30, and September 30 in 2017 and 2018. + +FTE’s Improper Revenue Recognition Practices + +9. From early 2016 through late 2018, FTE improperly recognized approximately +$12.5 million of revenue and related accounts receivable from purportedly completed construction +projects that had not yet been billed and from contracts for projects that purportedly had been +completed and billed but not yet paid. FTE management orchestrated FTE’s improper accounting +practices for these projects, most of which they attributed to FTE’s largest customer (“Customer +A”). These practices involved FTE (1) recording wholly fictitious revenue and (2) recording +revenue for which no evidence of an arrangement or contract with a customer existed. + +10. According to the Restatement, these transactions materially overstated FTE’s +revenue by 108% for the year ended December 31, 2016, and overstated accounts receivable by +4 + +477% and 20% as of December 31, 2016 and December 31, 2017, respectively, and between 18% +and 120% as of the quarterly periods ended March 31, June 30, and September 30, 2017 and 2018. +Adjustments for these transactions were recorded in the Restatement. + +Markowitz Violated PCAOB Auditing Standards When Conducting the Audits of +FTE’s Annual Financial Statements + +11. Markowitz was the engagement partner for the 2016 and 2017 annual audits +(“Audits”). As the engagement partner, Markowitz was responsible for the supervision and +performance of the engagements in order “to obtain reasonable assurance about whether the +financial statements [were] free of material misstatement whether caused by error or fraud.”3 For +the Audits, Markowitz supervised engagement teams consisting of approximately five to six team +members who managed and conducted the fieldwork. + +12. In accordance with PCAOB Auditing Standard (“AS”) 2110, Identifying and +Assessing Risks of Material Misstatement, Marcum developed Audit plans for FTE that identified +several areas as having high risk of material misstatement due to fraud or related to a significant +audit area (“Audit Risks”). The 2016 audit plan identified several Audit Risks, including: +accounts receivable— assessed as both a significant risk and fraud risk for improper revenue +recognition; notes payable and long-term debt—assessed as a significant audit area with a high risk +of material misstatement for the completeness assertion because FTE might not record all +outstanding notes; and equity—assessed as a significant risk due to complexity and potential +accounting errors. The 2017 audit plan identified similar risks of material misstatement although +notes payable and long-term debt was assessed as having a significant risk of material +misstatement overall. As the engagement partner, Markowitz had an obligation to design and +perform audit procedures commensurate with assessed risks. + +13. During the Audits, Markowitz improperly relied on management representations +and did not obtain sufficient appropriate audit evidence related to the Audit Risks. Specifically, +Markowitz performed no additional, substantive procedures (and, in certain instances, performed +no substantive procedures) to appropriately respond to the assessed Audit Risks despite: (1) +Marcum’s risk assessments noting that extended audit procedures were to be performed in certain +areas; (2) having reviewed documents contradicting management representations; and (3) +identifying that FTE had internal control weaknesses as reflected by, among other things, +Marcum’s difficulties in obtaining audit documentation from FTE management. + +14. Markowitz’s conduct demonstrated the following audit failures in violation of +PCAOB standards: (1) failure to exercise due professional care; (2) failure to address assessed +risks; (3) failure to obtain sufficient appropriate audit evidence; and (4) failure to evaluate audit +results. As a result of these violations, Markowitz caused Marcum’s issuance of audit reports that +inaccurately stated that the Audits were conducted in accordance with the standards of the +PCAOB. + + +3 See PCAOB Auditing Standard (“AS”) 1001, Responsibilities and Functions of the Independent Auditor and AS +1201 Supervision of the Audit Engagement. +5 + +15. As a result of these violations, Markowitz engaged in improper professional +conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice. +The 2016 Audit Failures + +16. Markowitz violated multiple PCAOB standards when conducting the audit of +FTE’s 2016 financial statements. These audit failures related to unbilled revenue (“Unbilled +Revenue”) and unbilled receivables (“Unbilled Receivables”) – which related to FTE’s purportedly +complete but unbilled construction projects – totaling $5.8 million as of December 31, 2016. This +represented 47% of FTE’s reported revenue and 83% of FTE’s reported accounts receivable, +respectively. Marcum’s planning materials assessed accounts receivable and sales as a significant +audit area susceptible to a significant risk of material misstatement due to fraud and concluded that +extended audit procedures should be performed. + +17. Markowitz primarily relied on substantive audit procedures to test Unbilled +Receivables along with oral confirmations from the customer. For example, with respect to testing +the support for Unbilled Receivables, Marcum sampled 31 transactions representing $1.7 million +(29%) of Unbilled Receivables. From this sample, the engagement team concluded that there was +insufficient audit evidence to support approximately $1.2 million (70%) of the sampled +transactions. These testing exceptions included instances in which transactions were recorded in +the wrong year and certain transactions where the engagement team concluded there was a “lack of +support/documentation.” Despite these testing exceptions, no additional test work was performed. +Moreover, when Markowitz proposed an adjustment to the financial statements to remove at least +$708,000 of Unbilled Receivables that the audit team had concluded were improperly recorded, +FTE refused to make the adjustment. + +18. In testing Unbilled Receivables, the engagement team also selected a sample of +$2.7 million of construction projects on which FTE had already begun work. However, +substantive testing consisted of documenting oral confirmation of $1.7 million of the projects with +a representative for Customer A, and two emails forwarded to Marcum by FTE (“FTE Emails”) +that purported to show customer approval for work on the project to begin. There was no written +confirmation from Customer A or other written documentation to support the purported $1.7 +million. In fact, in an email Markowitz sent to FTE six days before the audit opinion was issued, +Markowitz requested that FTE provide the engagement team with five types of evidentiary support +for the FTE Emails. There is no written documentation that FTE ever provided the requested +support for the $1.7 million of Unbilled Receivables. Furthermore, Marcum did not perform any +substantive testing on the remaining $1 million in the sample. + +19. Markowitz’s failure to perform additional procedures in the face of numerous +testing exceptions along with his reliance on oral confirmations and insufficient documentation +demonstrated his lack of due professional care and skepticism when evaluating the audit +results. Based on the test work performed, Markowitz did not have sufficient audit evidence as +required by AS 1105, Audit Evidence to conclude that FTE’s 2016 financial statements were free +of material misstatements. Markowitz caused Marcum’s issuance of an audit report that +inaccurately stated that the audit was performed in accordance with PCAOB standards. FTE filed +Marcum’s inaccurate audit report along with FTE’s 2016 Form 10-K on May 11, 2017. +6 + +20. The Unbilled Revenue and Unbilled Receivables materially overstated FTE’s +revenue and accounts receivable by 108% and 477%, respectively, for the year ended December +31, 2016. Adjustments for these transactions were recorded in the Restatement. + +The 2017 Audit Failures + +21. Like the 2016 audit, Markowitz violated multiple PCAOB standards when +conducting the audit of FTE’s 2017 financial statements. These audit failures spanned three audit +areas – accounts receivable (specifically, Unbilled Receivables and miscellaneous receivables +(“Miscellaneous Receivables”)), notes payable, and equity and stemmed from Markowitz’s +overreliance on management representations in the face of contradictory evidence. Moreover, +Markowitz ignored numerous red flags regarding audit documentation. As such, the 2017 audit +was not performed in accordance with PCAOB standards. + +(a) Unbilled Receivables and Miscellaneous Receivables + +22. As of December 31, 2017, FTE’s financial statements showed that Unbilled +Receivables increased from $5.8 million as of December 31, 2016 to $10 million (representing +16% of FTE’s reported accounts receivable). In accordance with AS 2110, the engagement team +identified accounts receivable as a significant audit area susceptible to a significant risk of material +misstatement due to fraud and noted that extended audit procedures should be performed. +Markowitz reviewed and approved the relevant work papers and relied on substantive audit +procedures. + +23. Specifically, the engagement team selected for testing a sample of 21 Unbilled +Receivables transactions representing $4.3 million (43%) of the Unbilled Receivables balance. As +set forth in AS 1105, Audit Evidence, when using information produced by the audit client as +evidence, the auditor should evaluate whether the information is “sufficient and appropriate” for +the audit procedure being performed. The testing performed on the 21 Unbilled Receivables solely +relied on internal FTE documents as opposed to third-party documentation such as independent +confirmation from the customer. + +24. Also in 2017, FTE recorded Miscellaneous Receivables of approximately $2.5 +million. Markowitz concluded that the limited documentation provided by FTE did not provide +sufficient support, and requested support for $2.4 million of the Miscellaneous Receivables. FTE +did not provide support for the $2.4 million, so the engagement team proposed an adjustment to the +financial statements to reverse the $2.4 million. FTE did not make the adjusting entry, and +Markowitz did not insist that FTE make the entry. The Miscellaneous Receivables remained on +FTE’s financial statements that were included in its 2017 Form 10-K and filed along with +Marcum’s inaccurate audit report. + +25. The Unbilled Receivables and Miscellaneous Receivables materially overstated +FTE’s accounts receivable by 20% for the year ended December 31, 2017. Adjustments for these +transactions were recorded in the Restatement. + + +7 + +(b) Notes Payable + +26. During the 2017 quarterly reviews and audit, Markowitz was confronted with +significant red flags and inconsistencies that contradicted management representations concerning +the Notes. As of December 31, 2017, the Notes represented $4.8 million (31%) of FTE’s reported +notes payable balance. The engagement team’s planning materials assessed notes payable as a +significant audit area susceptible to significant risk of material misstatement and concluded that +extended audit procedures should be performed. Yet of 30 Notes FTE entered into in 2017, the +engagement team obtained executed agreements for only three. + +27. Markowitz ignored significant red flags regarding the Notes. During the first +quarter review, Markowitz reviewed FTE’s instructions to its transfer agent to reserve a certain +number of shares of FTE common stock in the event the noteholder of a $385,000 Note exercised +its right to convert the Note into common stock. Markowitz knew the Notes, namely, the +Convertible Features, required additional scrutiny and potentially had to be accounted for +differently in FTE’s financial statements. Markowitz requested a copy of the Note, but FTE never +provided one. Instead of following up with FTE, Markowitz accepted FTE management’s +representation that the Note was not convertible. + +28. During the third quarter, the engagement team obtained a board resolution that +authorized the issuance of two convertible promissory notes. Despite ongoing difficulties in +obtaining Notes and prior evidence from the first quarter that FTE had entered into Notes with +Convertible Features, Markowitz never reviewed the resolution and the engagement team never +raised it with him. During the third quarter, Marcum continued to ask FTE for all Notes. None +were received. + +29. During the annual audit, Marcum’s audit manager showed Markowitz FTE board +meeting minutes authorizing the issuance of convertible debt and warrants to two lenders. +Markowitz consulted with FTE’s senior management, who told him that the debt had not been +issued as authorized. Markowitz accepted their representation and did not conduct any further +inquiry. + +30. Markowitz and the engagement team sent numerous emails throughout 2017 to +FTE management requesting all debt agreements (that included Notes). In one email, Markowitz +told FTE that the request had been pending for over two months, and further told FTE management +that FTE’s continued failure to provide the requested agreements or confirmation of the terms +could result in a scope limitation (i.e., that Marcum could not opine on the financial statements as a +whole). Although Markowitz and the engagement team only received three notes (out of 30), +Markowitz did not conclude there was a scope limitation. In fact, 27 of the 30 Notes FTE issued +were Convertible Notes that required different, more complex accounting treatment. + +(c) Equity Transactions + +31. During the 2017 quarterly reviews and audit, Markowitz encountered difficulties +with obtaining from FTE documentation related to equity transactions. The engagement team’s +8 + +planning materials assessed equity as a significant risk due to complexity and possible errors in +accounting and concluded that extended audit procedures should be performed. + +32. During 2017, FTE issued approximately 491,000 shares of FTE common stock, +valued at approximately $5.2 million, to “consultants” and “vendors” in lieu of payment. Although +Markowitz and the engagement team requested that FTE provide the agreements or supporting +documents related to the share issuances for each quarter, by the third quarter the requests +remained outstanding. FTE never fully provided the outstanding documents. Additionally, +although many of the “consultants” and “vendors” were Note holders, Markowitz failed to perform +additional procedures in the face of these red flags and insufficient evidence. Nevertheless, +Markowitz caused Marcum to release the 2017 audit opinion. + +33. As part of the Restatement, FTE determined that certain of these share issuances +were related to or executed contemporaneously with the issuance of the Notes, and thus required +complex accounting analysis and material adjustments in FTE’s Restatement. By failing properly +to account for the Convertible Features of the Notes and equity transactions, FTE understated its +2017 net loss before tax and current liabilities by approximately $60 million (65% and 34%, +respectively). + +PCAOB Auditing Standards Markowitz Violated During the Audits + +Failure to Exercise Due Professional Care + +34. PCAOB AS 1015, Due Professional Care in the Performance of Work requires +due professional care “to be exercised in the planning and performance of the audit and the +preparation of the report.” It states that the “exercise of due professional care allows the auditor to +obtain reasonable assurance about whether the financial statements are free of material +misstatement, whether caused by error or fraud, or whether any material weaknesses exist as of the +date of management’s assessment.” It further provides that “[a]lthough not absolute assurance, +reasonable assurance is a high level of assurance.” The standards require the auditor to: + +a. exercise professional skepticism, “an attitude that includes a questioning +mind and a critical assessment of audit evidence” and the auditor must use “the +knowledge, skill, and ability called for by the profession of public accounting to +diligently perform, in good faith and with integrity, the gathering and objective +evaluation of evidence;” +b. “consider the competency and sufficiency of the [audit] evidence;” +c. neither assume that management is dishonest nor assume “unquestioned +honesty” and “the auditor should not be satisfied with less than persuasive +evidence because of a belief that management is honest;” and +d. adhere to the standard during the planning and throughout the audit +process. + +35. PCAOB AS 2401, Consideration of Fraud in a Financial Statement Audit +requires that the auditor exercise professional skepticism when considering the fraud risks and +“conduct the engagement with a mindset that recognizes the possibility that a material +9 + +misstatement due to fraud could be present, regardless of any past experience with the entity and +regardless of the auditor’s belief about management's honesty and integrity. Furthermore, +professional skepticism requires an ongoing questioning of whether the information and evidence +obtained suggests that a material misstatement due to fraud has occurred. In exercising +professional skepticism in gathering and evaluating evidence, the auditor should not be satisfied +with less-than-persuasive evidence because of a belief that management is honest.” It also states +that “[i]f there is an identified fraud risk that involves improper revenue recognition, the auditor +also may want to consider [c]onfirming with customers certain relevant contract terms and the +absence of side agreements, because the appropriate accounting often is influenced by such terms +or agreements.” + +36. During the Audits of FTE, Markowitz knew or should have known that there was +insufficient evidence or support for the Unbilled Receivables, Miscellaneous Receivables, notes +payable, and equity. For example, in 2016 and 2017, Markowitz proposed that FTE make +adjusting entries to the Unbilled Receivables and Miscellaneous Receivables. FTE did not make +such entries, and Markowitz did not further insist upon the entries. In 2016, Markowitz was aware +that there were testing exceptions within sampled items for Unbilled Receivables, but he failed to +perform additional procedures or extrapolate the testing results to the entirety of the Unbilled +Receivables. + +37. Additionally, Markowitz was confronted with evidence that contradicted +management representations regarding the existence of the Notes and equity transactions. For +example, despite repeated and unanswered requests for the Notes, Markowitz failed to raise his +level of professional skepticism and insist on obtaining copies of the Notes. Similarly, he +repeatedly requested copies of third-party agreements, which FTE did not provide, in support of +the issuance of FTE common stock to “consultants” and “vendors.” Instead, he improperly relied +on management’s representations that the Notes did not contain Convertible Features and the share +issuances were unrelated to the Notes. + +38. As a result, Markowitz failed to exercise due professional care, which was required +by PCAOB standards, during the Audits of FTE’s financial statements. + +Failure to Properly Address Assessed Risks + +39. PCAOB AS 2110, Identifying and Assessing Risks of Material Misstatement +states that “[w]hen the auditor obtains audit evidence during the course of the audit that contradicts +the audit evidence on which the auditor originally based his or her risk assessment, the auditor +should revise the risk assessment and modify planned audit procedures or perform additional +procedures in response to the revised risk assessments.” + +40. PCAOB AS 1101 Audit Risk provides that “[r]easonable assurance is obtained by +reducing audit risk to an appropriately low level through applying due professional care, including +obtaining sufficient appropriate audit evidence. + +41. During the Audits, Markowitz learned of red flags and contradictory evidence +indicating that Unbilled Revenue and Receivables, Notes and equity transactions may not have +10 + +been properly accounted for. Markowitz did not modify Marcum’s audit plans to respond to these +red flags and contradictory evidence by, for example, expanding testing or obtaining third-party +audit evidence to corroborate management representations. Accordingly, Markowitz failed to +reduce audit risk to an appropriately low level. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +42. PCAOB AS 1105, Audit Evidence provides that the auditor “must plan and +perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable +basis for his or her opinion.” It states that “[t]o be appropriate, audit evidence must be both +relevant and reliable in providing support for the conclusions on which the auditor’s opinion is +based.” Relevance depends on “whether [the audit procedures] is designed to (1) test the assertion +or control directly and (2) test for understatement or overstatement” and the “timing of the audit +procedure used to test the assertion or control.” Additionally, the “reliability of evidence depends +on the nature and source of the evidence and the circumstances under which it is obtained … +Evidence obtained from a knowledgeable source that is independent of the company is more +reliable than evidence obtained only from internal company sources.” + +43. Furthermore, when using information produced by the company as audit evidence, +the standard requires the auditor to “[t]est the accuracy and completeness of the information, or test +the controls over the accuracy and completeness of that information” and [e]valuate whether the +information is sufficiently precise and detailed for purposes of the audit.” Furthermore, “the +auditor should perform the audit procedures necessary to resolve the matter” when “audit evidence +obtained from one source is inconsistent with that obtained from another, or if the auditor has +doubts about the reliability of information to be used as audit evidence.” + +44. PCAOB AS 2301, The Auditor’s Responses to the Risks of Material +Misstatement states that “assessed risks of material misstatement, particularly fraud risks, should +involve the application of professional skepticism in gathering and evaluating audit evidence[,]” +which includes “(a) modifying the planned audit procedures to obtain more reliable evidence +regarding relevant assertions and (b) obtaining sufficient appropriate evidence to corroborate +management’s explanations or representations concerning important matters, such as through third- +party confirmation, use of a specialist engaged or employed by the auditor, or examination of +documentation from independent sources.” The standard also requires the auditor to: + +a. design the audit procedures performed to “[o]btain more persuasive audit +evidence the higher the auditor’s assessment of risk [and] [t]ake into account the +types of potential misstatements that could result from the identified risks and the +likelihood and magnitude of potential misstatement;” +b. “perform substantive procedures for each relevant assertion of each +significant account and disclosure, regardless of the assessed level of control risk;” +and +c. obtain more evidence from substantive procedures as “the assessed risk of +material misstatement increases.” “Inquiry alone does not provide sufficient +appropriate evidence to support a conclusion about a relevant assertion.” + +11 + +45. PCAOB AS 2310, The Confirmation Process explains that the purpose of +confirmation is to “obtain evidence from third parties about financial statement assertions made by +management.” It provides that “[o]ral confirmations should be documented in the workpapers +[and] [i]f the information in the oral confirmations is significant, the auditor should request the +parties involved to submit written confirmation of the specific information directly to the auditor.” +Additionally, the auditor should apply “alternative procedures” to nonresponses to “positive +confirmation requests” in order “to obtain the evidence necessary to reduce audit risk to an +acceptably low level.” + +46. Furthermore, it states that “[c]onfirmation of accounts receivable is a generally +accepted auditing procedure [and] it is generally presumed that evidence obtained from third +parties will provide the auditor with higher-quality audit evidence than is typically available from +within the entity.” As such, “there is a presumption that the auditor will request the confirmation +of accounts receivable during an audit unless “[a]ccounts receivable are immaterial to the financial +statements[,] [t]he use of confirmations would be ineffective, [or] [t]he auditor’s combined +assessed level of inherent and control risk is low, and the assessed level, in conjunction with the +evidence expected to be provided by analytical procedures or other substantive tests of details, is +sufficient to reduce audit risk to an acceptably low level for the applicable financial statement +assertions.” + +47. The standard explains that “[i]n many situations, both confirmation of accounts +receivable and other substantive tests of details are necessary to reduce audit risk to an acceptably +low level for the applicable financial statement assertions.” “An auditor who has not requested +confirmations in the examination of accounts receivable should document how he or she overcame +this presumption.” + +48. PCAOB AS 2805, Management Representations states that representations from +management “are not a substitute for the application of those auditing procedures necessary to +afford a reasonable basis for an opinion regarding the financial statements under audit.” “If a +representation made by management is contradicted by other audit evidence, the auditor should +investigate the circumstances and consider the reliability of the representation made. Based on the +circumstances, the auditor should consider whether his or her reliance on management’s +representations relating to other aspects of the financial statements is appropriate and justified.” + +49. During the Audits, Markowitz learned of significant red flags and inconsistencies +that necessitated him to exercise a heightened level of professional skepticism and expand the level +and extent of audit procedures performed. Examples include: + + In 2017, the testing performed on Unbilled Receivables solely relied on internal +FTE documents as opposed to third-party documentation such as independent +confirmation from the customer. + In 2016, Markowitz identified testing exceptions within sampled items of Unbilled +Receivables and several instances where Unbilled Receivables were unsupported. +Further, in 2017, Markowitz identified that Miscellaneous Receivables were +unsupported. Despite this, in each instance, Markowitz did not perform additional +procedures in the face of insufficient audit evidence. +12 + + In 2017, Markowitz’s repeated requests to FTE for documentation to support the +Notes and certain equity transactions went unanswered. Despite contradictory +evidence, he relied on management representations that the Notes did not contain +Convertible Features and that the equity transactions were unrelated. Moreover, he +did not obtain any evidence to corroborate these representations. + +50. As a result, Markowitz failed to obtain sufficient appropriate audit evidence, as +required by PCAOB standards, during the Audits of FTE’s financial statements. + +Failure to Evaluate Audit Results + +51. PCAOB AS 2810, Evaluating Audit Results provides that “the auditor should take +into account all relevant audit evidence, regardless of whether it appears to corroborate or to +contradict the assertions in the financial statements[,] when forming an opinion on whether the +financial statements are presented fairly, in all material respects, in conformity with the applicable +financial reporting framework. Additionally, “the auditor should evaluate whether the +accumulated results of auditing procedures and other observations affect the assessment of the +fraud risks made throughout the audit and whether the audit procedures need to be modified to +respond to those risks.” The auditor should consider the following factors when determining +whether “sufficient appropriate audit evidence” has been obtained: + +a. “[t]he significance of uncorrected misstatements and the likelihood of their +having a material effect, individually or in combination, on the financial +statements;” +b. “[t]he results of audit procedures performed in the audit of financial statements, +including whether the evidence obtained supports or contradicts management's +assertions and whether such audit procedures identified specific instances of +fraud;” +c. “[t]he auditor’s risk assessments;” and +d. “[t]he appropriateness (i.e., the relevance and reliability) of the audit evidence +obtained.” + +52. If the following matters are identified during the audit, the auditor should take into +account “[c]onflicting or missing evidence, including: [m]issing documents” and “[p]roblematic or +unusual relationships between the auditor and management,” including “[u]nusual delays by +management in providing requested information.” + +53. Markowitz failed properly to evaluate audit results. During the Audits, FTE +repeatedly failed to provide copies of the Notes and support for certain equity transactions, as well +as sufficient audit evidence to support the Unbilled Revenue and Unbilled Receivables. +Throughout the Audits, Markowitz did not consider conflicting audit evidence when evaluating +audit results. For example, despite written representations in board meeting minutes, board +resolutions, and transfer agent instructions that FTE issued convertible notes, Markowitz accepted +management representations that there were no such Notes, even when FTE did not produce copies +of the Notes. + +13 + +54. As a result, Markowitz failed properly to evaluate audit results, which was required +by PCAOB standards, during the Audits of FTE’s financial statements. + +Marcum’s Inaccurate Audit Reports + +55. Despite Markowitz’s multiple departures from PCAOB auditing standards, as +described above, Marcum, through Markowitz, issued audit reports that contained unqualified +opinions on FTE’s 2016 and 2017 financial statements. Those reports contained Marcum’s +opinion that FTE’s financial statements presented fairly, in all material respects, the company’s +financial position and results of operations in conformity with GAAP, and Marcum’s +representation that its audits were conducted in accordance with PCAOB audit standards. + +56. As the lead engagement partner on the audits, Markowitz approved the issuance of +these audit reports. Markowitz knew that FTE would file Marcum’s audit reports with the +Commission with FTE’s Forms 10-K. Markowitz caused Marcum’s audit reports to inaccurately +state that the audits were conducted in accordance with PCAOB audit standards. + +E. VIOLATIONS + +57. As a result of the conduct described above, Markowitz engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) and Rule 102(e)(1)(ii) +provide, in pertinent part, that the Commission may censure or deny, temporarily or permanently, +the privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. With respect to persons licensed +to practice as accountants, “improper professional conduct” includes “[r]epeated instances of +unreasonable conduct, each resulting in violations of applicable professional standards, that +indicate a lack of competence to practice before the Commission.” See Rule 102(e)(1)(iv)(B)(2). +As discussed above, Markowitz engaged in repeated instances of unreasonable conduct, each +resulting in a violation of applicable professional standards. + +58. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “the +applicable professional standards under which the audit was conducted.” 17 C.F.R. § 210.2- +02(b)(1). For audits of fiscal years 2016 and 2017, Rule 2-02(b)(1) similarly mandated that an +accountant’s report “state whether the audit was made in accordance with accepted auditing +standards….” An auditor violates Rule 2-02(b)(1) if it issues a report stating it has conducted its +audit in accordance with the PCAOB standards when it has not. As a result of the conduct +described above, Marcum violated and Markowitz caused Marcum’s violations of Rule 2-02(b)(1) +of Regulation S-X. + +III. + +In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it necessary and appropriate in the public interest that public +administrative and cease-and-desist proceedings be instituted to determine: + +14 + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; + +B. What, if any, remedial action is appropriate in the public interest against Respondent +pursuant to Section 4C(a) of the Exchange Act and Rule 102(e) of the Commission’s Rules of +Practice; and + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondent should be +ordered to cease and desist from committing or causing violations of and any future violations of +Rule 2-02(b)(1) of Regulation S-X and whether Respondent should be ordered to pay a civil +penalty pursuant to Sections 21B(a) of the Exchange Act. + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of taking +evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days +and not later than 60 days from service of this Order at a time and place to be fixed by further order +of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § +201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondent shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fails to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the proceedings +may be determined against the Respondent upon consideration of this Order, the allegations of +which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the +Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondent by any means permitted by the +Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +15 + +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + +Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of Practice, 17 +C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is set before the +Commission, all papers (including those listed in the following paragraph) shall be filed +electronically in administrative proceedings using the Commission’s Electronic Filings in +Administrative Proceedings (eFAP) system access through the Commission’s website, +www.sec.gov, at http://www.sec.gov/eFAP. Respondent also must serve and accept service of +documents electronically. All motions, objections, or applications will be decided by the +Commission. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, +232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public hearing +has been completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a +motion for summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.250, where the Commission has determined that no public hearing is necessary; or +(C) The determination that a party is deemed to be in default under Rule 155 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + + + + + + + +16 + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + + +Vanessa A. Countryman +Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4381.pdf b/raw/aaer/2023/AAER-4381.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f2e712cfa724be181a77ea34a3c3e8ba15103283 --- /dev/null +++ b/raw/aaer/2023/AAER-4381.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b79799df0dce039f01e244da787f676d10afe07a8dfa3a5fabdaa673c98a79db +size 232178 diff --git a/raw/aaer/2023/AAER-4381.txt b/raw/aaer/2023/AAER-4381.txt new file mode 100644 index 0000000000000000000000000000000000000000..02a3d06bda1689d07313005b83ef0dedd46d0382 --- /dev/null +++ b/raw/aaer/2023/AAER-4381.txt @@ -0,0 +1,122 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97004 / March 1, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4381 / March 1, 2023 + +Admin. Proc. File No. 3-20602 + + +In the Matter of + +NOE CORRALES REYES + + + +ORDER REGARDING SERVICE + +The Securities and Exchange Commission (“Commission”) issued an order instituting +proceedings (“OIP”) on September 27, 2021, pursuant to Commission Rule of Practice +102(e)(3),1 against Noe Corrales Reyes (“Respondent”).2 According to the OIP, Respondent was +permanently enjoined from violating antifraud provisions of the federal securities laws.3 The +OIP further temporarily suspended Respondent from appearing or practicing before the +Commission.4 On January 18, 2023, the Division of Enforcement (“Division”) filed a motion for +leave to serve the OIP on Respondent by alternative means. We believe that resolution of that +motion would be assisted by additional briefing. + +1 17 C.F.R. § 201.102(e)(3). +2 Noe Corrales Reyes, Exchange Act Release No. 93136, 2021 WL 4452770 (Sept. 27, +2021). +3 Id. at *1; see also SEC v. Gerardo de Nicolás, et al., Civil Action No. 17-CV-02086 +(S.D. Cal.). +4 Reyes, 2021 WL 4452770, at *2. +2 +According to the Division’s motion, Respondent is a citizen and resident of Mexico, and +his last known address is in Mexico. The Division therefore attempted to serve Respondent by +sending “sets of Hague Service Convention documents to Mexico’s Central Authority” on +November 22, 2021, and April 27, 2022, “to effect process on Respondent.”5 Because the +Division has not yet received confirmation of a service attempt by the Mexico Central Authority, +the Division now seeks leave to serve Respondent by e-mail at an e-mail address known to be +used by Respondent.6 +Commission Rule of Practice 141(a)(2)(iv)(D) provides that service of an OIP on persons +in a foreign country may be accomplished “[b]y any other means not prohibited by international +agreement, as the Commission or hearing officer orders.”7 Mexico, however, has lodged an +objection Article 10 of the Hague Service Convention, and thus objects to service “by postal +channels.”8 There is a split in authority in the federal courts as to whether a foreign country’s +objection to service by mail under Article 10 also precludes service by e-mail.9 And the case +relied upon by the Division for the proposition that service by e-mail is appropriate here, RPost +Holdings, Inc. v. Kagan, is not on point.10 The Hague Service Convention was inapplicable in + +5 See Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in +Civil or Commercial Matters, Nov. 15, 1965, 20 U.S.T. 361, 658 U.N.T.S. 163 (“Hague Service +Convention”). +6 The Division’s motion also seeks leave to serve Respondent by publication, but we find it +appropriate to defer consideration of that request given the uncertainty, at this juncture, as to +whether other methods of service are more likely to provide Respondent with actual notice of +this proceeding. Cf. United Fin. Cas. Co. v. R.U.R. Transp., Inc., Case No. 22cv333-LL-WVG, +2022 WL 16747283, at *4–5 (S.D. Cal. Nov. 7, 2022) (noting that “a wide variety of alternative +methods of service” exist in concluding that the plaintiff had not demonstrated that “service by +publication is reasonably calculated, under all the circumstances,” to provide notice to the +defendant). +7 17 C.F.R. § 201.141(a)(2)(iv)(D). +8 See Hague Convention Conference on Private International Law, Mexico Declarations, +https://www.hcch.net/en/instruments/conventions/status- +table/notifications/?csid=412&disp=resdn (last visited Feb. 27, 2023); U.S. Dep’t of State: +Bureau of Consular Affairs, Mexico Judicial Assistance Information, +https://travel.state.gov/content/travel/en/legal/Judicial-Assistance-Country- +Information/Mexico.html (last visited Feb. 27, 2023). +9 See, e.g., UOP LLC v. Industria del Hierro SA de CV, Case No. 2:22-cv-01089, 2022 WL +2056363, at *2–3 (W.D. La. June 7, 2022) (collecting cases); Chanel, Inc. v Handbagstore, Case +No. 20-cv-62121, 2021 WL 3060329, at *8–9 (S.D. Fla. June 30, 2021) (same). Precedent +construing the Federal Rules of Civil Procedure can be persuasive authority, but that precedent +does not bind us when construing our Rules of Practice. See Healthway Shopping Network, +Exchange Act Release No. 89374, 2020 WL 4207666, at *2 & n.9 (July 22, 2020). +10 RPost Holdings, Inc. v. Kagan, Case No. 2:11-cv-238-JRG, 2012 WL 194388, *2 (E.D. +Tex. Jan. 23, 2012). +3 +that case because the address of the defendant was unknown.11 Here, the Division is aware of +Respondent’s last known address. And Respondent was served in the underlying injunctive +action pursuant to the Hague Service Convention, so alternative service did not need to be +authorized. +Thus, the Commission would benefit from additional briefing to determine whether +service of the OIP on Respondent using e-mail would constitute a “means not prohibited by +international agreement” under the circumstances of this case—that is, e-mail to a foreign +defendant with a known address in a foreign country that has objected to service by postal +channels under the Hague Service Convention.12 Accordingly, IT IS ORDERED that the +Division file a brief by March 29, 2023, addressing the above issues, and any other matters the +Division may deem pertinent. Respondent may file a response by April 26, 2023. +Under the circumstances, the Division may also wish to continue to pursue its service +efforts with the Mexico Central Authority. It is therefore further ORDERED that the Division +file a status report regarding its attempts to serve Respondent with the OIP via the Mexico +Central Authority by May 30, 2023, and every 90 days thereafter until service is accomplished. + + +11 Hague Service Convention art. 1 (“This Convention shall not apply where the address of +the person to be served with the document is not known.”). +12 In identifying and discussing relevant legal authority, the Division may wish to consider +the venue provision of the Exchange Act’s judicial review provision in determining what +authority is most likely to be persuasive. See Exchange Act Section 25(a)(1), 15 U.S.C. +§ 78y(a)(1) (contemplating that a respondent who neither resides in nor has a place of business in +the United States can seek judicial review of a Commission final order in the U.S. Court of +Appeals for the D.C. Circuit). +4 +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.13 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary + + + +13 Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a redaction and omission of sensitive personal information requirement. Amendments to the +Commission’s Rules of Practice, 85 Fed. Reg. at 86,465–81. \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4383.pdf b/raw/aaer/2023/AAER-4383.pdf new file mode 100644 index 0000000000000000000000000000000000000000..82e44593df3e37d6673a140f454bc0a49732301a --- /dev/null +++ b/raw/aaer/2023/AAER-4383.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b63b8f89d8af7700c02037e281693c6989966bb47a2273e1acf77daa789f427b +size 235211 diff --git a/raw/aaer/2023/AAER-4384.pdf b/raw/aaer/2023/AAER-4384.pdf new file mode 100644 index 0000000000000000000000000000000000000000..af5ebaf990511d3d1b8e0fe3f62ee514dcbe4297 --- /dev/null +++ b/raw/aaer/2023/AAER-4384.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3eae9624802f514838f35148e8c13a07c1055932bf04aa3fb0be5eeb7b2bbe5c +size 223343 diff --git a/raw/aaer/2023/AAER-4386.pdf b/raw/aaer/2023/AAER-4386.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9e850c59c7eee7cafc3506cb0fcf6510a98bccf3 --- /dev/null +++ b/raw/aaer/2023/AAER-4386.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:7c10fe8308cd4035a09494359b1f3dd478b972bc1c0aa36c43d5e6bddfa8c082 +size 306398 diff --git a/raw/aaer/2023/AAER-4387.pdf b/raw/aaer/2023/AAER-4387.pdf new file mode 100644 index 0000000000000000000000000000000000000000..884e5074734a0b57c9df1af980a0a4a0b5d02e00 --- /dev/null +++ b/raw/aaer/2023/AAER-4387.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:79627fbd546d9845bb79186c9863fe1591874d063e07cc3eecbb937a0df25004 +size 221297 diff --git a/raw/aaer/2023/AAER-4387.txt b/raw/aaer/2023/AAER-4387.txt new file mode 100644 index 0000000000000000000000000000000000000000..2a3a2b59f3a711c7ab9a144d62a777aa6ffe5e10 --- /dev/null +++ b/raw/aaer/2023/AAER-4387.txt @@ -0,0 +1,94 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11164 / March 7, 2023 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97061 / March 7, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4387 / March 7, 2023 + +Admin. Proc. File No. 3-21239 +In the Matter of + +ANDY CHIN FONG CHEN + + +ORDER SCHEDULING BRIEFS AND AMENDING CAPTION + +On November 10, 2022, the Commission temporarily suspended Andy Chin Fong Chen +from appearing or practicing before the Commission pursuant to Commission Rule of Practice +102(e)(3).1 On January 19, 2023, the Commission denied Chen’s petition to lift that temporary +suspension and directed that this matter be set for hearing before the Commission.2 +On February 27, 2023, the parties filed a Joint Statement Pursuant to Rule 221(c) of the +Commission’s Rules of Practice, which stated that the parties had agreed that the issues in this +proceeding may be decided “solely on the papers filed with the Commission” and that they +would “stipulate to essential facts.”3 The parties also represented that they had not reached an + +1 Andy Chin Fong Chen, CPA, Exchange Act Release No. 96299, 2022 WL 16900142 +(Nov. 10, 2022); 17 C.F.R. § 201.102(e)(3). +2 Andy Chin Fong Chen, CPA, Exchange Act Release No. 96710, 2023 WL 345030 (Jan. +19, 2023). +3 Cf. Russell C. Schalk, Jr., Exchange Act Release No. 78898, 2016 WL 5219501, at *2, *5 +(Sept. 21, 2016) (sustaining result reached by administrative law judge in proceeding determined +on the papers after respondent determined to forgo an in-person hearing). +2 + +agreement on filing motions for summary disposition pursuant to Rule of Practice 250.4 The +parties further requested that they be permitted to file briefs addressing whether the Commission +should “maintain its suspension of Chen from appearing or practicing before the Commission as +an accountant.” The parties proposed that they exchange briefs on or before March 31, 2023, but +did not address additional briefing in the case. In addition, the parties agreed that the +abbreviation “CPA” should be removed from the caption of the case.5 +Accordingly, IT IS ORDERED that, the parties shall each file by March 31, 2023, a brief +addressing whether the Commission should censure Chen or disqualify him from appearing or +practicing before the Commission for a period of time or permanently6 and identifying the +standard applicable to the Commission’s review and consideration of the record and briefs;7 the +parties shall file any responses to the initial briefs by May 1, 2023; and the parties may file any +replies to any such responses by May 15, 2023;8 and it is further +ORDERED that, for the purpose of narrowing the matters at issue in the case and to +facilitate citations to the record, the parties are directed to file any joint stipulations of fact on or +before March 31, 2023, or that, in the alternative, the parties notify the Commission of any +alternative agreement regarding the filing of any such stipulations by that date; and it is further +ORDERED that the caption in this proceeding be amended to remove “CPA.”9 +Pursuant to Rule of Practice 180(c), a party’s failure to file a brief or comply with this +order may result in the Commission’s determination of the matter at issue against that party, +entry of default, dismissal of the proceeding, or the prohibition of the introduction of evidence or + +4 See 17 C.F.R. § 201.250(b) (allowing for determination of case where “there is no +genuine issue with regard to any material fact and that the movant is entitled to summary +disposition as a matter of law”); Jay T. Comeaux, Exchange Act Release No. 72896, 2014 WL +4160054, at *2 (Aug. 21, 2014) (stating that “[t]he facts on summary disposition must be viewed +in the light most favorable to the non-moving party” (citing Robert L. Burns, Advisers Act +Release No. 3260, 2011 WL 3407859, at *9 (Aug. 5, 2011))). +5 See Chen, 2023 WL 345030, at *1 n.4 and *4 n.39 (recognizing that Chen is not currently +licensed to practice as a CPA and directing the parties to confer and specify whether the caption +should be amended to eliminate “CPA”). +6 See Rule of Practice 102(e)(3)(iii), 17 C.F.R. § 102(e)(3)(iii). +7 See, e.g., supra notes 3 and 4 and accompanying text; cf. O’Shea v. UPS Ret. Plan, +837 F.3d 67, 72 & n.8 (1st Cir. 2016) (discussing considerations applicable where parties submit +matter for consideration as a “case stated”). +8 Attention is called to Rule of Practice 450(b) and (c), 17 C.F.R. § 201.450(b) and (c), +with respect to content and length limitations, and Rules of Practice 150 - 153, 17 C.F.R. +§ 201.150 - 153, with respect to form and service. +9 Cf. Karen Bruton, Exchange Act Release No. 84627, 2018 WL 6061351, at *4 & n.25 +(Nov. 19, 2018) (granting respondent’s request that “CPA” be stricken from the caption because +her CPA license was inactive). +3 + +the exclusion of testimony regarding the matter at issue.10 The Commission may decide at a later +point that, contrary to the parties’ agreement, the proceeding cannot be decided solely on the +papers and that, consequently, a live hearing should be held for the taking of evidence. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + +Vanessa A. Countryman +Secretary + + + + +10 17 C.F.R. § 201.180(c). \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4391.pdf b/raw/aaer/2023/AAER-4391.pdf new file mode 100644 index 0000000000000000000000000000000000000000..168e221c5224851c837658021e1a0d20dfdc0848 --- /dev/null +++ b/raw/aaer/2023/AAER-4391.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4df1250ff775ec4a36fdcfd156386a2a10855ce632c5fa1b50c6d37a02f9df81 +size 418974 diff --git a/raw/aaer/2023/AAER-4393.pdf b/raw/aaer/2023/AAER-4393.pdf new file mode 100644 index 0000000000000000000000000000000000000000..39a23008a6cc800c74e43f315ec70b3daaadbe6b --- /dev/null +++ b/raw/aaer/2023/AAER-4393.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:a00cdfb2c3c7ddfd93a2f35b12fce7b62cb7f70eee5fbbd8378fcdf228a9797c +size 211418 diff --git a/raw/aaer/2023/AAER-4398.pdf b/raw/aaer/2023/AAER-4398.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f745aaa1403222befb2cabc09c532e0b40fc2d29 --- /dev/null +++ b/raw/aaer/2023/AAER-4398.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4868ad564234d72a69f92e771eed818fe550e775fe75c11ab5e8fc7f0db785ee +size 247859 diff --git a/raw/aaer/2023/AAER-4400.txt b/raw/aaer/2023/AAER-4400.txt new file mode 100644 index 0000000000000000000000000000000000000000..d86036458f4c027bfb88619212ad9e5c00d0faf1 --- /dev/null +++ b/raw/aaer/2023/AAER-4400.txt @@ -0,0 +1,124 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97292 / April 12, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4400 / April 12, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21365 + + +In the Matter of + + +MICHAEL K. MOLEN, + + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against +Michael K. Molen (“Respondent” or “Molen”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + +2 +proceedings, and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Molen, age 66, is a resident of Berkeley Lake, Georgia. Molen is or was +the sole officer, sole director, and controlling shareholder of Enviro Impact Resources, Inc., +formerly known as Industry Source Consulting, Inc. (“INSO”), a public company with the stock +ticker symbol “INSO” that publicly posts quarterly and annual reports (“Reports”) and related +documents on the OTC Markets Group, Inc. (“OTC Markets”) website. During relevant periods +from at least 2014 to 2022, Molen prepared and posted INSO’s Reports, which included +unaudited financial statements. During such relevant periods, Molen was INSO’s principal +financial officer and principal executive officer, and he signed and certified Reports in those +capacities. Molen is not, and had not been, licensed as a Certified Public Accountant. + + 2. On March 30, 2023, a judgment was entered by consent against Molen, +permanently enjoining him from future violations of Sections 5 and 17(a) of the Securities Act of +1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, in the +civil action entitled Securities and Exchange Commission v. Michael K. Molen, et al., Civil Action +File Number 1:23-cv-00735-LMM, in the United States District Court for the Northern District of +Georgia, Atlanta Division (the “Judgment”). Pursuant to the Judgment, the court also ordered +against Molen an officer and director bar and a penny stock bar. In addition, the court ordered that +Molen pay disgorgement of ill-gotten gains plus prejudgment interest and a civil penalty, in +amounts to be determined by the court upon a motion by the Commission at a later date. + +3. The Commission’s complaint alleged, among other things, that during +relevant periods from at least 2014 to 2022, Molen signed, certified, and publicly posted false +and misleading INSO Reports and related documents on the OTC Markets website. In +particular, the Commission’s complaint alleged that Molen prepared and publicly posted false +and misleading unaudited financial statements, because Molen certified that the financial +statements and other financial information included in the Reports fairly presented in all material +respects the financial condition, results of operations and cash flows of INSO as of and for the +periods presented in the Reports, when in fact Molen did not accurately disclose INSO’s actual +financial condition, results of operations and cash flows for the periods presented. The +Commission’s complaint further alleged that Molen falsely and misleadingly represented that the +financial statements were prepared in accordance with U.S. Generally Accepted Accounting +Principles, and by persons with sufficient financial skills to do so, when neither was true. The +Commission’s complaint also alleged that, for many years, Molen caused INSO to report a +$500,000 license as its principal asset on its financial statements, when Molen had insufficient +support for the existence of the license as an asset or its purported $500,000 valuation. + + +3 +Furthermore, the Commission’s complaint alleged that Molen directly or indirectly made false +and misleading statements to brokerage firms, INSO’s transfer agent, and other third parties to +facilitate fraudulent transactions in INSO stock and convertible promissory notes, largely for +Molen’s ultimate benefit, and that Molen directly or indirectly deceptively created, and/or +participated in the creation of, forged bank records and other forged documents used to facilitate +the fraudulent transactions. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Molen’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Molen is suspended from +appearing or practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4406.pdf b/raw/aaer/2023/AAER-4406.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1259379569f198267c1bdefcde8bd93466dabce6 --- /dev/null +++ b/raw/aaer/2023/AAER-4406.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:c2f956b645badbb2693f89f582755ee4e1319bcd88e345f3bee61318b28228b8 +size 275977 diff --git a/raw/aaer/2023/AAER-4409.pdf b/raw/aaer/2023/AAER-4409.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a42e015343af96856533fddc1252b8fa7c7e4326 --- /dev/null +++ b/raw/aaer/2023/AAER-4409.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b4b724f338d190bc1a36cd30ebe40879bd4a61cf27251e1e6d030b7ff7ced8d3 +size 231261 diff --git a/raw/aaer/2023/AAER-4410.pdf b/raw/aaer/2023/AAER-4410.pdf new file mode 100644 index 0000000000000000000000000000000000000000..17993ebfd49dc16e157efa6de6c0ab88afe473ab --- /dev/null +++ b/raw/aaer/2023/AAER-4410.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:dbe38e79b31c30ca9db79d1834dd5e65efaa580b39971e9bc9cedddf28a373b8 +size 128878 diff --git a/raw/aaer/2023/AAER-4412.pdf b/raw/aaer/2023/AAER-4412.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b913770a95e5c8a77a11f6a13859e833d8888fca --- /dev/null +++ b/raw/aaer/2023/AAER-4412.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:74d5bcb400379542211c1cb631d71588d700246db4cd70acaa26096872980ba1 +size 195123 diff --git a/raw/aaer/2023/AAER-4414.pdf b/raw/aaer/2023/AAER-4414.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2f39df2060ae21d3976add09f3135635993a4647 --- /dev/null +++ b/raw/aaer/2023/AAER-4414.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:aa672e1242f6fd49baf7fd6aafa32704b1bfa3dd2cf7c196a41020f20017febf +size 197925 diff --git a/raw/aaer/2023/AAER-4416.pdf b/raw/aaer/2023/AAER-4416.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b8851c07a66e81e9180a095afbcc67d0eff7df88 --- /dev/null +++ b/raw/aaer/2023/AAER-4416.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:116c199b803c8314439a505f9f52a08f42f41479ba5d1603bfe880451b08255b +size 194093 diff --git a/raw/aaer/2023/AAER-4417.pdf b/raw/aaer/2023/AAER-4417.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b1bf0b3ec3ae80bdb98566f47bb92b9864434525 --- /dev/null +++ b/raw/aaer/2023/AAER-4417.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f8f9936a7a3b7ee4e44f43b724eb4e76b69df83bd153052ffc5a6a305287a84f +size 182481 diff --git a/raw/aaer/2023/AAER-4419.pdf b/raw/aaer/2023/AAER-4419.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d47f62b2f11b14e7f147f35069939b281727e6b1 --- /dev/null +++ b/raw/aaer/2023/AAER-4419.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:91205badb3bafdfccaecbf895b5829c9459028c70e7e3d5b1f1b57773c0bb841 +size 158778 diff --git a/raw/aaer/2023/AAER-4420.txt b/raw/aaer/2023/AAER-4420.txt new file mode 100644 index 0000000000000000000000000000000000000000..88271200b75a932ee393d72a8ea5cbbc1fa7fd93 --- /dev/null +++ b/raw/aaer/2023/AAER-4420.txt @@ -0,0 +1,77 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 97757 / June 20, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4420 / June 20, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21496 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +BRIAN C. JENSEN, CPA, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Brian C. Jensen (“Jensen”) pursuant to Rule 102(e)(2) of the +Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Jensen was a certified public accountant in Idaho until his license lapsed in 2017. + +2. On July 6, 2018, a judgment of conviction was entered against Jensen in United +States v. Jensen, No. 16-cr-86 (BMC), in the United States District Court for the Eastern District +of New York, finding him guilty of one count of securities fraud, in violation of Title 15, United +States Code, Sections 78j(b) and 78ff. + +3. As a result of this conviction, Jensen was sentenced to 3 years of probation and + +1 Rule 102(e)(2) provides in pertinent part: “Any . . . person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + + +2 + +ordered to pay restitution in the amount of $2,000,000. + + +III. + +In view of the foregoing, the Commission finds that Jensen has been convicted of a +felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Brian C. Jensen is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4421.pdf b/raw/aaer/2023/AAER-4421.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9955e23c5ca5dd3f71da61cfe34e6fbd863a830f --- /dev/null +++ b/raw/aaer/2023/AAER-4421.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ceeaf59683350c8ae059a5a9432ff612fa6ba8a95e10624fced996679b0a252b +size 181295 diff --git a/raw/aaer/2023/AAER-4422.pdf b/raw/aaer/2023/AAER-4422.pdf new file mode 100644 index 0000000000000000000000000000000000000000..53b9496537cdcc9255b63fe4869d4b02d67b2d1e --- /dev/null +++ b/raw/aaer/2023/AAER-4422.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9106c2b169089cb9ef0753c19b2b67c8b3a6a4574de68cd01b0f511b9110eca2 +size 242366 diff --git a/raw/aaer/2023/AAER-4428.pdf b/raw/aaer/2023/AAER-4428.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0a52e8b42108e83ad15d8d84574b66dc50618b76 --- /dev/null +++ b/raw/aaer/2023/AAER-4428.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:40c2cb461444455afa190b514c5f62e5f2664654e2156ff8af9479c405fd5b85 +size 169887 diff --git a/raw/aaer/2023/AAER-4429.pdf b/raw/aaer/2023/AAER-4429.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7f18d067c831558b84424961209fe778ff9e6238 --- /dev/null +++ b/raw/aaer/2023/AAER-4429.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:69e0bb2c626ab7f8b13939f487c62a67b9883aba84994049bcd0a3a45c61890e +size 171624 diff --git a/raw/aaer/2023/AAER-4434.pdf b/raw/aaer/2023/AAER-4434.pdf new file mode 100644 index 0000000000000000000000000000000000000000..1c99595a1586adeed2885834ee8bd13619a1b02a --- /dev/null +++ b/raw/aaer/2023/AAER-4434.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b6935c2d375240207b3af86b9638b657a60fe4aca792e5c268d1e6b0797e2397 +size 259888 diff --git a/raw/aaer/2023/AAER-4435.pdf b/raw/aaer/2023/AAER-4435.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7abee036ab61e738f5d5145d6478aa7835f367cc --- /dev/null +++ b/raw/aaer/2023/AAER-4435.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:2e03273530a692b598d5015bb259103ea196ad27edee148d1808d0df9af8911c +size 270518 diff --git a/raw/aaer/2023/AAER-4437.pdf b/raw/aaer/2023/AAER-4437.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f1b1d635a25d19f1b082bae38c4490c000797ad7 --- /dev/null +++ b/raw/aaer/2023/AAER-4437.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:52d1df80deac1688f614f0d59053ca7593f6f398e121669a8601cddfc8dd1089 +size 192996 diff --git a/raw/aaer/2023/AAER-4438.pdf b/raw/aaer/2023/AAER-4438.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2611e27c55be0a6e3ce5c1f59dd683c9323e9c82 --- /dev/null +++ b/raw/aaer/2023/AAER-4438.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:f21f5429f7aebe6a52361c0be2d07aee0f51ab517c6964986bc8ac82dbebdcde +size 531884 diff --git a/raw/aaer/2023/AAER-4439.pdf b/raw/aaer/2023/AAER-4439.pdf new file mode 100644 index 0000000000000000000000000000000000000000..96af3310845702df003fd340f70eb827b6b3cce6 --- /dev/null +++ b/raw/aaer/2023/AAER-4439.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:90a69da2bc7517c45c4aa4d93e8159f032d155242aaa01e1428ea800423e9339 +size 126092 diff --git a/raw/aaer/2023/AAER-4439.txt b/raw/aaer/2023/AAER-4439.txt new file mode 100644 index 0000000000000000000000000000000000000000..a58b0d1159f258e89081c0c576ca4de7d0989e94 --- /dev/null +++ b/raw/aaer/2023/AAER-4439.txt @@ -0,0 +1,69 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98122 / August 14, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4439 / August 14, 2023 + +Admin. Proc. File No. 3-21214 + + +In the Matter of + +JOSHUA ABRAHAMS, CPA + + +ORDER POSTPONING PROCEEDING + +On October 21, 2022, the Securities and Exchange Commission issued an order +instituting administrative proceedings (“OIP”) against Joshua Abrahams, CPA, pursuant to +Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules +of Practice.1 On April 3, 2023, the Commission issued a scheduling order, reflecting the parties’ +joint stipulation, that provided fact discovery would close on July 31, 2023.2 On July 28, 2023, +the parties filed a joint stipulation to stay the proceeding upon the conclusion of the fact +discovery period. The parties “agree that a stay of all deadlines . . . is warranted” pending the +Supreme Court’s resolution of SEC v. Jarkesy3 in light of the issues that are before the Supreme +Court in that case. + + +1 Joshua Abrahams, CPA, Exchange Act Release No. 96127, 2022 WL 13566785 (Oct. 21, +2022). +2 Joshua Abrahams, CPA, Exchange Act Release No. 97238, 2023 WL 2771179 (Apr. 3, +2023). +3 No. 22-859, 2023 WL 4278448 (June 30, 2023) (cert. granted). +2 + +We construe the stipulation as a request for postponement under Commission Rule of +Practice 161.4 Rule 161 authorizes postponements based on a consideration of, among other +things, the length of the proceeding to date; the number of postponements, adjournments, or +extensions already granted; the stage of the proceedings at the time of the request; and any other +such matters as justice may require. Here, this proceeding was instituted less than a year ago; +fact discovery (on the schedule proposed by the parties and adopted by the Commission) has just +closed; and no evidentiary hearings have been held. Given the foregoing, and the parties’ joint +stipulation, we conclude that a postponement of this proceeding is warranted. For the same +reasons, we find that a postponement of more than 21 days is necessary.5 +Accordingly, it is ORDERED that the proceeding is postponed until the earlier of 30 days +after the Supreme Court issues its mandate in Jarkesy or July 31, 2024, and that, when the +proceeding resumes, the parties shall promptly file a status report discussing the impact of that +decision on this proceeding, if any, and any other relevant matters. It is further ORDERED that +the April 3, 2023, scheduling order, insofar as it prescribes deadlines after the conclusion of fact +discovery, is vacated. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + +4 17 C.F.R. § 201.161; see Francis V. Lorenzo, Exchange Act Release No. 10460, 2018 +WL 994316, at *1 (Feb. 21, 2018) (construing motion for stay as request for postponement under +Rule of Practice 161). +5 See Rule of Practice 161(c)(1), 17 C.F.R. § 201.161(c)(1) (“Postponements . . . shall not +exceed 21 days unless the Commission or the hearing officer states on the record or sets forth in +a written order the reasons why a longer period of time is necessary.”). \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4440.pdf b/raw/aaer/2023/AAER-4440.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ff655edf710b24628b33c8a3c571660aecf15f27 --- /dev/null +++ b/raw/aaer/2023/AAER-4440.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:d0e6be5a14f10a1a04672ef34af75548cb8ebc8ecac04066bad1cd37dcf2a4f4 +size 356566 diff --git a/raw/aaer/2023/AAER-4442.pdf b/raw/aaer/2023/AAER-4442.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8470b4b56bec754842909486cb1f8fbd255ce63e --- /dev/null +++ b/raw/aaer/2023/AAER-4442.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0c3ecb0f37c5254646421f5c0c242f7d3689e56e436578038ece2b1f4311d70b +size 162119 diff --git a/raw/aaer/2023/AAER-4446.pdf b/raw/aaer/2023/AAER-4446.pdf new file mode 100644 index 0000000000000000000000000000000000000000..dcac0e79bce025cdb3ecf13bdb9ccaac91840a09 --- /dev/null +++ b/raw/aaer/2023/AAER-4446.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:aa5a87ac908b65c0d5a1cdc74c2593bc5f0bd66b790d75f146d43ba07f6c0cc7 +size 326470 diff --git a/raw/aaer/2023/AAER-4447.pdf b/raw/aaer/2023/AAER-4447.pdf new file mode 100644 index 0000000000000000000000000000000000000000..659815757cdfa1fac9b00d33475c6b87386cfe20 --- /dev/null +++ b/raw/aaer/2023/AAER-4447.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:6054f9c693313496a2dacbddfe372d3b876fb250c858395dfe9e299c772e0865 +size 325414 diff --git a/raw/aaer/2023/AAER-4450.pdf b/raw/aaer/2023/AAER-4450.pdf new file mode 100644 index 0000000000000000000000000000000000000000..cbe041a2c8376fcc4586e560fab3568cebb46369 --- /dev/null +++ b/raw/aaer/2023/AAER-4450.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e5ab4823ce2dd7bbcc931261b9ed44cc0061e2fb7ae42f39aeed50d7c5ec24ca +size 167919 diff --git a/raw/aaer/2023/AAER-4451.txt b/raw/aaer/2023/AAER-4451.txt new file mode 100644 index 0000000000000000000000000000000000000000..669514be96ff6fbaef252f682ee7d3f59b3d8fb1 --- /dev/null +++ b/raw/aaer/2023/AAER-4451.txt @@ -0,0 +1,91 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98229 / August 28, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4451 / August 28, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21584 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +PETER ARMBRUSTER, CPA, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Peter Armbruster pursuant to Rule 102(e)(2) of the Commission’s Rules +of Practice [17 C.F.R. § 201.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Armbruster, age 64, has been a certified public accountant licensed to practice in +the State of Wisconsin. The license is currently expired. From around 2005 until his termination +in March 2017, Armbruster served as Chief Financial Officer of Roadrunner Transportation +Systems, Inc. (“Roadrunner”). + +2. Roadrunner is a shipping and logistics company incorporated in Delaware. From +in or around 2010 to in or around March 2017, Roadrunner’s corporate headquarters was in +Cudahy, Wisconsin. From 2010 through early 2020, Roadrunner’s common stock was registered +with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + + +2 + +(“Exchange Act”) and was quoted under the symbol “RRTS” on the New York Stock Exchange +(“NYSE”). On April 6, 2020, Roadrunner filed a Form 25 withdrawing its common stock from +listing on the NYSE and on April 17, 2020 filed a Form 15 terminating its common stock from +registration under Section 12(g) of the Exchange Act. + +3. On July 29, 2021, Armbruster was convicted after trial in the United States +District Court for the Eastern District of Wisconsin of committing one count of acts to +fraudulently influence accountants in violation of 17 C.F.R. § 240.13b2-2(b) and 15 U.S.C. § +78ff(a); two counts of false entries in a public company’s books, records, and accounts in +violation of 15 U.S.C. §§ 78m(b)(2), 78m(b)(5), and 78ff(a); and one count of securities fraud in +violation of 18 U.S.C. §§ 2 and 1348 in connection with his work for Roadrunner. United States +v. Armbruster, et al., Case No. 18-cr-130 (E.D. Wis.). + +4. As a result of this conviction, Armbruster was sentenced to 24 months +imprisonment in a federal penitentiary to be followed by one year of supervised release and +ordered to pay restitution in the amount of $1,142,597.50. + +III. + +In view of the foregoing, the Commission finds that Armbruster has been convicted of a +felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Peter Armbruster is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4456.pdf b/raw/aaer/2023/AAER-4456.pdf new file mode 100644 index 0000000000000000000000000000000000000000..29345fb9f4aa26f70a636f64bb6a289cccbec0bf --- /dev/null +++ b/raw/aaer/2023/AAER-4456.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:9b11744be24eec04ddb347d81da59fb1119181e4e9c8fc218cccabffb87394df +size 150505 diff --git a/raw/aaer/2023/AAER-4458.txt b/raw/aaer/2023/AAER-4458.txt new file mode 100644 index 0000000000000000000000000000000000000000..df7ab651d761af99a844dc4457056058331f4536 --- /dev/null +++ b/raw/aaer/2023/AAER-4458.txt @@ -0,0 +1,589 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98352 / September 12, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4458 / September 12, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21650 + + +In the Matter of +Alfonse Gregory Giugliano, +CPA +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Alfonse +Gregory Giugliano (“Respondent” or “Giugliano”) pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found … (1) not to possess the requisite qualifications to represent others; (2) to +be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations issued +thereunder. + + +2 +Rules of Practice.2 +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: +A. SUMMARY +1. Giugliano served as Marcum LLP’s (“Marcum” or the “Firm”) National Assurance +Services Leader for over 20 years. In this role, he had primary responsibility for quality controls +across the Firm’s assurance practice, overseeing all related policies, procedures, and monitoring, +including those relevant to compliance with PCAOB quality control and audit standards. He also +directly or indirectly supervised all personnel working within Marcum’s quality control functions. +2. From at least 2020, Marcum engaged in systemic quality control failures and +widespread violations of PCAOB audit standards.4 Marcum’s violations of professional standards +primarily related to audit work for special purpose acquisition companies (“SPACs”). However, the + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may censure a person or deny, temporarily or permanently, the +privilege of appearing or practicing before it … to any person who is found … to have +engaged in unethical or improper professional conduct. +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. +4 Marcum, LLP, Exchange Act Rel. No. 97773 (June 21, 2023). Throughout this Order, unless +otherwise specified, references to “audit standards” refer to audit standards promulgated by the +PCAOB. + + +3 +nature of those professional standard violations—including their volume and range—reflected +deficiencies relevant to and impacting Marcum’s entire public company audit practice. +3. Throughout the relevant time, Giugliano failed to sufficiently address and timely +remediate numerous deficiencies in the Firm’s quality control system. As a result, Giugliano’s +conduct led to quality control and audit standard violations that permeated many stages of +engagement work, such as client acceptance, engagement partner supervision and review, audit +documentation, and technical consultations. While Giugliano was at the helm of the Firm’s quality +control system, Marcum did not sufficiently monitor the effectiveness of many policies and +procedures, and in many areas, did not adequately communicate policies and procedures to relevant +personnel. +4. Investors rely on audit firms to serve a critical function regarding financial reporting. +Quality controls and audit standards are necessary to maintaining this essential gatekeeping role. +Those charged with oversight and management of these quality control functions are vital to an +audit firm’s ability to fulfill this critical function. The quality control system that Giugliano +oversaw failed, and as a result, over a multi-year period, certain Marcum audits were not conducted +in compliance with audit standards. +B. RESPONDENT +5. Alfonse Gregory Giugliano, age 61, is a resident of Dix Hills, New York. He has +worked at Marcum since January 2001. From 2001 to September 2022, Giugliano served as +Marcum’s National Assurance Services Leader and the partner in charge of the firm’s quality +control system, including all relevant policies and procedures. Giugliano was sanctioned by the +PCAOB in 2019, based on its findings that Marcum violated independence standards over the +course of four years.5 He has been licensed as a certified public accountant in the State of New +York since 1985. +C. OTHER RELEVANT ENTITY +6. Marcum, a New York limited liability partnership headquartered in New York, New +York, is a public accounting firm in the United States. As of mid-2022, Marcum had over 370 +partners and 2,300 employees, with offices in more than 30 cities. Marcum has been registered with +the PCAOB since October 2003. + +5 In the Matter of Marcum LLP and Alfonse Gregory Giugliano, CPA, PCAOB Release No. 105- +2019-022 (Sept. 10, 2019). + + +4 +D. FACTS +MARCUM’S SPAC PRACTICE +7. In 2020 and 2021, over 860 SPACs completed initial public offerings (“IPOs”) in +the United States. Over 400 of these SPAC IPOs were audited by Marcum. In 2019, Marcum had +served as the auditor for only 185 public company issuers; by 2022, Marcum was responsible for +auditing over three times that number—a total of 575 issuers, the majority of which were SPACs. +8. The strain of this exponential growth in Marcum’s public company practice exposed +substantial, widespread, and pre-existing deficiencies in the Firm’s underlying quality control +policies, procedures, and monitoring that Giugliano oversaw. Giugliano was aware that, in the +period immediately preceding the SPAC market’s explosion, Marcum’s annual inspections by the +PCAOB had revealed an increasing number of deficiencies. Giugliano was also aware that Marcum +was subject to consecutive PCAOB enforcement orders—in 2019 and 2020—related to quality +control failures concerning independence and client acceptance; the 2019 order also sanctioned +Giugliano based on the PCAOB’s findings that Marcum violated independence standards. +9. Through his oversight, Giugliano was also aware that Marcum’s own internal +inspections—starting at least in 2018 and continuing through 2021—also revealed deficiencies. +Over several years, these inspections identified numerous deficiencies in audit documentation. The +2020 internal inspection also concluded that such deficiencies were caused by insufficient time +spent on engagements and audit documentation. Despite inspection findings, Giugliano did not +sufficiently address and timely remediate deficiencies in the Firm’s policies, procedures, and +monitoring. +CLIENT ACCEPTANCE AND ITS CONSEQUENCES +10. In his role as National Assurance Services Leader, Giugliano had primary +responsibility for Marcum’s policies and procedures related to client acceptance, including authority +to revise such policies and procedures. Marcum’s client acceptance policies, procedures, and +monitoring did not provide reasonable assurance that the Firm was undertaking only those +engagements that the Firm could reasonably expect to be completed with professional competence, +as required by PCAOB Quality Control (“QC”) 20.15(a), QC 20.03, and QC 20.20. Despite his +awareness of relevant facts, Giugliano failed to take sufficient and timely steps to remediate relevant +firm policies, procedures, and monitoring related to client acceptance. +11. For example, Giugliano was aware that Marcum had insufficient policies and +procedures related to the evaluation of personnel capacity. Giugliano knew, for example, that to the +extent that Marcum evaluated staffing capacity, it did so in connection with the logistics and +scheduling of work to which it had already committed. +12. While Giugliano was not typically involved in individual client acceptance +decisions, he was one of four members on Marcum’s Client Acceptance Committee. In this role, he + + +5 +was contemporaneously aware of the volume of new client acceptances. Giugliano knew that +Marcum’s SPAC client acceptances significantly increased over the course of 2020 and 2021. In +2020, Marcum accepted 178 new SPAC clients. In 2021, it accepted 633 new SPAC clients, +including 159 accepted in March 2021 alone—a substantial increase from the 8 new SPAC clients +accepted just one year prior, in March 2020. +13. Giugliano also knew that Marcum therefore faced difficulty in staffing engagements, +difficulty and delays in completing work within requisite deadlines, and non-compliance with +numerous PCAOB audit standards. These difficulties and delays became especially apparent in the +summer and fall of 2020, as Marcum’s monthly SPAC client acceptance figures increased from +single-digit figures in June, to the mid-teens in July, to 29 clients per month, for three consecutive +months in August, September, and October. +14. From as early as October 2020, Giugliano was aware of widespread failures in the +timely completion, assembly, and retention of audit documentation. For example, Giugliano +received weekly emails reflecting that the number of work paper binders that were not finalized and +assembled for retention within the PCAOB-required 45-day period increased from 23 to 687 +between October 2020 and June 2021. +15. Moreover, Giugliano was repeatedly notified of capacity constraints throughout the +SPAC practice. At the beginning of February 2021, for example, a national office partner alerted +Giugliano that managers in the SPAC practice were overworked and lacking resources. +Nonetheless, over the course of February 2021, Marcum accepted a record 114 new SPAC clients. +The same pattern of notifications and high client acceptances continued into March 2021, as the +Firm accepted a record 159 new SPAC clients. +RESULTING AUDIT STANDARD VIOLATIONS +16. Marcum’s exponential client growth in its SPAC practice exposed pre-existing +shortcomings in Marcum’s quality control system, including policies, procedures, and monitoring +that were insufficient to provide reasonable assurance that audit work satisfied the requirements of +audit standards including AS 1215 (audit documentation), AS 1220 (engagement quality review), +AS 1201 (supervision of the audit engagement), and AS 1015 (due professional care), as required +by QC 20.03, QC 20.17, and QC 20.20. +17. In 2020 and 2021, such shortcomings, combined with severe capacity constraints, +led to a myriad of audit standard violations, including basic audit documentation requirements, and +documentation requirements specific to engagement quality reviews (“EQRs”).6 The volume and + +6 Throughout this Order, “EQR” will be used to refer to both: (1) the audit partner (the +“engagement quality reviewer”) providing concurring approval of an audit report, and (2) the + + + +6 +range of these violations also resulted in violations of audit standards related to engagement partner +supervision and review and due professional care. Throughout this period, even though Giugliano +was aware of relevant facts reflecting the insufficiency of Marcum’s quality control system, he did +not take sufficient and timely steps to remediate. +Audit Documentation (AS 1215) +18. At least as early as 2019, Giugliano was on notice that Marcum personnel frequently +failed to sign off on certain work papers prior to the release of audit reports. For example, +Giugliano signed Marcum’s 2019 internal inspection report, which identified this deficiency. Two +years later, Giugliano directed and oversaw a separate internal review focused on SPAC work +papers that found that the majority of audit binders lacked numerous work paper sign offs. Across +this review, missing and late sign offs were repeatedly found on key work papers, including routing +slips. Marcum’s “routing slip” work paper was designed to serve as the Firm’s control to ensure +and document that procedures and review were completed prior to the release of an audit report. +19. Yet, throughout the relevant period, Giugliano took insufficient action to address +Marcum’s work paper sign off deficiencies. Instead, Marcum’s written policies failed to address the +explicit requirements of AS 1215.06(b), including that audit documentation reflect “the date such +work was completed” and “the date of such review.” In addition, in connection with routing slip +sign offs, Giugliano oversaw efforts to implement a new electronic system designed to improve the +timeliness of sign offs, however, he took insufficient steps to address ongoing deficiencies in the +nearly two-year period during which the system was under development. +Engagement Quality Review Documentation (AS 1220.19) +20. Throughout the relevant period, Giugliano was aware of insufficiencies in the +documentation of EQR procedures. Giugliano was aware, for example, that EQR work paper sign +offs were frequently either signed post-issuance or missing. These delinquent sign offs included +late sign offs on Marcum’s “routing slip” work paper, as well as the work paper memo designed to +memorialize the EQR’s review procedures. These deficiencies occurred against a backdrop in +which Giugliano was on notice, for several years running, that the engagement quality review +process was under stress. This included repeated internal inspection findings flagging concerns that +EQRs were not provided sufficient time to conduct their review procedures, and that engagement +teams were over-reliant on EQRs to catch deficiencies and documentation issues. + +review procedures (an “engagement quality review”) performed by such partner in connection +with providing his or her concurring approval. + + +7 +Engagement Partner Supervision and Review; Due Professional Care (AS 1201, AS 1015) +21. Dating back to at least January 2021, Giugliano acknowledged that insufficient +engagement partner supervision and review was the “root cause” of Marcum’s poor internal and +PCAOB inspection findings, and that the insufficient supervision and review was caused by +insufficient time and attention by engagement partners, including the failure to provide +contemporaneous oversight of engagement work. +22. Giugliano was also aware that after January 2021, Marcum continued to accept an +escalating number of new clients, resulting in correspondingly escalating partner workloads. He +was also aware that, with these escalating workloads, SPAC partners were often not providing +timely oversight, including supervision of initial planning and staff-level work. Giugliano was also +aware of insufficient supervision and review across other stages of SPAC engagement work, +including, for example, in connection with ensuring timely and sufficient audit documentation. +23. As described throughout, Giugliano was aware of facts reflecting numerous and +widespread audit standard violations in SPAC engagements. As Giugliano should have been aware, +the volume and range of these violations reflect that engagement partners were failing to exercise +due professional care in their work, in violation of AS 1015. +FAILURES IN MARCUM’S POLICIES AND PROCEDURES +Technical Consultations (QC 20.19) +24. As National Assurance Services Leader, Giugliano had ultimate responsibility for +Marcum’s quality control policies and procedures, including responsibility for ensuring such +policies and procedures were sufficient to provide reasonable assurance that firm personnel conduct +audit work in compliance with requisite audit standards. Among other requirements, these +standards require that personnel obtain technical consultations in the appropriate circumstances, +such as when confronted with complex, unusual, or unfamiliar issues. These consultations are +conducted by expert accounting personnel outside the engagement team, often working within a +firm’s “national office.” +25. Under Giugliano’s leadership, however, Marcum lacked sufficient policies, +procedures, and monitoring related to technical consultations, as required by QC 20.19, as well as +QC 20.03, QC 20.17, and QC 20.20. The adoption and implementation of any such policies, +procedures, and monitoring was within Giugliano’s ability and authority, yet he did not take +sufficient and timely steps to do so. Consequently, Marcum’s policies, procedures, and monitoring +failed to provide reasonable assurance: (a) that personnel obtained consultations when appropriate, +(b) that individuals consulted had appropriate levels of knowledge, competence, judgment, and +authority, and (c) related to consultation quality. +26. The insufficiency of Marcum’s quality control is evidenced by instances in which +even mandatory consultations were not obtained. For example, the limited circumstances in which + + +8 +Marcum’s policy explicitly required consultations included in the event of any restatement. +Marcum’s policy made Giugliano personally responsible for performing any restatement-related +consultations. Over the course of 2021, Marcum SPAC clients issued hundreds of restated +financials, including restatements related to the accounting for warrants. Yet, Marcum’s +engagement teams did not request and receive a restatement consultation in connection with most +SPAC restatements. +Documentation and Communication of Policies and Procedures; Evaluation of Sufficiency of +Practice Aids and Guidance (QC 20.20, 20.23, 20.24) +27. As National Assurance Services Leader, Giugliano had ultimate responsibility for +the substance of Marcum’s quality control policies and procedures, as well as for documenting and +communicating such policies and procedures to relevant personnel, as required by QC 20.23 and +QC 20.24. Giugliano was also responsible for evaluating the Firm’s guidance materials and practice +aids, as required by QC 20.20. Yet, throughout the relevant time period, under Giugliano’s tenure, +Marcum failed to adequately document and communicate its policies and procedures and failed to +adequately monitor its related guidance materials and practice aids. +28. Under Giugliano’s leadership, Marcum did not memorialize its SPAC policies and +procedures in a consistent fashion or centralized location. In certain instances, Marcum’s SPAC +practice appeared to deviate from standard documentation requirements without memorializing such +practice deviations in any formal policy. In lieu of any formal policy or centralized guidance +document, the SPAC practice typically relied upon email communications, including many sent by +Giugliano, which piecemeal guidance was not centralized and evolved over time. +29. Under Giugliano’s leadership, Marcum’s failure to consistently memorialize policies +and procedures also extended outside the SPAC practice. Formal policy documents at times +provided conflicting guidance, including, for example, regarding topics including technical +consultations, work paper sign off requirements, and the documentation of alterations made to work +papers following the PCAOB-mandated “documentation completion date.” Formal policy +documents at times also conflicted with separate guidance circulated only via email. +30. Giugliano was also aware of wide ranging questions and confusion within the Firm +regarding relevant policies and procedures. Such questions and confusion reflected Marcum’s +failure to sufficiently evaluate, on an ongoing basis, the appropriateness and sufficiency of its +guidance materials, and practice aids. For example, in light of certain concerns being raised, +Giugliano acknowledged that a relevant work paper template had not been appropriately maintained +or updated since its creation and needed significant work and updates. +MARCUM’S INSUFFICIENT MONITORING +31. In addition to the quality control deficiencies discussed above, Giugliano did not +implement monitoring procedures sufficient to provide reasonable assurance that Marcum’s +underlying policies and procedures were suitably designed and effectively applied, as required by + + +9 +QC 20.20. In particular, Giugliano did not implement monitoring procedures sufficient to provide +timely detection of widespread audit documentation and risk assessment standard violations +occurring across engagements throughout the SPAC practice over a multi-year period. As a result, +hundreds of Marcum SPAC audits reflected violations of audit standards related to both audit +documentation (AS 1215) and risk assessment procedures (AS 2110), which violations went +undetected until mid-2021, and consequently, unremediated. +Documentation of Warrant Accounting Procedures (AS 1215) +32. Among Marcum’s SPAC clients, virtually all issued warrants. Warrants issued by +SPACs were determined by Marcum to be complex financial instruments. Indeed, such warrants +were typically among the most complex components of a SPAC IPO audit. While many SPAC +warrant agreements contained similar terms corresponding to parallel accounting treatment, the +likelihood of commonalities did not exempt Marcum from the requirement to review relevant +documentation, perform requisite audit procedures, and sufficiently document such procedures. +33. Marcum’s monitoring procedures, as led by Giugliano, failed to detect in a timely +manner that Marcum’s documentation of warrant accounting procedures was consistently +insufficient. For example, Marcum’s internal memos documenting warrant accounting procedures +consistently did not include any citations or cross-references to the individual client’s warrant +agreement or features. Across clients, the language utilized and the specific description of terms +was virtually identical from memo to memo, and unchanged from the memo template, making it +difficult to identify what procedures Marcum actually performed, including whether the underlying +agreement was reviewed—in sufficient detail, or at all. +34. Notably, the SPAC practice relied upon a template memo that provided for only one +accounting conclusion and failed to provide sufficient guidance regarding requisite audit procedures +and their documentation. Consequently, across a multi-year period, SPAC audits across the firm +failed to sufficiently document warrant accounting procedures. Despite the consistent use of this +template in connection with hundreds of SPAC audits, there is no evidence that Giugliano or one of +his designees took steps to review the template warrant accounting memo until the end of April +2021. +Risk Assessments (AS 2110) +35. Risk assessment is a foundational audit procedure—a crucial and ongoing obligation +throughout an audit—and provides the framework upon which all subsequent audit procedures are +planned and performed. Yet, the SPAC practice engaged in consistent and widespread violation of +AS 2110, including failing to conduct risk assessments at the assertion level and failing to identify +all relevant significant risks. +36. Assertion Level Risk Assessments. Marcum’s SPAC practice failed to conduct +risk assessments at the assertion level. Marcum had a template work paper which outlined requisite +procedures, but, prior to late 2021, the work paper was never used in SPAC engagements, nor were + + +10 +such procedures performed and documented elsewhere in SPAC work papers. Giugliano did not +implement monitoring procedures sufficient to identify and remediate, in a timely manner, the +failure to conduct assertion-level risk assessments. +37. Identification of All Significant Risks. Marcum’s SPAC practice also consistently +failed to identify all relevant significant risks. Significant risks were identified in SPAC work +papers within the planning memo. Prior to March 2020, however, Marcum’s planning memos did +not explicitly identify any significant risks. Among memos drafted over the following year, +virtually all memos identified only management override of controls as a significant risk. It was +within this time period that Marcum introduced a SPAC-specific planning memo template, which +identified management override—and only management override—as a significant risk. In failing +to reference any additional potential significant risks to be considered, this template memo +contributed to Marcum’s failures to identify all significant risks. Notably, however, there is no +evidence that the SPAC practice’s template planning memo was appropriately reviewed by +Giugliano or one of his designees, despite its consistent use in hundreds of SPAC audits. +E. VIOLATIONS +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT +38. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in part, that the +Commission may censure any person who is found by the Commission to have engaged in improper +professional conduct. With respect to persons licensed to practice as accountants, “improper +professional conduct” includes either of the following two types of negligent conduct: (1) a single +instance of highly unreasonable conduct that results in a violation of applicable professional +standards in circumstances in which an accountant knows, or should know, that heightened scrutiny +is warranted; or (2) repeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards, that indicate a lack of competence to practice before the +Commission. See Rule 102(e)(1)(iv)(B); Exchange Act Section 4C(b)(2). As a result of the +conduct described above, Giugliano engaged in “repeated instances of unreasonable conduct,” +resulting in violations of professional standards, and consequently engaged in “improper +professional conduct” within the meaning of Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii). +Due Professional Care in the Performance of Work (AS 1015) +39. AS 1015 requires an auditor to exercise “due professional care … in the planning +and performance of the audit and the preparation of the report.” AS 1015.01. “[D]ue professional +care concerns what the independent auditor does and how well he or she does it.” AS 1015.04. AS +1015.06 provides that “[t]he engagement partner is responsible for the assignment of tasks to, and +supervision of, the members of the engagement team.” +40. As a result of Giugliano’s conduct described above, Marcum violated this standard +in numerous engagements. + + +11 +Supervision of the Audit Engagement (AS 1201) +41. AS 1201.03 provides that “the engagement partner is responsible for proper +supervision of the work of engagement team members and for compliance with PCAOB standards.” +AS 1201.05(a) requires the engagement partner to “inform engagement team members of their +responsibilities,” including, among other items, “the nature, timing, and extent of procedures they +are to perform.” The engagement partner should also “[r]eview the work of engagement team +members to evaluate whether: (1) the work was performed and documented; (2) the objectives of +the procedures were achieved; and (3) the results of the work support the conclusions reached.” AS +1201.05(c). AS 1201.06 requires that the engagement partner, in determining the extent of +supervision necessary, take into account, among other items, “[t]he knowledge, skill, and ability of +each engagement team member.” +42. As a result of Giugliano’s conduct described above, Marcum violated this standard +in numerous engagements. +Audit Documentation (AS 1215) +43. AS 1215.06 requires that an “auditor must document the procedures performed, +evidence obtained, and conclusions reached with respect to relevant financial statement assertions. +Audit documentation must clearly demonstrate that the work was in fact performed . . . . Audit +documentation must contain sufficient information to enable an experienced auditor, having no +previous connection with the engagement, (a) to understand the nature, timing, extent, and results of +the procedures performed, evidence obtained, and conclusions reached, and (b) to determine who +performed the work and the date such work was completed as well as the person who reviewed the +work and the date of such review.” +44. AS 1215.15 requires that “[p]rior to the report release date, the auditor must have +completed all necessary auditing procedures and obtained sufficient evidence to support the +representations in the auditor’s report.” AS 1215.15 also requires that “[a] complete and final set of +audit documentation should be assembled for retention as of a date not more than 45 days after the +report release date (documentation completion date). If a report is not issued in connection with an +engagement, then the documentation completion date should not be more than 45 days from the +date that fieldwork was substantially completed. If the auditor was unable to complete the +engagement, then the documentation completion date should not be more than 45 days from the +date the engagement ceased.” +45. As a result of Giugliano’s conduct described above, Marcum violated this standard +in numerous engagements. +Engagement Quality Review (AS 1220) +46. AS 1220.19 requires that “[d]ocumentation of an engagement quality review should +contain sufficient information to enable an experienced auditor, having no previous connection with + + +12 +the engagement, to understand the procedures performed by the engagement quality reviewer … to +comply with the provisions of this standard, including information that identifies,” among other +items: “[t]he documents reviewed by the engagement quality reviewer,” and “[t]he date the +engagement quality reviewer provided concurring approval of issuance.” +47. As a result of Giugliano’s conduct described above, Marcum violated this standard +in numerous engagements. +Identifying and Assessing Risks of Material Misstatement (AS 2110) +48. AS 2110.59 requires that an auditor “identify and assess the risks of material +misstatement at the financial statement level and the assertion level.” +49. AS 2110.59(f) requires that an auditor “[d]etermine whether any of the identified +and assessed risks of material misstatement are significant risks,” based upon the factors relevant to +identifying significant risks outlined at AS 2110.70-71. AS 2110.69 requires that an auditor’s +identification of fraud risks include the risk of management override of controls. +50. As a result of Giugliano’s conduct described above, Marcum violated this standard +in numerous engagements. +PCAOB Quality Control Standards (QC 20) +51. PCAOB Quality Control Standards, specifically QC 20.01, provides that “a CPA +firm shall have a system of quality control for its accounting and auditing practice.” QC 20.03 +broadly defines a system of quality control as “a process to provide the firm with reasonable +assurance that its personnel comply with applicable professional standards and the firm’s standards +of quality.” QC 20.04 provides that “[t]he nature, extent, and formality of a firm’s quality control +policies and procedures should be appropriately comprehensive and suitably designed in relation to +the firm’s size, the number of its offices, the degree of authority allowed its personnel and offices, +the knowledge and experience of its personnel, the nature and complexity of the firm’s practice, and +appropriate cost-benefit considerations.” +52. QC 20.13 requires a firm to have policies and procedures to provide reasonable +assurance that “[w]ork is assigned to personnel having the degree of technical training and +proficiency required in the circumstances,” and that “[p]ersonnel participate in general and industry- +specific continuing professional education and other professional development activities that enable +them to fulfill responsibilities assigned.” +53. QC 20.15(a) requires that a firm’s policies and procedures related to acceptance and +continuance of clients and engagements are sufficient to provide reasonable assurance that the firm +“undertakes only those engagements that the firm can reasonably expect to be completed with +professional competence.” + + +13 +54. QC 20.17 requires a firm to have policies and procedures to provide reasonable +assurance that work performed by engagement personnel complies with professional standards and +the firm’s own standards of quality. QC 20.18 provides that these policies and procedures should +cover, among other things, “planning, performing, supervising, reviewing, documenting, and +communicating the result of each engagement,” as well as engagement quality reviews. +55. QC 20.19 requires a firm to have policies and procedures sufficient to provide +reasonable assurance that personnel, among other things, “consult, on a timely basis, with +individuals within or outside the firm, when appropriate,” including that “[i]ndividuals consulted [] +have appropriate levels of knowledge, competence, judgment, and authority.” +56. QC 20.20 also imposes requirements on firms to properly monitor whether the +firm’s quality control policies and procedures are suitably designed and are being effectively +applied. +57. QC 20.23 requires a firm to “communicate its quality control policies and +procedures to its personnel in a manner that provides reasonable assurance that those policies and +procedures are understood and complied with.” QC 20.24 provides that “[t]he size, structure, and +nature of the practice of the firm should be considered in determining whether documentation of +established quality control policies and procedures is required for effective communication and, if +so, the extent of such documentation,” stating that “documentation of established quality control +policies and procedures would generally be expected to be more extensive in a large firm than in a +small firm and in a multioffice firm than in a single-office firm.” +58. As a result of Giugliano’s conduct described above, Marcum violated QC 20. +GIUGLIANO CAUSED MARCUM TO VIOLATE +RULE 2-02(b)(1) OF REGULATION S-X +59. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state the +applicable professional standards under which the audit was conducted. +60. Through the conduct described above, Respondent caused Marcum to violate +Rule 2-02(b)(1) of Regulation S-X in connection with the issuance of numerous SPAC audit +reports, all of which stated that Marcum had conducted its audit in accordance with PCAOB +standards when, in fact, it had not done so. +F. FINDINGS +61. Based on the foregoing, the Commission finds that Respondent caused Marcum to +violate Rule 2-02(b)(1) of Regulation S-X. + + +14 +62. Based on the foregoing, the Commission finds that Respondent engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) + . +G. UNDERTAKINGS +63. For a period of three years from the date of this Order, Respondent undertakes to: +a. have no leadership, management, oversight, or supervisory position at any registered +public accounting firm; +b. have no decision-making role in connection with (i) performing client acceptance or +continuance functions for any engagement to perform attestation or assurance +services for any entity that files financial statements with the Commission; or (ii) the +quality control system at any registered public accounting firm; and +c. certify, in writing, compliance with the undertakings set forth above. The +certification shall identify the undertakings and provide written evidence of +compliance in the form of a narrative. The Commission staff may make reasonable +requests for further information, and Respondent agrees to provide such information +that is reasonably available. The certification and supporting material shall be +submitted to Carolyn M. Welshhans, Associate Director, Division of Enforcement, +Securities and Exchange Commission, 100 F Street NE, Washington DC, 20549 +with a copy to the Office of Chief Counsel of the Enforcement Division, no later +than sixty (60) days from the date of the completion of the undertakings. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X. +B. Respondent is censured. +C. Respondent shall comply with the undertakings enumerated in Section III(G) +above. +D. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $75,000 to the Securities and Exchange Commission for transfer to the + + +15 +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Payment must be made in one of the following ways: +1. Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +2. Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +3. Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Alfonse Gregory Giugliano, CPA as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to Carolyn +Welshhans, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F Street NE, Washington, DC 20549. +E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + +16 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§ 523(a)(19). + + By the Commission. + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4459.pdf b/raw/aaer/2023/AAER-4459.pdf new file mode 100644 index 0000000000000000000000000000000000000000..833b7530f955b24b334991faa01a01188c211de6 --- /dev/null +++ b/raw/aaer/2023/AAER-4459.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:93f1bbcf518489e2648893e765649a7ade95a56740650c539a3f263b5aa338ce +size 230528 diff --git a/raw/aaer/2023/AAER-4460.pdf b/raw/aaer/2023/AAER-4460.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9f20139f9e06c4ba370bf036bdf93766a1106a36 --- /dev/null +++ b/raw/aaer/2023/AAER-4460.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8d05e3588748587514744600978e25e85bcef33896c9ceecf38fc1f1e58cbbe5 +size 197539 diff --git a/raw/aaer/2023/AAER-4461.pdf b/raw/aaer/2023/AAER-4461.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5a5ecb9c04cc782bb5e368338186c03dd0b0e64f --- /dev/null +++ b/raw/aaer/2023/AAER-4461.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:1796ef1d8e17e8a62e4b49effa8fda5b235d59d7789dda16faafaac7ed3110cb +size 335186 diff --git a/raw/aaer/2023/AAER-4462.pdf b/raw/aaer/2023/AAER-4462.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a67680be655f2ac4e63a84426b0003fa3fe215a3 --- /dev/null +++ b/raw/aaer/2023/AAER-4462.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:29a5495c22c3fbe80d9449b510c7c7bd3d227fae14716b9173dd9c452565f5cd +size 218216 diff --git a/raw/aaer/2023/AAER-4464.pdf b/raw/aaer/2023/AAER-4464.pdf new file mode 100644 index 0000000000000000000000000000000000000000..deae7bede1211a39442a2526e9951eaa9ac741cb --- /dev/null +++ b/raw/aaer/2023/AAER-4464.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:4e7b81f6c121eeb6c2906bf82f2e98163cba98660dae43b1105658b9b3249e97 +size 147589 diff --git a/raw/aaer/2023/AAER-4465.pdf b/raw/aaer/2023/AAER-4465.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f080286de160d3d99e067c7a1a6afa7f827514a6 --- /dev/null +++ b/raw/aaer/2023/AAER-4465.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:ef342982448c32022ebaa1a4b2be4918bdf9734d981378c3deba9185166bd5cc +size 191872 diff --git a/raw/aaer/2023/AAER-4468.txt b/raw/aaer/2023/AAER-4468.txt new file mode 100644 index 0000000000000000000000000000000000000000..3d818a9e76fab29f179ef2fcfa05fdb801201f1d --- /dev/null +++ b/raw/aaer/2023/AAER-4468.txt @@ -0,0 +1,571 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 98622 / September 29, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4468 / September 29, 2023 + +ADMINISTRATIVE PROCEEDING +File No. 3-21763 + + +In the Matter of + +ALBEMARLE +CORPORATION + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Albemarle Corporation (“Albemarle” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Albemarle has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to which +the Commission is a party, Respondent admits the Commission’s jurisdiction over it and the subject +matter of these proceedings, and consents to the entry of this Order Instituting Cease -and-Desist +Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and +Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + +2 + + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds +1 that: + + +SUMMARY + +1. This matter concerns violations of the anti-bribery, books and records, and internal +accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) by +Albemarle, a global specialty chemicals company that develops and sells catalysts us ed in the +operation of oil refineries. From at least 2009 through 2017, Albemarle’s agents paid bribes to obtain +sales of catalysts to public-sector oil refineries in Vietnam, India, and Indonesia and to private-sector +oil refineries in India. Despite significant red flags indicating a high probability of bribery, +Albemarle retained and paid these intermediaries, who in turn made corrupt payments to government +officials. Albemarle also failed to implement sufficient internal accounting controls to provide +reasonable assurances that payments made to agents in Vietnam, Indonesia, India, China, and the +United Arab Emirates (“UAE”) were for legitimate services. Albemarle’s books and records failed +to accurately reflect, or contain reasonable detail supporting, such payments. As a result of its +misconduct, Albemarle obtained an improper benefit of approximately $81.86 million from sales to +state-owned customers. + +RESPONDENT + +2. Albemarle Corporation (“Albemarle”) is a Virginia corporation with its principal +place of business in Charlotte, NC. The company is a global developer, manufacturer, and marketer +of specialty chemicals. Albemarle’s common stock is and, throughout the relevant period, was +registered with the Commission under Section 12(b) of the Exchange Act and trades on the New +York Stock Exchange under the ticker “ALB.” + +FACTS + +Background + +3. During the relevant period, Albemarle managed and report ed its worldwide +operations through three global business units (GBUs) corresponding to its primary product markets: +catalysts (which contained the Refining Solutions business), lithium, and bromine. The Refining +Solutions business developed and s old catalysts to oil refineries through sales offices and +intermediaries around the world. The President of the Refining Solutions GBU reported directly to +Albemarle’s Chief Executive O fficer. Albemarle centrally coordinated its compliance, legal, +finance, contracting, and internal audit functions. + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +4. Albemarle sold refinery catalysts to state -owned refineries in Vietnam, India, +Indonesia, China, and the UAE through four wholly owned and consolidated foreign subsidiaries: +Albemarle Catalysts Company B.V. in the Netherlands (“Albemarle Netherlands”); Albemarle +Singapore Pte. Ltd in Singapore (“Albemarle Singapore”); Albemarle Chemicals (Shanghai) Co. +Ltd. in China (“Albemarle China”); and Albemarle Middle East FZE in the UAE (“Albemarle +Middle East”) ( each, an “Albemarle Subsidiary,” and together, the “Albemarle Subsidiaries”) . +Albemarle also used sales agents to sell refinery catalysts in Vietnam, India, Indonesia, China, and +the UAE. The sales agents in Indonesia and China were also retained as distributors. + +5. Albemarle exercised control over the sales activities of the Albemarle Subsidiaries, +which acted as agents for Albemarle when retaining agents to sell catalysts globally. Albemarle +officers served on the Albemarle Subsidiaries’ boards of directors and held signatory authority over +bank accounts, at local branches of both U.S. and non-U.S. banks, used to pay sales intermediaries +in the relevant countries. Albemarle sold refinery catalysts globally through agents and distributors +approved by Albemarle sales, business, legal, compliance, and finance personnel and management. +Personnel at the center of the misconduct reported directly or indirectly to issuer-employed managers +in Albemarle’s sales and Refining Solutions organizations, who at times met with and communicated +directly with customers . These managers also participated in regular sales strategy calls and +meetings with Albemarle Subsidiary personnel and participated in evaluating and approving agent +commissions and expenses. + +Albemarle failed to timely address identified deficiencies in its +internal accounting controls surrounding sales agents and distributors + +6. Despite the known risks posed by Albemarle’s reliance on third-party sales agents +and distributors in the sale of catalyst products to state -owned and -controlled oil refineries , +Albemarle failed for many years to institute sufficient compliance systems and devise and maintain +a sufficient system of internal accounting controls concerning the retention, payment, and oversight +of these intermediaries. + +7. A series of internal audit reports in 2013, 2015, and 2016 identified multiple gaps in +Albemarle’s internal accounting controls with respect to the Refining Solutions business’s use of +intermediaries. For example, sales agents and distributors were paid: despite incomplete due +diligence; despite a lack of an executed contract; despite having a contract that lacked required anti- +corruption provisions; and at rates higher than those provided for by contract – all in contravention +of Albemarle’s policies and procedures. + +8. The audit team for the 2013 internal audit recommended that Albemarle establish a +comprehensive program to manage and monitor the entire life cycle for intermediaries. While +Albemarle hired compliance personnel, reduced the number of sales agents and distributors without +contracts, and implemented software to assist in third-party onboarding and contracting, it failed to +devise and maintain a sufficient system of internal accounting controls with respect to commission +rates and deviations from contracted rates. As a result, sales personnel were able to increase agents’ +commission rates in multiple countries – including Vietnam, India, China, and UAE – despite certain +Albemarle personnel having knowledge of red flags indicating the agents would use a portion of the + +4 + +commission to make bribe payments to obtain contracts, influence tender specifications, or obtain +nonpublic information concerning competitors’ bids. + +9. Other examples of internal accounting controls deficiencies during the relevant +period include the payment of sales agents in Vietnam, India, Indonesia, China, and the UAE despite +a lack of contractually required reports from the agents describing the services provided. In some +instances, Albemarle Subsidiaries also entered backdated agreements with the sales agents and +reimbursed vague, unsupported, and extra-contractual expenses. Certain personnel also instructed +sales agents to omit detail from their invoices or to re-submit the invoices to a different Albemarle +Subsidiary to avoid a lengthy approval process. + +Vietnam: +Albemarle’s agent paid bribes to obtain contracts from Vietnamese refineries + +10. Between 2012 and 201 7, Albemarle made sales to two Vietnamese oil refineries +through its sales agent for Vietnam (“Vietnam Agent ”), which was retained through Albemarle +Singapore. In 2012 Vietnam Agent approached Albemarle Subsidiary personnel in Asia Pacific +about becoming a sales agent for Vietnam. Although Vietnam Agent had registered to do business +in Vietnam only three months ea rlier and had no catalysts experience, Vietnam Agent touted its +ability to secure business for Albemarle based on its friendship with key decision makers at a +Vietnamese state-owned refinery (“Vietnam Refinery 1”) and past equipment sales he had made to +the refinery. Vietnam Agent was hired in 2012 at a 4.25 percent commission rate that Albemarle’s +sales representative viewed as high for the region, and Albemarle approved an increase to Vietnam +Agent’s commission to 6.5 percent in 2015 despite emails reflecting a high probability additional +funds would be used to bribe Vietnamese government officials. + +11. Once retained in 2012, Vietnam Agent provided Albemarle with valuable nonpublic +information concerning the Company’s competitors and state-owned customers and secured orders +for Albemarle. With respect to tenders issued by Vietnam Refinery 1 and a second refinery that was +a joint venture of state-owned and private companies (“Vietnam Refinery 2), Vietnam Agent secured +non-public and competitively sensitive information from government officials, as well as advance +notice of tender requirements, fresh catalyst samples from competitors, information on competitors’ +tender submissions, and advice in navigating tender processes. With Albemarle’s input, Vietnam +Agent also secured changes to bid and evaluation criteria that advantaged Albemarle. + +12. Beginning in 2013, Vietnam Agent made frequent requests to increase its +commission. Emails from sales personnel in Asia and Europe reflected that Vietnam Agent had +asserted that the commission increase was meant to “settle down,” “take care [of],” and “contribute” +to state-owned refinery officials. Increasing the commission, the sales personnel understood, would +be necessary to “secure orders,” “win the job,” and avoid “los[ing] the market.” In communications +with these Albemarle Subsidiary personnel, Vietnam Agent ’s principal referred to using the +commission increase to appease government officials. His messages regarding the increase included +numerous coded references to his “Friend” (a key decision-maker at Vietnam Refinery 1) and the +“Friend’s” views on the desired level of Vietnam Agent’s commission. Without the full details of +the nature of communications with Vietnam Agent, Refinery Solutions managers at Albemarle +Netherlands and Albemarle Europe sprl (“Albemarle Europe”) approved an increase to Vietnam + +5 + +Agent’s commission, to 6.5 percent, in March 2015. In June 2016, Albemarle agreed to apply the +same 6.5 percent commission rate on sales to the then recently constructed Vietnam Refinery 2. As +a result of an internal investigation Albemarle began conducting in 2016, Albemarle terminated +Vietnam Agent in 2017. Albemarle obtained improper benefits from sales to Vietnam Refinery 1 +between 2013 and 2017 and to Vietnam Refinery 2 between 2016 and 2019 pursuant to contracts +obtained through Vietnam Agent between 2013 and 2017. + +13. Albemarle’s system of internal accounting controls was insufficient to prevent or +detect these improper payments, which Albemarle Singapore falsely recorded as legitimate +commissions in books and records that were consolidated into Albemarle’s financial statements. + +India: +Albemarle’s agent in India paid bribes to executives of state-owned and private customers + +14. In India, an Albemarle consultant and sales agent (“India Agent”) paid bribes to +decision-makers at a state-owned oil company (“India State-Owned Customer”) between 2009 and +2011 and at a private sector customer (“India Private Customer”) between 2009 and 2017 to obtain +and retain catalyst orders and secure sensitive, nonpublic information for Albemarle. + +15. The impetus for retaining India Agent came in May 2009, after India State-Owned +Customer reportedly threatened to place Albemarle on a “holiday list” as a sanction for purportedly +failing to meet a performance guarantee, which would have barred Albemarle from future business +with India State -Owned Customer. India Agent contacted Albemarle Middle East personnel to +advise that it was aware of the “holiday list” issue and that it could help Albemarle avoid the “holiday +list.” Albemarle , contracting through Albemarle Netherlands, then engaged India Agent as a +consultant and later sales agent, despite the high probability that India Agent would use a portion of +its compensation to bribe a senior decision -maker (“Senior India Official”) at India State-Owned +Customer. + +16. Several red flags emerged during Albemarle’s due diligence process. India Agent +claimed that its board of directors included two former senior India State-Owned Customer officials, +and Albemarle already had a sales agent in India. An Albemarle Subsidiary regional director alerted +an Albemarle sales executive (“Sales Executive”), who was employed directly by Albemarle and +based in the United States, of his understanding, based on a July 2009 call with India Agent, that the +agent would make corrupt payments to keep Albemarle off the holiday list and obtain business from +Indian Oil Company and other customers. The regional director warned Sales Executive by email +that it was “clear to [him]” that India Agent intended to use a portion of its commission to “handle” +the Senior India Official, as well as officials “many levels below.” The regional director expressed +his concern that engaging India Agent would cause Albemarle to violate the FCPA. On August 13, +2009, despite the regional director’s warning, Sales Executive signed a backdated consulting +agreement between Albemarle Netherlands and India Agent. The agreement called for payment of +a three percent commission to India Agent, a rate three times higher than that paid to Albemarle’s +existing agent for India. Shortly after Albemarle retained India Agent, the threat to place Albemarle +on the “holiday list” was withdrawn. + + +6 + +17. Between 2009 and 2017, Albemarle also paid India Agent what personnel understood +was an excessive commission to obtain catalyst orders from India Private Customer. As Albemarle’s +sales to India Private Customer grew, India Agent demanded increases to its commission rate. In +support of one such request, India Agent provided nonpublic details about a competitor’s bid and a +confidential report by India Private Custo mer’s technical team on the results of a performance +evaluation. India Agent noted that Albemarle was obtaining sales “very easily due to our +relationships, without any competition.” Alluding to its relationship with India Private Customer’s +management, India Agent contended that the increase had been “discussed with all the friends and . +. . agreed upon.” In response, Albemarle increased India Agent’s commission in 2010 (via a +backdated agreement) and again in 2012. A July 2014 email from an Albemarle Europe sales +executive to India Agent described the commissions as “extremely high” and “far from any possible +realistic justification.” + +18. India Agent obtained business from India Private Customer by paying a senior +executive (“Private Customer Executive”) and his family more than $190,000 between August 2009 +and March 2018, including monthly payments directly to Private Customer Executive’s wife and +son. In 2011, at the request of Sales Executive, Albemarle sales personnel in Brazil arranged a hotel +and tour of Rio de Janeiro for Private Customer Executive’s son, who was working in Brazil at the +time, and transferred the charge to India Agent’s credit card. In March 2014, India Private Customer +suspended shipments under Albemarle’s supply contract while conducting a trial of a competitor’s +products. India Agent paid Private Customer Executive $81,000 by check to restore Albemarle’s +catalyst order. India Private Customer resumed Albemarle’s deliveries in July 2014 and placed +additional catalyst orders through December 2017. + +19. Although India Agent’s agreement required it to cover all expenses associated with +contract performance, it submitted more than $100,000 in vague and unsupported “Business +Development Expenses” and “HPC division Expenses” to Albemarle Netherlands. An Albemarle +Subsidiary regional sales manager directed India Agent to resubmit its invoices through Albemarle +Middle East, which would pay the invoices “without any lengthy authorization.” + +20. Albemarle’s system of internal accounting controls was insufficient to prevent or +detect the improper and extra- contractual payments made to and through India Agent, which +Albemarle Netherlands and Albemarle Europe falsely recorded as “commissions” and +reimbursements of legitimate expenses in books and records that were consolidated into Albemarle’s +financial statements. + +Indonesia: +Albemarle’s agent bribed officials of Indonesia’s state-owned oil and gas company + +21. Between 2012 and 2014 Albemarle, acting through Albemarle Singapore , used a +sales agent in Indonesia (“Indonesia Agent”) to sell catalysts to Indonesia’s state-owned oil and gas +company (“Indonesia State-Owned Customer”). Indonesia Agent bribed officials of Indonesia State- +Owned Customer to obtain contracts and non- public information concerning tenders and +competitors’ products. + + +7 + +22. In April 2012, an official of Indonesia State-Owned Customer urged Albemarle +Subsidiary personnel to replace Albemarle’s existing agent with Indonesia Agent. The official +reported that a key decision-maker at the customer (“Indonesia Official”) was “very close friend[s]” +with Indonesia Agent’s president and that Indonesia Official ’s son served on Indonesia Agent’s +board of directors. Albemarle Subsidiary managers in Asia and Europe understood that, if they +refused to use Indonesia Agent, Albemarle would “lose the business opportunity” to sell catalysts to +Indonesia State-Owned Customer. Despite these red flags of the corrupt relat ionship between +Indonesia Agent and Indonesia Official, Albemarle retained Indonesia Agent effective August 2012. + +23. Over the next two years, Indonesia Agent provided Albemarle Subsidiary personnel +with sensitive, nonpublic information and arranged for Indonesia Official to intervene in tenders on +Albemarle’s behalf. In August and November 2012, an Albemarle Subsidiary sales representative +for the Asia Pacific region asked Indonesia Agent to obtain samples of competitor catalysts from +Indonesia State-Owned Customer in connection with an upcoming tender. In response to the second +request, Indonesia Agent cautioned that the first one had “cost us quite a sum.” The sales +representative understood Indonesia Agent to mean it had paid bribes to obtain the initial samples. +The same sales representative directed Indonesia Agent not to include detail in its invoices +concerning certain “tips” paid to staff of the Indonesia State-Owned Customer. + +24. In December 2012, Indonesia Official intervened in a tender to Albemarle’s benefit. +Following initial catalyst testing results, Indonesia Official changed the tender procedure to permit +purchase of an initial supply based on a “paper” qualification process that did not require testing. +This allowed Albemarle to supply catalysts despite its technical disqualification. Likewise, +Indonesia Official arranged for an April 2013 tender to use a paper-only qualification process. + +25. During a February 2013 meeting in Singapore with three sales personnel of +Albemarle Subsidiaries in the Asia Pacific region, Indonesia Agent requested a commission increase +expressly to fund bribes to Indonesia State-Owned Customer officials, purportedly to compete with +one of Albemarle’s competitors. Although Albemarle sales personnel declined to increase the +commission and reportedly told Indonesia Agent that Albemarle did not conduct business via +bribery, they did not report concerns to their supervisors, Legal, or Compliance personnel or take +any steps to terminate the agency relationship. Instead, Albemarle made contractual commission +payments and certain extra-contractual expense reimbursements to Indonesia Agent throughout 2013 +in connection with a contract Indonesia State-Owned Customer awarded to Albemarle in April 2013. +A portion of these funds was used to pay bribes. After Indonesia Official retired in 2015, Albemarle +terminated Indonesia Agent. + +26. Albemarle’s system of internal accounting controls was insufficient to prevent or +detect the improper payments made to and through Indonesia Agent, which Albemarle Singapore +falsely recorded as legitimate commissions and business expenses in books and records that were +consolidated into Albemarle’s financial statements. + + +8 + +Albemarle had insufficient internal accounting controls surrounding +the payment of high-risk agents in China and the UAE + +27. As a result of weaknesses in Albemarle’s internal accounting controls surrounding +intermediaries, Albemarle hired, paid, and increased commission rates for agents in additional +countries, including China and the UAE, despite elevated risks of bribery and without reasonable +assurance that its payments compensated legitimate services. + +28. From 2013 through 2017, Albemarle obtained catalyst sales from a refinery (“China +State-Owned Customer”) through a sales agent (“China Agent”) retained through Albemarle China +based on the recommendation of an official from China State -Owned Customer. Emails among +Albemarle Subsidiary personnel described a senior official (“China Official”) at China State-Owned +Customer as the “uncle” of China Agent’s principal (“China Agent’s Principal”), a situation they +recognized was “thorny.” Neither China Agent nor Albemarle Subsidiary personnel identified China +Agent’s Principal, or reported the possible familial connection to China Official, in the due diligence +questionnaire or other documents submitted to Albemarle compliance personnel conducting due +diligence on China Agent. However, Albemarle compliance department due diligence revealed that +China Agent had no website and was authorized to do business only a few weeks before China +Agent’s Principal first met with Albemarle personnel. + +29. Despite these red flags , Albemarle retained China Agent. When an Albemarle +business director questioned China Agent’s compensation as “high,” an Albemarle Netherlands +business director replied that he anticipated large returns on the contract. In February 2014 +Albemarle agreed to increase Ch ina Agent’s commission if it obtained higher prices from China +State-Owned Customer. In August 2016 Albemarle China further increased the commission rate. +Albemarle Subsidiary management knew that, due to a “powerful agent” who had a “good +connection” to China State-Owned Customer’s management, Albemarle was able to obtain business +on a sole source basis and at an “incredibly high price.” Albemarle’s system of internal accounting +controls provided inadequate assurances that payments and discounts to China Agent were used for +legitimate purposes. Moreover, Albemarle China’s books and records, which were consolidated into +Albemarle’s financial statements, lacked support for payments to China Agent that were recorded as +legitimate commissions or for discounts recorded as appropriate adjustments to sales. + +30. In the U AE, Albemarle, contracting through Albemarle Netherlands, used a sales +agent (“UAE Agent”) between 2011 and 2016 to obtain catalyst orders from a state-owned refinery +(“UAE State-Owned Customer”). In violation of Albemarle policy, due diligence was conducted on +UAE Agent only after entering sales agency agreements with the agent , including an addendum +increasing its commission. UAE Agent had close and well publicized ties to the UAE government +and royal family, contrary to UAE Agent’s representations in its due diligence questionnaire. + +31. In May 2011, a consultant (“UAE Consultant”) approached an Albemarle Middle +East regional sales representative offering to assist in obtaining business from UAE State -Owned +Customer. UAE Consultant claimed to have good contacts with the engineering, procurement, and +construction (“EPC”) firm to which UAE State -Owned Customer had outsourced portions of the +catalysts tender. UAE Agent formally retained UAE Consultant in June 2012, purportedly to assist +it with logistics and administrative functions in connection with Albemarle’s bid for additional + +9 + +business with UAE State-Owned Customer. Although certain Albemarle Subsidiary personnel in +the Middle East and the Netherlands knew of UAE Consultant’s involvement, they did not inform +Albemarle Legal or Compliance personnel of the relationship, and no due diligence was conducted +on UAE Consultant. The agreement with UAE Agent was amended in 2013 to increase its +commission by one percent -- the same amount UAE Agent agreed to pay UAE Consultant. UAE +Consultant provided no discernable services other than conveying confidential tender evaluations +and competitors’ bids obtained from the refinery and the EPC firm. + +32. In addition to commissions that Albemarle paid to UAE Agent (and, through it, UAE +Consultant), Albemarle paid UAE Agent undefined “administrative charges” equal to ten percent of +its invoices for customs clearance and other non-sales services. These undocumented charges fell +outside the scope of Albemarle ’s agreement with UAE Agent. Albemarle’s system of internal +accounting controls provided inadequate assurances that payments to UAE Agent were used for +legitimate services. Moreover, Albemarle Netherlands and Albemarle Middle East, whose books +and records were consolidated into Albemarle’s financial statements, lacked support for payments +to UAE Agent that were recorded as legitimate commissions and business expenses. + +LEGAL STANDARDS AND VIOLATIONS + +33. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease - +and-desist order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation, due to an act or omission the person knew or should have known +would contribute to such violation. + +Albemarle Violated Exchange Act Section 30A + +34. The anti-bribery provisions of the FCPA, Section 30A of the Exchange Act, make it +unlawful for any issuer with securities registe red pursuant to Section 12 of the Exchange Act or +which is required to file reports under Section 15(d) of the Exchange Act, or any officer, director, +employee, or agent acting on its behalf, to make use of the mails or any means or instrumentality of +interstate commerce corruptly in furtherance of the provision of or offer to provide anything of value, +directly or indirectly, to foreign officials for the purpose of influencing their official decision - +making, in order to assist in obtaining or retaining business. 15 U.S.C. § 78dd-1(a). + +35. Additionally, under Section 30A(g) of the Exchange Act it is unlawful for any issuer +organized under the laws of the United States, or a State, territory, possession, or commonwealth of +the United States or for any United States person that is an officer, director, employee, or agent of +such issuer, to corruptly do any act outside the United States in furtherance of the provision of or +offer to provide anything of value , directly or indirectly, to foreign officials for the purpose of +influencing their official decision-making, to assist in obtaining or retaining business, irrespective of +whether such issuer or such officer, director, employee, or agent makes use of the mails or any means +or instrumentality of interstate commerce. 15 U.S.C. § 78dd-1(g). + + +10 + +36. As a result of improper offers and payments made through Albemarle’s sales agents +to foreign officials in Vietnam, India, and Indonesia to win public tenders from state-owned +customers as described above, Albemarle violated Exchange Act Sections 30A(a) and (g). + +Albemarle Violated Exchange Act Section 13(b)(2)(A) + +37. The books and records provision of the FCPA, Section 13(b)(2)(A) of the Exchange +Act, requires every issuer with a class of securities registered pursuant to Section 12 of the Exchange +Act or which is required to file reports under Section 15(d) of the Exchange Act to make and keep +books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer. 15 U.S.C. § 78m(b)(2)(A). As described +above, Albemarle’s books and records inaccurately characterized payments to agents in Vietnam, +India, and Indonesia that included portions intended for bribes as commissions and legitimate +business expenses, and it lacked sufficient detail and support to record payments to agents in +Vietnam, India, Indonesia, China, and the UAE as legitimate commissions and business expenses. +Therefore, Albemarle violated Exchange Act Section 13(b)(2)(A). + +Albemarle Violated Exchange Act Section 13(b)(2)(B) + +38. Section 13(b)(2)(B) of the Exchange Act requires companies with a class of securities +registered under Section 12 of the Exchange Act or which are required to file reports under Section +15(d) of the Exchange Act to devise and maintain a system of internal accounting controls sufficient +to provide reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation +of financial statements in conformity with generally accepted accounting principles or any other +criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to +assets is permitted only in accordance with management’s general or specific authorization; and (iv) +the recorded accountability for assets is compared with the existing assets at reasonable intervals and +appropriate action is taken with respect to any differences. 15 U.S.C. § 78m(b)(2)(B). + +39. As described above, Albemarle failed to implement a system of internal accounting +controls sufficient to provide reasonable assurances that access to assets was permitted, and +transactions were executed, only in accordance with management’s general or specific authorization. +Specifically, Albemarle had insufficient internal accounting controls over vendor management and +accounts payable to provide reasonable assurances that the Albemarle Subsidiaries were adhering to +Albemarle’s anti-corruption policy and procedures before paying agents, lacked sufficient entity- +level controls over the Albemarle Subsidiaries, and failed to address repeated audit findings +regarding identified deficiencies in its controls surrounding intermediaries. By this conduct, +Albemarle violated Exchange Act Section 13(b)(2)(B). + +ALBEMARLE’S DISCLOSURES, COOPERATION, AND REMEDIATION + +40. In determining to accept the Offer, the Commission considered Albemarle’s self - +disclosures, cooperation, and remedial efforts. + + +11 + +41. Albemarle made an initial self -disclosure to the Commission of potential FCPA +violations in Vietnam following its completion of an internal investigation of such conduct and, at +the same time, self-reported potential violations it was investigating in India, Indonesia, and China. +Albemarle later self-disclosed to the Commission potential violations in other jurisdictions as part +of an expanded internal investigation. + +42. Albemarle’s cooperation included providing regular updates on its internal +investigation; giving regular and detailed factual presentations to the staff ; voluntarily producing +relevant documents (including translations, bank records, emails, and text messages); making current +and certain former employees available to the Commission staff, in cluding those who needed to +travel to the United States; and summarizing the results of forensic accounting and auditing analysis. + +43. Albemarle began its remediation upon identifying issues and continued its efforts +thereafter. Its remediation included: (1) terminating culpable personnel and intermediaries; (2) +exercising third-party audit rights; (3) revamping its anti-corruption policies, procedures, and +systems; (4) enhancing internal accounting controls over the retention, payment, and oversight of +third parties, including the use of transaction monitoring and data analytics; (5) hiring a dedicated +and experienced compliance officer and compliance staff; and (6) ceasing use of all sales agents +globally across its business units, including Refining Solutions, and significantly decreasing the use +of other third parties involved in the sale or resale of its products; and (7) enhancing risk -based +training regarding anti-corruption, internal accounting controls, and other compliance matters. + +DISGORGEMENT AND CIVIL PENALTIES + + The disgorgement and prejudgment interest ordered in section IV is consistent with +equitable principles and does not exceed Respondent’s net profits from its violations, and allowing +Respondent to retain such funds would be inconsistent with equitable principle s. Therefore, in +these circumstances, distributing disgorged funds to the U.S. Treasury is the most equitable +alternative. The disgorgement and prejudgment interest ordered in section IV shall be transferred +to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange Act. + + Albemarle acknowledges that the Commission is not imposing a civil penalty based upon +the imposition of a $ 99,000,000 criminal fine as part of Albemarle’s resolution with the U.S. +Department of Justice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist from +committing or causing any violations and any future violations of Sections 30A, 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78dd-1, 78m(b)(2)(A), and 78m(b)(2)(B)]. + + +12 + + B. Respondent shall, within 14 days of the entry of this Order, pay disgorgement of +$81,856,863 and prejudgment interest of $21,761,447 for a total of $103,618,310 to the Securities +and Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest shall accrue +pursuant to SEC Rule of Practice 600. + + C. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank acc ount via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + + +13 + +Payments by check or money order must be accompanied by a cover letter identifying +Albemarle as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Charles Cain, Unit Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4469.pdf b/raw/aaer/2023/AAER-4469.pdf new file mode 100644 index 0000000000000000000000000000000000000000..40b49c713eb0c9533b35186a5f786099d72be951 --- /dev/null +++ b/raw/aaer/2023/AAER-4469.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:689f113182b9f54daa09ce0878f9e43b29104c82743a01732f0ae0cf6d27af99 +size 306104 diff --git a/raw/aaer/2023/AAER-4470.pdf b/raw/aaer/2023/AAER-4470.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0a9b360b4daef31d56508960c736ca11870d09e8 --- /dev/null +++ b/raw/aaer/2023/AAER-4470.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:3607529694d27c87ee5b58089aece3b2f6ae1a8878c6eb3c3b033981576aaccd +size 143351 diff --git a/raw/aaer/2023/AAER-4471.pdf b/raw/aaer/2023/AAER-4471.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7840998e2ef06c2b5c189b775ad5282572f37af8 --- /dev/null +++ b/raw/aaer/2023/AAER-4471.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:b5ef0b74901e396faee3a9f243b1d9355abb96127775779d78c14a3cb80ac850 +size 201479 diff --git a/raw/aaer/2023/AAER-4472.pdf b/raw/aaer/2023/AAER-4472.pdf new file mode 100644 index 0000000000000000000000000000000000000000..fdbf5e6614f92313c3ee50f82f6f9f8dc7fb10bc --- /dev/null +++ b/raw/aaer/2023/AAER-4472.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:332e4fd2e69a9d75c9fb740fbe2679ffd9a492b6de43092967122a51ba1f5b8a +size 157195 diff --git a/raw/aaer/2023/AAER-4473.pdf b/raw/aaer/2023/AAER-4473.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0a0bd74d8d5dfafb9984d3bcaec8e41541a459ad --- /dev/null +++ b/raw/aaer/2023/AAER-4473.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:0c8efa3bb89d55f3cbd668aec6a5bd25b2770420be109333ec5a86ba6a990a69 +size 199778 diff --git a/raw/aaer/2023/AAER-4477.txt b/raw/aaer/2023/AAER-4477.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2cde6fc3f775dee7017d50cbadead4ee5958685 --- /dev/null +++ b/raw/aaer/2023/AAER-4477.txt @@ -0,0 +1,58 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99074 / December 4, 2023 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4477 / December 4, 2023 + +Admin. Proc. File No. 3-21214 + + +In the Matter of + +JOSHUA ABRAHAMS, CPA + + +ORDER MODIFYING POSTPONEMENT ORDER + +On October 21, 2022, the Securities and Exchange Commission issued an order +instituting administrative proceedings (“OIP”) against Joshua Abrahams, CPA, pursuant to +Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules +of Practice.1 On August 14, 2023, the Commission, in light of the parties’ joint stipulation and +the other circumstances before it, issued an order postponing this proceeding until the Supreme +Court’s resolution of SEC v. Jarkesy2 and vacating all then-pending deadlines.3 The parties have +now filed a joint stipulation to modify the August 14 order on the basis that “it would be most +efficient to complete expert discovery, notwithstanding the current stay.” + +Accordingly, it is ORDERED that the following expert discovery deadlines shall apply: + December 15, 2023 Last date to serve expert reports + February 12, 2024 Last date to serve rebuttal reports + April 8, 2024 Close of expert discovery + + +1 Joshua Abrahams, CPA, Exchange Act Release No. 96127, 2022 WL 13566785 (Oct. 21, +2022). +2 No. 22-859, 143 S. Ct. 2688 (June 30, 2023) (mem.) (cert. granted). +3 Joshua Abrahams, CPA, Exchange Act Release No. 98122, 2023 WL 5203091 (Aug. 14, +2023). +2 + +Upon the close of expert discovery, this proceeding will again be postponed until the +earlier of 30 days after the Supreme Court issues its mandate in Jarkesy or July 31, 2024. It is +further ORDERED that, when the proceeding resumes, the parties shall promptly file a status +report discussing the impact of that decision on this proceeding, if any, and any other relevant +matters. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2023/AAER-4480.pdf b/raw/aaer/2023/AAER-4480.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7f3b6368492f8513b098ab4d3ace07951b74e32f --- /dev/null +++ b/raw/aaer/2023/AAER-4480.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:e8ccc62ebc410a71f995ef40a01283b8fd88fcbbcf752a64ab479994b99762a0 +size 196408